Why is Sohum Asset Managers' India Opportunity Fund skewed towards large caps?
Niraj Shah in conversation with Founder & CIO Sanjay Parekh on 'The Portfolio Manager'. #NDTVProfitLive
Niraj Shah in conversation with Founder & CIO Sanjay Parekh on 'The Portfolio Manager'. #NDTVProfitLive
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00:00 And therefore, as a result of that, what is the kind of portfolio construct that you do? Is it
00:05 more safe? Is it more biased towards large caps? And is it different from what you would otherwise
00:09 do? Yeah, Neerad, so good afternoon. Essentially, you know, ours is a large cap fund, where we have
00:17 said that at least 70% always would be large cap. Our average holding of large cap in the last 19
00:24 months has been 78%. Right now, we've moved up further, which is right around 82% in large cap.
00:31 And then mid and small cap is another 16%. And the rest is, of course, cash. So,
00:40 our thesis has been that there is enough scope of alpha creation possibility, even in large cap.
00:48 And if you see the one year, three year, five year returns of Nifty, in fact, for one year,
00:54 it's very starking where the Nifty returns on one year has been 17, 18%. But the average of the top
01:00 10, and I'm talking about average of the top 10 has done 65% plus. And the worst of the top 10,
01:06 the average of the worst of the top 10 has just done one or 2%. So, this is the divergence in
01:13 return within Nifty. And our endeavor is to get the 18 or 20 stocks from the Nifty. And some of
01:19 it, which are not in Nifty, but large cap is what we would seek to get. And in mid and small cap,
01:25 our strategy is that the divergence has to be larger between price and value, which means
01:30 our returns, ideally, we would want to double them in three to four years, but not beyond four
01:38 years. So, for the risk that we take, we would want that sort of threshold of returns in mid
01:42 and small cap. And by and large, it has worked, in this environment, in 19 months, we would have done
01:50 16% over Nifty TRI. And on annualized cases also, the alpha has been 11% over Nifty TRI.
01:57 So, for us, risk is very important. And hence, we don't add in one mid and small cap,
02:03 we don't exceed 3%. So, that's a risk measure we have at cost. And as I said, we've
02:12 got alpha in this environment, mid and small cap is an exceptional, almost twice of large cap.
02:17 We've got alpha both from large cap and the mid and small cap as well.
02:22 It's broadly equally spread. So, we are happy with that. That's a sad thing.
02:26 Why this bias towards, why this preference for large caps? Because almost everybody that I speak
02:33 to Sanjay, say that the real story is in mid caps and small caps. You see a tremendous number of
02:39 sectors which have emerged off late, which largely have a mid cap and small cap presence and don't,
02:45 by definition, strict definition, don't have a large cap presence. So, how do you account for that?
02:50 Yeah, very valid point. So, one is, you play your style. So, over my career, the $4.5 billion that
02:59 I've managed has been in a style wherein you could have 70% in large cap and all the alpha
03:06 you want to create, which you feel that it is more possible in mid and small cap, you could
03:12 do that in the 30%. And then you position the product accordingly. So, an investor across
03:19 cycles, in the last two years, mid and small cap has done well and exceptionally well. But if you
03:26 take a 10-year view, and if your product positioning is right, there's enough money
03:31 waiting there for large cap funds, focus funds, who know the risk element, because that is also
03:37 important. And we do emphasize that our fund has less risk, less volatility, compared to
03:45 mid and small cap. And yet, if we can deliver alpha, then I think we have done a reasonable job.
03:50 So, that's the positioning and that's the way we think about it. But it's more, your main question
03:56 is yes, you play your style. I mean, you know, if Sevag plays like Dravid, he'll get out, if
04:04 Dravid plays like Sevag, he'll get out. So, we said we understand this piece. And we're not staying
04:10 away from mid and small cap. And we've got some great multi bankers in mid and small cap. But we
04:15 will want that threshold of returns. And if it fits in within compromise on quality, we'll love
04:21 to add that. Got it. Do you reckon the next 12 months could be months wherein alpha generation
04:27 would be easy for anybody with a particular kind of strategy and you with your kind of strategy?
