- DSP Mutual Fund's portfolio management strategies
- Ways to beat the benchmark
Alex Mathew in conversation with Abhishek Singh on 'The Mutual Fund Show'. #NDTVProfitLive
- Ways to beat the benchmark
Alex Mathew in conversation with Abhishek Singh on 'The Mutual Fund Show'. #NDTVProfitLive
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TVTranscript
00:00 is the opportunity to understand the perspective of the people that manage your money, the fund manager.
00:06 And from that perspective, I've got my guest today. We've got Abhishek Singh,
00:12 who is the fund manager of a fund that has done quite well over the last one year, particularly in its category.
00:19 It stood in the top of the category in 2023 and it has comfortably beaten the benchmark.
00:25 Not something that we say very often for the category as a whole. Abhishek, thank you so much for taking the time
00:30 and pleasure speaking to you on NDTV Profit. - Tim, yeah, Alex, thanks. Thanks for having me on the show.
00:36 So, let's start with that because often the criticism that is leveled against fund managers in the large cap category
00:44 and we are talking about the DSP Top 100 Equity Fund is that there is a difficulty in beating the benchmark.
00:52 Why was that something that was achievable in 2023? What worked in your favor?
00:58 You are right, Alex. It has been one of the most challenging categories for Alpha generation in the sense it was very,
01:08 it has been very hard to beat the benchmark. But a lot of factors have kind of failed last year.
01:14 The rally was broad based, it was not concentrated in certain segments. Also, if you look at the history,
01:23 typically strategies that have kind of diverged from the indexes, they have had a better chance of generating Alpha
01:32 and this is something that we have embraced in the last couple of years. So, those two factors helped.
01:38 A broad based rally and running a relatively high active share position is what kind of helped us.
01:44 Okay, so that's a good springboard, I think, to talk about this in more detail.
01:50 So, help me first before we get into the portfolio construction of it to understand how things work.
01:57 What is the strategy of the fund house as a whole? What is your own strategy and your ethos when it comes to building a portfolio?
02:05 So, Alex, the construct of the large cap category is that 80% of the weight in the fund, they have to come from the top 100 stocks only.
02:14 So, your universe is very well defined. Now, typically you would eliminate 20-30 odd stocks based on your framework,
02:21 based on your approach, based on certain forensics and the quality of the business that you want to own.
02:25 So, out of the remaining 60-70 odd stocks, depending upon your comfort, the way you are creating portfolios,
02:33 you end up owning some 30 odd stocks. Now, this sounds very logical, but if you look at the category,
02:38 very few funds actually run a relatively concentrated 30-35 odd stock portfolio.
02:45 And I think this is vital because if you own a large number of stocks in this space,
02:55 you end up basically being very close to the benchmark and it hinders your chances of outperforming the benchmark.
03:03 The strategy that we have adopted and it's very well communicated. In fact, the investment frameworks of all the fund managers of DSP,
03:12 it's there on our website. In my case, what I focus on is basically running a very, very valuation conscious portfolio.
03:21 The three things that I tell people that I'm not willing to compromise on, they are that valuations matter.
03:27 And nobody knows in the sense your portfolio instruction should not be dependent on your ability to focus macros or in some cases,
03:33 even the micros and the third is the structure itself should be such that it helps you avoid large errors.
03:40 So, a relatively concentrated portfolio of 30 odd stocks and a very valuation conscious portfolio,
03:45 that is what we have been trying to execute.
03:48 I think that's understood. So, therefore, am I right in understanding and I've looked at your portfolio construction as well.
03:55 So, I think that what I'm thinking is right is that you will choose to take a few very big bets with the understanding that they can take off in a big way.
04:05 I'm also assuming that that has worked in the last year or so.
04:10 Yeah, so Alex, the big bets are where you don't expect them to kind of take off in a big way.
04:15 The big bets are where you think that the downside is very low and it's a very different approach.
04:21 I don't think it's easy to know what will do well. It's relatively easier to know what will not do too bad.
04:28 And that is what we try to focus on. Typically, markets, they kind of surprise most people.
04:34 So, if the implied expectations are too benign, where the market or the price is not implying a very high growth or very sharp improvement in profitability,
04:44 markets typically surprise you on the upside. So, that is what has been our approach.
04:48 Buy stuff where a lot of negatives are already in the price. It has been harder to do in the last one year or so, but that is what we try to execute.
04:57 Okay, so that makes sense to me because your top three holdings are essentially private banks and private banks have not done too much.
05:05 Absolutely. So, if you kind of look at where certain sectors are trading compared to their 10-year history,
05:13 financials is where at least 5% there is significant comfort. In fact, if you rank all the stocks, all the 100 stocks,
05:20 based on where they are trading compared to their own 10-year history in terms of valuation, 6 out of 10 are kind of BFSI stocks.
