Super Fund Manager 2024: How this fund manager outperformed the benchmark with “smart sectoral” moves

Edited excerpts:

What, according to you, what has been the reason for Flexi Cap fund's performance this year?

Several factors contributed to the fund’s strong performance. Sector selection was crucial, as we anticipated banking would underperform due to sub-15% earnings growth. We underweighted banks and over weighted IT, particularly mid-cap IT, which significantly outperformed large-cap IT. While most peers were overweight on banking and underweight on IT, our strategy was the opposite, which worked well. Strong sector and stock selection drove our success this year.

Could you talk about specific strategies that worked for both the Flexi and Mid Cap funds?

Earnings growth was the key driver. While mid-cap index earnings fell to single digits, our portfolio maintained over 30% growth, resulting in strong performance. We overweighed IT, consumer discretionary (eg: Trend, Kalyan Jewellers, Zomato), capital goods (eg: CG Power, ABB), renewables (eg: Suzlon), real estate (eg: Prestige Estate), and manufacturing (eg: wires and cables). These sectors and stocks outperformed significantly, showcasing the effectiveness of our strategy.

There seems to be an overlap in the top five stocks between the two funds?

There is approximately 50% overlap between the Flexi Cap and Mid Cap funds.

In the Flexi Cap Fund, your top five stocks form the majority weight…

Our concentrated portfolio strategy consists of 25–30 stocks, meaning larger weightage is allocated to the top 5–7 holdings. This approach amplifies returns when these stocks perform exceptionally well. The high weightage in the top five today reflects their exceptional performance over the past 18 months, as many of these holdings have doubled or tripled in value… they (also) contribute disproportionately to the portfolio's alpha generation. Because the weight of those stocks also move up.

What changes have you made to your funds over the past year?

In the last six months, we made two significant changes to our portfolio. First, we meaningfully reduced our allocation to real estate and capital goods due to expensive valuations. While real estate had performed well earlier in the year, particularly between April and May, we anticipated limited upside going forward and decided to reduce exposure. Similarly, capital goods valuations had become stretched, prompting us to shift capital to other areas.

Second, we increased our allocation to telecom, a sector we believe is in a structurally favourable position. Telecom companies benefited from a 15–20% tariff hike last year, and we expect another similar hike this year around April or May. This positions these companies for steady earnings growth exceeding 15–20% year-on-year. Our investments in companies like Bharti Airtel have performed well, reducing the beta of the portfolio. By shifting away from high-risk sectors like real estate to more stable and growing sectors like telecom, we aimed to balance growth and risk in the portfolio.

What's your cash position right now?

If you look at our last month's fact sheet, you would have seen that our cash is less than 1%.  I think we've continuously kept largely fully invested, barring one or two months where we have remained on high cash, because we have seen very weak earnings with environment. But otherwise our philosophy is to largely, at least be 95 to 96% invested.

Have you maintained a low level of cash through the year?

In September, we exceeded 20% cash, anticipating weaker earnings in October, which played out as expected. After the dip, we reinvested in companies with corrected stock prices despite weaker earnings. Since then, equity markets have rebounded, and our investments have performed well.

Has there been any particular fund segment or stock that has surprised you the most this year, in terms of how well they've done?

Small caps have been the standout this year. In the second quarter, they saw the highest earnings upgrades, outpacing mid and large caps. Many doubted their potential, but higher earnings growth drove their success, and we expect this trend to continue. Large caps, meanwhile, showed weaker earnings growth, underscoring small caps' resilience.

Both the funds have a large weightage to retail. Could you explain your rationale?

We focus on value-driven retail players, particularly in fast fashion. Brands like Trent, offering products priced under Rs 500, have thrived due to their sharp pricing and consumer demand for affordable options in an inflationary environment. This positioning has been key to their strong performance.

Any specific market movement or theme that you are looking out for next year?

Two themes look promising – namely, electronic component manufacturing and pharmaceuticals. A Rs 45,000 crore PLI could unlock an Rs 1.5 lakh crore opportunity, positioning India as a global manufacturing hub, moving beyond assembly to meaningful production. In pharmaceuticals, off-patent molecules like liraglutide and semaglutide could drive growth for Indian companies. Additionally, China plus One and Mexico plus One strategies remain significant, especially for wires and cables companies poised to benefit from these shifts.

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