04:33 Or do you believe markets might actually give sideways returns considering that
04:37 2023 has been a decent year? Yeah, Neeraj, very valid point. So, one is, you know,
04:43 just two, three years back, if we go, there were discussions around and still it's on that,
04:49 you know, whether it makes sense in large cap funds to be in only passive,
04:54 whether active fund management is relevant in the large cap space. But you can see it's not
05:00 about us, you know, where we've done 16% over Nifty TRI in 19 months. But a lot of funds have
05:08 done well, even in the mutual fund space who have been into large cap and the alpha is significantly
05:13 larger. So, we genuinely believe alpha in India, which is an emerging market, which is transiting,
05:20 and we are growing in size, the larger players also will become much, much larger, you know,
05:26 there was one new support of, you know, which will be the next trillion dollar company in India
05:34 in 2032. So, this is the way we are thinking now. And that's where we believe that the larger
05:40 companies also can have alpha and that's showing up in one, three, five-year return.
05:45 And let me just emphasize, let's say, Coal India three years back. And if you look hindsight,
05:50 five years, very bad returns. Next three years, it's 3x. NTPC, you know, you could take the
05:58 largest bank, then SPI is up three times, but some of the other private names have not delivered. So,
06:07 you could have huge divergence within sectors and stocks in large cap as well. And if you can get
06:14 those 18-20 names, and then add on with mid and small cap, you could have a blend. So, this year,
06:21 coming to this year, I feel yes, alpha is possible. But this will be a year of mediocre returns,
06:28 because, you know, the starting point of valuation is not cheap. And hence, one will have to be
06:35 navigating it very cautiously. One has to be having a higher margin of safety when you're
06:40 buying particularly mid and small cap. And do understand that there is a froth in a lot of
06:46 segments of mid and small cap. There are values there, but there is enough froth in certain
06:50 segments that will be taking care of that. So, hey, just tongue in cheek, I must ask you,
06:55 so what are those companies which will become trillion dollars out of India? I mean,
06:58 just trying to understand what themes, because you said that you read that report,
07:03 and you're also thinking about that. Yeah, I mean, you know, it covered three companies,
07:08 and it just to, it's not the direction, you know, but it did cover three companies. One was,
07:13 and it said that if Reliance went to, and it's not about the stock recommendation,
07:18 it's about the big picture that we have started thinking, that which could be the trillion dollar
07:23 company. And as I said, the next six months could be painful for those companies. But
07:30 it had said three companies, one was Reliance, if it grows at 20% for till 32. And then you know,
07:39 with the price burning and price to book, if it remains same, it was a match. You know, it could
07:44 be there. It could go there near trillion dollars. Second was what could be a cliche, but HDFC Bank.
07:51 And of course, the implied growth there expected is 25%. We may say it may not grow 25%. But even
07:58 if it doesn't happen in 32, but it happens 35. But the direction you can see that what could be
08:03 the size of the market cap of a company which is today 15 lakh crores, around, you know, less now
08:09 because the market cap has gone down. So around 12 lakh crores. So this is the third was of course,
08:16 Bajaj Finance, which has to grow significantly larger. So it may not happen in 32. But it could
08:22 happen might as well happen few years ahead. But the main direction is that these growth large
08:27 companies can really turn out to be winners in the next 10 years. That's the main point.
08:35 Got it. Viewers, just to re-emphasize viewers in case you misunderstood, this was
08:39 more an abstract question about a particular note, and how people think about things,
08:45 not that Sanjay Parekh is saying that any of these businesses or any of these stocks
08:49 could actually hit that particular number in a particular year. They may not do it at all for
08:54 that matter. But it's just about the thought process. And it's good to know that thought
08:58 process, Sanjay. And therefore, which probably aligns with the thought process that you have,
09:02 that you have a large cap bias because the larger companies in India can certainly grow very high
09:07 and become very large. And that might itself give you alpha as well. I'm inclined to,
09:13 before we take that break, inclined to ask you, if you look three years out, Sanjay, because I'm
09:19 guessing you don't invest just for the next six months to 12 months, if you look three years out,
09:22 where is it that you believe within the large cap universe, within banks, within IT, within
09:28 whatever else, which team has the highest probability of giving the best CAGR returns?