05:27 And so, it kind of automatically selects itself and it gets a larger allocation in the portfolio. So, yeah, you are right.
05:34 Okay. I also want to talk about some of your, well, I don't want to say sectoral bets because as I understand it,
05:41 this is primarily a stock-driven and bottom-up approach in terms of how you have selected the stocks in these 100 as well, right?
05:49 In terms of the selections that you have made, it's not really a sectoral bias that you have at all. It's purely stock-driven.
05:57 Yeah, absolutely. But at point in time what happens is certain sector, they get a higher allocation because there are lot of ideas in a sector which are qualifying on your favor.
06:09 So, one year ago, for example, healthcare was a, even today it's a very large allocation because the risk return was really favorable.
06:17 And when you went and looked at different stocks in a category, there were many ideas where the upside, downside were kind of very favorable.
06:26 And they automatically end up getting a higher allocation. So, today, for example, BFSI and healthcare, they are large mates in the portfolio.
06:32 Primarily because of this reason. I was trying to get a clarification on that because I see that IT is not really, is something that you seem to be underweight on.
06:42 Could you explain why that is? Yeah, so, the fund has been underweight IT for some time.
06:49 If you look at where the stocks are trading, I think they are trading at the, in some cases, almost 2-3% above their pre-COVID averages.
06:58 And this is a sector where over time the growth rates have actually come down.
07:03 Even the last 10 years and all the organic growth rates have been single digit.
07:07 And with the stress in US markets, also if you just look at the commentary, the headcount addition, everything is pointing to subdued growth.
07:16 I don't think the valuation at this point in time are reflecting that same. And that is why they have a lower weighting of funds.
07:24 Okay. So, I'm just trying to understand from this point on, how do you see things panning out?
07:30 Of course, we are at the start of an earning season. So, that should kind of give you some idea of how things will pan out.
07:37 But few argue that the way that markets have gone in the recent past, valuations are a little bit stretched in a few pockets.
07:46 Does that give you the urge to take some money off the table in a few situations?
07:53 Does that make you want to churn? I'm asking again because I see that the churn in your portfolio is very, very low.
08:00 Yeah. So, churn is low and you are right that the valuations are… I mean, it's difficult at this point in time to be a very, very valuation sensitive investor.
08:11 Our recommendation to most of our clients, most of our investors has been to basically take… I mean, not add to risk at this point in time.
08:20 So, if you have large exposure to mid-cap and small caps, maybe it's time to move to large caps.
08:24 If you already have a very significant exposure to large caps, maybe hybrid funds.
08:28 For me, my job is slightly easier in the sense I have to be invested 80% in the large cap schemes.
08:35 So, you try to invest in ideas where the risk return is the best.
08:39 So, yeah, it's a challenge at this point in time, but I don't take very large cash calls.
08:46 So, that is not something that I typically do.
08:50 I take the thesis or the idea that you are going to have a diversion from the index.
08:57 But there is one very glaring miss or exclusion from your portfolio, one of the largest weightages on the benchmark.
09:06 I am just trying to understand from a strategy point of view. I am not asking you to justify it.
09:11 But if you go wrong, you could go wrong in a big way.
09:16 I am just trying to understand or help you speak to your investor and say, reinforce why you do this.
09:22 Yeah. So, Alex, I think the way we think about the portfolios is that they have to be benchmark agnostic.
09:31 So, at least in the large cap space, we are pretty much benchmark agnostic.
09:36 If you look at the last 10 years, even 20 years history, Nifty has generated some 14-15% odd returns.
09:42 A large part of it has happened because of re-rating in the multiples.
09:48 And that is the hurdle rate that you want to beat.
09:51 And you want to beat it taking the least risk possible.
09:55 So, that is the starting point. And based on that, you create your portfolio.
09:59 Whether something is a large representation in the index, whether that is there in the portfolio or it's not there.
10:04 I mean, it is just incidental. So, you are trying to create the best risk return portfolio
10:10 and not think in terms of what is there in the benchmark and what is not.
10:14 The universe is well defined. But beyond that, you don't give a lot of weight to these things.
10:20 The last aspect of this conversation, this is something that I endeavour to give all the fund managers that speak to us on this program,
10:27 is what advice or what message would you like to give to your investors and prospective investors over the coming year?
10:36 And not necessarily in the very short term, but to set expectations.
10:41 Yeah, correct. So, I don't know what is going to happen in the next year.
10:46 But from at this point in time, I think we should temper or moderate our return expectations, let's say, over the next 5-7 years.
