Meeting with Mr. Jayesh Gandhi, Senior Fund Manager, ABSL.
Recently, I had the opportunity to meet Mr. Jayesh Gandhi and talk about our favourite topic, “THE MARKETS”. Mr. Gandhi manages the Mid & Small-Cap funds of Aditya Birla Sunlife Mutual Fund, schemes of which have been consistent performers in the recent past.
This meeting gave me an opportunity to understand the fund manager’s view of the markets when there is a divergence between mid-cap and large-cap stocks. He follows the growth stock investing approach using a template which finds stocks that are growing in both their sales and profits.
Straight out I asked him about the underperformance of the mid-cap stocks in the recent past against the broad markets. His reasoning was that growth stocks tend to underperform when value picks give larger moves. Growth investing creates higher alpha when the markets get into a broad-based up move. When there is a correction they tend to also correct as much as the indices. The advantage here is that when staying invested in such schemes, over a period, the growth tends to out beat the benchmarks to a larger extent.
Presently the SENSEX and NIFTY have been reaching new highs while the mid and small cap space has lost considerable value. Investors are questioning the underperformance in their portfolios since they see that the Sensex is climbing higher. This divergence is due to a few stocks in the large-cap space garnering higher demand during the recent scheme re-categorization. Fund managers were forced to liquidate quality mid-cap stocks and had to add large-cap stocks to reduce exposure and meet SEBI norms.
In the large-cap space, there are no high-quality stocks which are an equal match to the mid-caps that are fundamentally strong with higher sales and profit growth. Yet, fund managers were forced to add the large-caps, creating demand for a small group of good picks, pushing these stocks further up. A few mutual fund schemes that already held these large-caps in their portfolio are now outperforming the universe that made big gains in the 2017 rally. But, this divergence is only to stay for a short period.
Mr. Jayesh’s view on profit growth is that in our country the mid and small cap space is likely to be rise by 20 to 30% in the next 3 years. The PE multiples, presently at 25-26 levels, will reach 14 and below 10 for the small-cap companies, thereby giving very high wealth creation possibility in the coming 3 years.
We had a good rally in the 2014-17 period and are likely to have a similar one for the next 3 years. We are going into an election year. By December we will have more clarity on the outcome of the elections and if it is positive, we should see a 40% growth in 2019-20 alone. And to be a part of this massive wealth creation and reap the benefits in full a person has to be invested now. All portfolio realignment as per SEBI categories is now over, and it will follow now to the next phase of aligning stocks that are the new leaders.
Most of the mutual fund schemes are holding a good amount of cash in their portfolios and these funds will be deployed in the next 2 to 3 months, in preparation for the next rally post elections. Next, we pondered – what if election results are not favourable?
Mr. Gandhi’s thought was that going into the election itself markets will rally about 10-15%. So if there is a correction due to unfavourable results, those already invested will only come back to present levels and not lose much. those who are in now will not lose much if there is an unfavourable condition as the correction if there is one, All the corrections that mid-caps should see is almost over and now the whole market will get aligned. There will be volatility but due to the whole market facing the same condition. Bigger as well as smaller stocks will have the same levels of downside. Whereas on the upside, there is a high potential for the smaller stocks to give higher returns. One is because they are at lows now and the other reason is that they will see higher levels of profit growth.
Oil is expected to touch $85 and probably from there it will see a fall. Exports will increase and with support from corporate earnings from FY19 everything looks favourable.
For the investors, it is going to be a few more months of ups and downs and then launching off to the next big growth phase. Even our portfolio is doing the same, we have been adding more new stocks, reducing cash exposure and will be ready for the next rally before elections.