09:37 Because while banks may look, private banks may look reasonably valuable right now,
09:45 there are concerns around their growth, not just for the largest bank, which has been
09:50 badly beaten, but some of the others too, which are not quite reacting to the results in a positive
09:55 way. And IT, everybody's talking about how the near term is fraught with discretionary spend
10:02 coming off concerns as well. Yeah, so, you know, I mean, ideally,
10:09 our portfolio is reflecting that, but I'll tell you the themes. One, and I'll just tell you a caveat,
10:17 we do look at last 12 months returns and underperformance, but we at times look at the
10:24 forward looking and at times you actually bought stocks which are underperformed, when we think
10:31 that it is overdone and outlook is good. And very, very clearly, some of them give you great
10:38 opportunities, that great franchisee in tough times, which are very short term in nature,
10:45 gives you the best opportunity, particularly at times if there is a, you know, heavy selling due
10:51 to some FIIs or whatever. Having said that, coming to the sectoral themes, we in the last 19 months,
10:58 it was very simple, domestic overweight, global underweight. By and large, it is worked. In the
11:05 last six months, IT is outperformed and underweight has not helped us. But otherwise, and then pharma,
11:11 we've already moved up. But the whole theme of auto, auto ancillaries, cement, capital goods,
11:19 telecom, real estate, each of them, financials, the whole scale of financials, and our lucky
11:27 our entry price was right 18-19 months back. So, last 12 months has not hit us as much.
11:33 And today we are equal weight on banks, overall financials, we are overweight. So, each of the
11:38 themes we like within financials, the private banks, it could be select PSU, which we like the
11:45 largest, largest name, it could be an AMC company, it could be a wealth provider, it could be an
11:51 insurance play, it could be a microfinance company, it could be a digital company. So, you have a huge
11:57 amount of gamut of plays. And some of these companies can really be meaningfully large in
12:04 27, you know, so 27-28. So, we genuinely feel that rightly you asked the three-year time horizon,
12:12 and we think these themes will do well. Pharma also, we've gone overweight, mild overweight,
12:18 there also will be select opportunity. Oil and gas, we are underweight, of course, O&M companies
12:25 were overweight, but overall oil and gas, we are underweight. And IT also, we feel that we will
12:32 remain underweight because the growth clarity is less and we are not comfortable with that in terms
12:38 of growth uncertainty. We'll probe some of these on the other side of this very quick breaks and
12:44 just stay tuned. So much more to glean from you. We'll take a quick break and come back with more
12:49 on the Portfolio Manager.
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15:44 Back with the Portfolio Manager in conversation with Sanjay Parekh, founder and CIO at Soham
15:49 Asset Managers. Sanjay has given us an idea of the portfolio that he has built right now for the
15:55 next 12 months, wherein he believes that the returns would be a lot mediocre relative to 2023
16:01 or even in absolute terms because we're coming at a very high base on the valuation front. Now,
16:06 Sanjay, I was looking at financials, for example, the largest weight.
16:10 You're present in private and public banks, as I saw in your portfolio. You're present in BFSI or
16:16 lending financials. In the non-lending space, I saw an insurance name, but I didn't see AMCs,
16:23 I didn't see capital marketplace in a meaningful way, whether they are the utility players or
16:29 wealth managers or brokers. Did I miss something or are you not quite keen about them?
16:36 No, no. I think there's a great opportunity. We, and I just disclose, we used to own Angel
16:43 Broking and it was there for last 18 months. It was a fabulous three-bagger for us,
16:52 but we really felt that it is expensive and we booked profits. On the AMC, we clearly watching
17:02 them closely. We like the space, but we genuinely feel the opportunity is all over in financials.
17:11 So it's just the relative gain. So in NBFC space, also you could see Bajaj Finance.
17:20 We oiled Paytm way down and again, it worked well for us. And we're looking at a three-year horizon
17:26 where from our entry point, at least we think we could double. And in the larger banks,
17:31 as you said, we have the larger names. So we like the space of Broking,
17:38 Wells, AMC, all of them. It's just that we want to enter at the right price.
17:45 Got it. So you like the space per se, maybe waiting for the opportunity time on the non-lending
17:52 financials. Insurance for the longest time Sanjay, hasn't given the kind of returns that one would
17:58 expect. The PSU insurers have actually destroyed wealth, the private insurers too. I mean,
18:03 you haven't seen the returns. So why stay constructive?
18:06 Yeah. So we don't own as of now.
18:10 Okay, you don't.
18:11 Yeah, we don't have insurance right now. But I mean, we were worried about,
18:16 you know, the earlier the tax regime changes and some of the premium customers, which were
18:23 using that loophole, I would say, to get into those products, which eventually would be tax-free,
18:29 that loophole was plugged. And we could see some impact of that. Protection now is getting better.
18:39 And then ULIP, of course, is getting better. But overall, APA growth is still sanguine,
18:47 broadly. And I think a little bit of it is because of the financial saving in terms of
18:52 prioritization. We believe, you know, start with most of them would always first have PPF,
18:59 then small savings, then fixed deposits. And now mutual fund equity is doing well.