10:55 They could be slightly lower than what we have earned over the years, just because a lot of the returns have been kind of upfronted.
11:03 A lot of mistakes happen in bull markets because you are already sitting on a lot of profits.
11:08 It nudges you to take more risks. And what you do today is going to determine how you behave in the next down cycle,
11:18 which at some point we get. I don't know whether we get next year or in 3 years or 5 years, but you will get it at some point.
11:24 And yeah, at this point in time, you should probably have moderate return expectations and do not add more risk is what makes sense to me.
11:35 Alright. Abhishek, on that note, thank you so much for joining us and for giving us that perspective and insight into the way that you manage your fund.
11:43 Thanks, Al. Thanks.
11:45 Alright. We have to slip into a very quick break. But on the other side, we get you the advice that you need to make the right choice in the large cap category.
11:53 Don't go anywhere.
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13:38 Welcome back. You are watching the Mutual Funds Show.
13:42 Now, we are speaking about large cap mutual funds and it is interesting.
13:45 I was looking at the performance of the actively managed funds in the large cap category and comparing them with the benchmark.
13:52 And more than 20 of the funds that I looked at have comfortably beaten the benchmark of the last year.
14:00 This is not something that has happened very often in the last decade or so.
14:04 The question is should you change your strategy or adjust your strategy to take this into account
14:10 or should you stick with the tried and tested method of investing in passive when it comes to the large cap category.
14:18 To talk about this in more detail, I am joined by Rushabh Desai who is the founder of Rupee with Rushabh Investment Services
14:25 as well as Sunil Javeri who is the founder and chairman of MSJ Mr. Bond.
14:29 Thank you so much gentlemen for taking the time.
14:32 I will start with a review of the fund that we just discussed or the fund manager that we just discussed
14:38 which is the DSP Top 100 Mutual Fund. It has done pretty well over the last year.
14:44 But what is your reading of the performance in the context of the space as a whole and over the longer period?
14:52 I will start with you Sunil and I will also get a view from Rushabh. Sunil?
14:56 Sure, thank you. So I think DSP Top 100 is one of those funds which is not really hugging the benchmarks.
15:03 So it is not like an alternate to the benchmark. It is actually actively managed fund.
15:09 If I recall correctly, I think Abhishek himself had mentioned that they are almost 60% actively managed stocks versus the benchmark.
15:18 That is number one. And if you see the last one year performance out of almost 30 odd schemes,
15:24 DSP Top 100 is 9th ranked in terms of performance, almost 27.5% versus Nifty 50 of 20%.
15:32 So it is a huge outperformance of almost 7.5% alpha over the benchmark.
15:37 So this narrative of whether the large caps can deliver alpha over the benchmarks is a wrong narrative
15:45 because sometimes the benchmarks will deliver returns if the weightages which are higher in some sectors,
15:52 in some stocks start doing well. And many times the actively managed funds will do better
15:58 because they are not hugging the benchmarks and then some of them may be equivated stocks also.
16:04 Like another fund house which is coming up with an equivated large cap fund.
16:08 So these are all different differentiations which each AMC will do and hope to generate and deliver alpha over the benchmarks.
16:17 That is my take as far as DSP Top 100 is concerned. It is a well managed fund.
16:22 A good track record of a very long time, I think 20-25 years old fund also.
16:27 Fair point. Quick view, Rushabh, on this particular scheme and also if you were to look at the actively managed funds as a whole,
16:36 what is your view? I ask this question knowing that you have shared certain information over the last decade.
16:44 Alex, first of all, thank you so much for having me on your show.
16:49 Yes, I do agree with the fact that large cap as a segment has done fairly well over the period of year, year and a half.
16:56 But short term is not the right way to look at performance of any fund.
17:04 I won't go into the nitty-gritties of the strategy and the portfolio which you already discussed with the fund manager.
17:11 I pulled out some data, 10-year daily rolling average from the scheme's inception.
17:18 From 11th of March 2013 to 11th of Jan 2024, on a 10-year daily rolling returns, the fund has underperformed 52% of this period.
17:33 And the outperformance has only been 48%.
17:37 Now the major underperformance of this fund on a 10-year rolling basis has come from 2018 to 2023 as on date as we speak.
17:48 Now the fund has unfortunately underperformed consecutively, constantly over the period of this 5-6 years.
17:55 So if a fund underperforms from a short-term perspective, which is 3 years, 4 years, 5 years, that's completely understandable.
18:03 But if a fund consecutively underperforms on a 10-year daily rolling basis for 5-6 years, that is something very to be concerned of.
18:12 So rather than going in the active large-cap space, I pulled out another data which shows that over the period of 10 years,
18:21 around close to 70% of active large-cap funds have underperformed their benchmarks.
