DAILY VOICE | Sharad Pachisiya of SageOne explains how their smallcap PMS turned into a wealth creator

He has worked with Edelweiss Financial Services for over 12 years with over 4 years in investment banking and over 8 years in Private Wealth Management.

Here are edited excerpts from that interview:

Q) 1-year data suggests that Sageone Small & Microcap fund has been a marked outperformer in the year 2020. It has given about 59 percent return so far in the year 2020 - the top-performing PMS. What was your strategy for the fund?

A) SageOne Small & Microcap Portfolio (SSP) was launched at a time when the valuation discount between Large Cap and Small Caps universe was at its extreme i.e. close to 55-56%. I very well remember this was in April 2019 when market and investment sentiments were at their lowest point after suffering the IL&FS crisis.

In our SSP portfolio, we identify 12-20 superior quality businesses in the market-cap range of Rs 500-5,000 crores, unlike our concentrated (SCP) or diversified (SDP) mid & small-cap portfolios where we look for 12-25 superior quality businesses in the market-cap range of Rs 3,000 -30,000 crores.

Today, the SSP portfolio would have about 15-16 companies that have delivered one of the best returns in this category led by superior fundamentals over the last nearly 1.5 years and also some valuation re-rating since April 2019.

Q) This is a recently launched fund and by numbers just shows the quality of stock selection. What has been your strategy to pick winning stocks for the fund?

A) The SSP portfolio is designed to take exposure in hidden gems found in relatively smaller market cap companies compared to our other portfolios.

In this portfolio also, we stick to our discipline and philosophy of identifying superior growth businesses and category leaders as to what we practice in our SCP & SDP (mid & small cap) portfolios.

Q)  Your PMS also bagged the topmost wealth creator of the decade award earlier in 2020. Would you like to share your investment mantras/philosophy?

A) At SageOne, we always strive to build and maintain a portfolio of superior businesses with high earnings growth (20%+ CAGR) available at a cheap or fair valuation.

Earnings growth is the key driver to portfolio returns in the long run. When you look at a business and if you get a feeling “I wish I owned this business”, we look for those kinds of businesses.
Investing in the right sectors and leaders within those sectors with long term competitive advantage is very crucial for superior long-term wealth creation.

This requires an in-depth understanding of the industry dynamics and business drivers to pick the right sectors and companies.

Our years of rigorous and disciplined investing approach helped us deliver superior returns for our investors. In July 2020, our flagship SageOne Core Portfolio (SCP) has been recognised as the best performing fund of the last decade (24.7% CAGR) across all Indian equity-focused Mutual Funds and Portfolio Management Services (PMS) across categories by performance aggregator PMS AIF World.

Q) Equity MF schemes are under redemption pressure for the last five months or so. Have you also faced a similar trend in your PMS schemes?
A) Unlike MF redemptions, we at SageOne have in fact received more funds in these last 5-6 months. Our existing clients have reposed faith in our approach and topped up their investments with us.

We have also been successful in onboarding new UHNIs and family offices in these last few months. These clients understand the dynamics of relatively high concentration and customisation in a PMS unlike what is practiced by MFs.

Q) Fighting an invisible enemy could grow on anyone's mind. What were your thoughts/emotions when markets fell in double digits in March?

A) In spite of having the experience of other past market crashes, (2008, 2012, 2018) honestly the start of the March 2020 crash got me nervous and concerned. The nerve-wracking velocity and dynamics of this crash were unprecedented with very high unknown variables.

There were thoughts and emotions on how precarious the future would unfold not just for markets but for life. I was fortunate to have Samit Vartak, Founder & CIO SageOne around who is by far one of the most level headed and rational person I have come across.

His words of wisdom and regular conversations of not reacting irrationally, being patient, and taking cognisance of unknown variables helped immensely to abate all the jitters and fear.

Famous author Morgan Housel puts it aptly in his book “Psychology of Money” that investing is not the study of finance, it’s about how people behave with money.

And behaviour is hard to teach even to really smart people …you can’t sum up behaviour with formulas or spreadsheet.” His perspective holds true across market cycles.

Q) What is your outlook for the year 2021, especially for the small & midcaps space? The rally has been broad-based and we are seeing some green shoots in the economy. But, will the momentum continue in the near future?

A) Last few years have been extremely difficult for small & mid-cap space. In spite of quality businesses and investable companies present in this segment, they were ignored by the gush of money which chased the large-cap space, validated by significant divergence in the performance of small & mid-cap index compared to the large-cap index in 2018 and 2019.

Come 2020, there is a clear reversal of this trend. Small & mid-caps have outperformed large caps this year. I strongly feel this trend should continue and the next 3-4 years look more rewarding for small & mid-cap space compared to large caps.

The renewed fundamental momentum, reasonable to fair valuations, and supportive government reforms & policies are some of the positive triggers I base my conviction in small & mid-caps.

However, one needs to focus on bottom-up stock selection and a deep understanding of businesses while investing in small & mid-cap companies rather than taking the broader market exposure in order to generate superior returns.

Q) Which sector(s) are likely to produce winners in 2021? And, why?

A) Let me share my thoughts on sectors that should benefit tremendously over the next 3-5 years. Sectors and companies in specialty chemicals, pharma, Agri, component manufacturing should continue to benefit significantly from the emerging themes in India - export-led opportunities, contract manufacturing, and import substitution.

Favorable government policies and reforms propelling manufacturing in India like the PLI scheme, labour reforms etc. add to the attractiveness of the above sectors.

Select players in the building materials space should also benefit from the expected manufacturing uptick and construction activity in India over the next few years.

I strongly believe that financialisation of savings will grow exponentially in India in the next 5 years and therefore niche financial services leaders should deliver superior returns.

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