19:06 So insurance takes a little bit of backseat. And the financial saving is limited. I mean,
19:12 the overall pie is large. But if you see the portion even RBI has highlighted,
19:18 the financial saving piece still has to get larger. So within that, we believe insurance
19:24 will take a little step down. And this is near term, not the long term. And they're absolutely
19:31 impeccable franchisee. And we like some of them. But it's just on a relative basis,
19:36 we would want to avoid for a while. And at the right entry point, we would certainly look at one
19:41 of them. Well, hopefully the right entry point comes soon, because some of these stocks haven't
19:45 just quite given returns. What I saw was interesting in the portfolio was that there is
19:52 an exposure to electric utilities by virtue of one company and please correct me if I'm wrong here.
19:56 But the power space Sanjay has been very, very active. So my question largely would be
20:05 why? I mean, how are you playing this? Why are you avoiding this? Because I don't see power
20:10 financiers, I don't see too many power names. Is it because of the large cap bias that you're
20:14 avoiding this pocket? Or how is it? No, so yeah, you're right. We could have in hindsight added
20:21 more of utility space. We of course have JSW Energy. And it's worked very well. It's almost
20:27 100% for us in the last one year or so. And here is a company where we're transiting from a pure
20:34 thermal play to a renewables play. Its thermal element, thermal EBITDA contribution was 2500
20:44 crores, 2000 to 2500 crores and that will remain. But the new energy piece would move from now
20:52 three and a half thousand crores to five and then 7000 crores. The total EBITDA itself this year
20:58 should be 5700 crores, which can move to seven and a half to eight and then to 10 to 10 and a half
21:03 thousand crores. So these are the transition without not a single dilution. There has been a
21:10 debt increase, but it's within the debt EBITDA bandwidth. So these are the companies we like,
21:16 we'll hold on. Then what we've done is on the whole theme of investment, we have Logistics,
21:23 where we have Adani Port, which we like a lot. Then in Cement, we have Ambuja and Grasim,
21:29 which we participate in Ultratec through Grasim. And the whole piece and capital goods,
21:35 we have Larsen as a whole weight. So that's how the whole basket is a fair representation.
21:40 But you're right, we could have still higher representation to utilities through Power
21:46 Finance or REC or through any one more renewable name. So you're right, or the equipment names.
21:52 So there in hindsight, it is certainly we could have done better.
21:56 Sorry, I didn't mean to say that you could have done better otherwise, because I'm sure you've
21:59 done very well. I was just wondering if you don't like that space. I mean, do you believe
22:03 valuations are stretched there? No, no, I mean, it's absolutely a great opportunity.
22:08 And ultimately, 10 or 20% is 20% is fine. When stocks moved up 100, 150%, there has to be a
22:15 rational and rightly some of them are moved. So we had looked at the whole new energy equipment
22:23 space where you have two companies, Inox and Suzlon. Then the utility space, which could be
22:31 NTPC or Tata Power or JSW Energy, and we got one of them. And then of course, the Power Finance
22:39 here is like BFC, REC. You could participate in each of them because then you could really see
22:46 that demand supply is moving in favor of generation. And at least the SEBs are now more
22:53 disciplined. I'm still not, I will not say we're end of it. There's still pain there, but we got
22:59 better. And the government support is also there to the sector. So and the new energy piece clearly
23:06 will do very well in the next 5, 7, 10 years. So that team was absolutely bang on. And we could
23:12 have represented it higher. So you're right in asking that we should have had more weight on that.
23:19 No, not at all. Sanjay, we're completely out of time, but I have to ask this to you.
23:24 Everybody's talking about premiumization. We have last 60 seconds. Are you playing
23:28 premiumization at all? And if so, how? 60 seconds. Yeah. So the team, consumption,
23:36 we could participate through auto, auto ancillaries, through, as I said, financials.
23:43 In fact, I genuinely believe cement is also consumption because housing. So we've looking
23:50 at it from that perspective. And then we are certainly participating. But overall,
23:56 premiumization is a theme. That's not how we looked at it. So that's the summary of it.
24:02 Got it. Well, Sanjay, lovely talking to you. Thank you so much for giving us some insights. And
24:07 we're talking in January. Look forward to talk to you soon enough. Much appreciate your time.
24:12 Thank you, Nilesh. Thanks a lot and best wishes to your whole team.
24:15 Thank you so much. Much appreciate, really appreciate your time as well. And viewers,
24:19 thanks for tuning in to this episode of the Portfolio Manager.
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