18:30 So in my humble opinion, I think it is time for investors to shift from the active large-cap space to passive strategies in the large-cap segment, Alex.
18:41 That's fair. And if anything, the incremental flows into these funds suggest that people are gravitating away.
18:50 And maybe that's also to a certain extent because, Sunil, of the gravitation towards small-cap and mid-cap,
18:57 I do not know if you can read too much into the flows from 2023.
19:01 But having said that, what is your view on passive versus active in this category,
19:06 knowing full well that actively managed funds tend to struggle to beat the benchmark?
19:12 See, this is the year 2024 when FIIs will come back. They have started coming back.
19:18 In fact, from November onwards, if you see the FII flows, they have started coming back.
19:23 They were negative flows for the last two, two and a half years. And then after that, from November 2023 onwards,
19:29 FIIs have come back. So December was also a positive month, plus the DII flows.
19:35 So the FIIs coming back happens and they tend to invest in the large-cap space.
19:41 They don't go into the mid-cap and the small-cap space. So 2024, if you see last one-year calendar year returns also,
19:48 in the large-cap, Nifty 50 has delivered 20% with earnings growth of almost 13%
19:54 and a price-to-earning growth of about 6% jump from Jan to December.
20:01 In the mid-cap space, the return was almost 46%, Nifty mid-cap 100.
20:07 Earnings growth was 46%, but the price-to-earning had actually negative 0.16% from the beginning to the end.
20:15 And the small-cap space has delivered the maximum return of 55%.
20:20 But the unfortunate part there is the earnings is negative 9% over that period and the PE has gone up by a whopping 70%.
20:28 Now that rotational shift will happen, the reversion to mean will happen for small caps to be correcting going forward.
20:38 And large caps, which have delivered decent returns, but not really phenomenal returns with some earnings growth also.
20:44 With the FII flows coming back into the system, most of the flexi-caps and multi-caps are more mid-cap and small-caps oriented currently.
20:53 So all these rotational shifts will happen in the large-cap space.
20:56 So that's where I again, I believe that actively managed funds versus passively managed will definitely have an edge at least in 2024, if not for longer periods.
21:07 Okay, so there's room for both. I think as a strategy is my takeaway from what you said right now.
21:13 Having said that, Rushabh, what's your view on constructing or the role that this particular category plays in your portfolio and what would you prefer?
21:23 Alex, I agree with what Sunil had to say that 2024 is the year where large caps may do very well because we have seen that mid and small caps have rallied tremendously from a price and valuations perspective.
21:39 And they are trading at a premium at this point of time, where on the other hand, large caps are trading close to their 10-year average, which is very reasonable at this point of time.
21:49 So I would actually bet on large caps at this point of time, although we all recommend our clients to look things from a long-term perspective and not from a short-term perspective.
21:59 But if someone wants to take a fresh exposure and make fresh investments, today I think large cap space is the right place to be in.
22:08 So I think we have seen over 2021, 2022, 2023 where value did phenomenally well and growth has taken a backseat.
22:19 I think with interest rates starting probably to fall from second half of 2024, I think growth as a style will come back in action.
22:28 So in my humble opinion, I think if someone wants to take exposure in the large cap space, I would still go for passive index funds, either on the traditional market cap base or on the smart beta base.
22:40 I think that is the best way to avoid any kind of underperformance risk.
22:46 So I think have a good blend of both growth strategy and value strategy, large cap funds in one portfolio. I think going forward, the good blend will do very well in one's portfolio.
22:58 So while you were speaking about that, I did play on screen the recommendations that you had on the funds that you like.
23:04 Suleel, any last thoughts? We've got 30 seconds. Funds that you like, not necessarily recommend, but funds that you watch closely in the large cap space?
23:12 No, more than that, I would only say that people must understand and appreciate that every bucket of this mid cap, large cap and small caps, there is a time and valuation at which they should be investing.
23:24 So whenever we say that markets are expensive or going towards the red zone, ideally a large cap would be the best bet.
23:31 When they become reasonable valuation zones, so to say yellow zone, mid caps start doing well. So that's when you start investing in mid caps.
23:38 And finally, when the markets are actually in the green zone and cheap valuation zones, and if you invest in small caps, you will do well.
23:45 But if you invest in small caps currently at the red valuation zones, looking at the past performance, I'm sure the investors will burn fingers going forward.
23:54 Fair point. All right, Rishabh, Suleel, thank you so much for joining in. Viewers, hopefully this has been an insightful conversation.
24:00 If you've got questions, do write to us on any one of our social media platforms. It's been a pleasure bringing you the show. Do stay tuned. This is NDTV Profit.
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