Super Fund Manager 2024: This fund manager explains how tactical sector allocations led to strong large-cap performance

Jitendra Sriram, Senior Fund Manager, Baroda BNP Paribas Mutual Fund

The Baroda BNP Large-Cap Fund has posted strong returns of 31% this year (as of December 13) despite challenging conditions within the large cap space. Speaking to Moneycontrol, Jitendra Sriram, Senior Fund Manager, Baroda BNP Paribas Mutual Fund said, “In 2024, large-cap stocks have shown resilience despite the volatility in the broader market. While mid- and small-caps have outperformed in recent periods, large caps have proven to be more stable, with consistent earnings growth and solid fundamentals.”

According to Sriram, the key to success for them during the year has been strategic stock and sector calls. “We have concentrated on sectors like utilities and consumer discretionary, which have shown solid growth potential, while keeping an underweight stance on metals and energy,” he says.

He also spoke about valuations, market outlook and challenges ahead.

Edited excerpts:

What do you think worked for your large-cap fund this year?

The large-cap category is fairly restricted, with choices limited to 100 predefined stocks, meaning 80% of the portfolio is set. The key lies in how weights are allocated, especially sectoral weights. Major sectors include consumer discretionary (e.g., autos), staples (e.g., FMCG), metals, oil, and gas refining.

The first focus is sector weight -- going overweight or underweight at the right time. The second is sub-segment allocation within sectors. For example, in financials, sub-categories include private banks, state-owned banks, NBFCs, insurers, and asset managers. The focus must be on both total sector weight and specific sub-segments.

In tech, even seemingly uniform sectors have nuances. Infosys, for instance, is US-focused, while TCS has a balanced global footprint. A US recovery favours Infosys, while TCS offers diversified exposure. Similarly, Tech Mahindra benefits heavily from telecom, thanks to its BT relationship, performing well when telecom thrives. These sector-specific nuances are crucial

Were there any specific calls that worked particularly well for you this year?

First, we were cautious about the pace of rate cuts. We did not buy into the theory that rate hikes would quickly reverse into rapid rate cuts. As a result, we were more underweight on financials compared to others, which worked in our favour.

Second, our positioning in utilities also helped. Last year, the government recognised that renewables alone could not meet the country’s energy demand. They announced plans for significant thermal capacity additions, around 80 gigawatts.

For example, the central nodal agency, Power Grid, was doing annual capex of about 60-70 billion before COVID. This was ramped back up to 140-150 billion as the government realised the need for additional capacity. Since these are largely guaranteed ROE businesses, higher capex translated into more earnings streams.

As a result, generators, transmission players, and downstream electricity makers all benefited from this shift. This positioning in utilities worked well for us.

Additionally, we were early on the industrials theme. The government introduced multiple schemes like PLI (Production Linked Incentive), indigenisation of defence spending, and others. Some of this focus was driven by supply disruptions during the Russia-Ukraine war, which forced rapid indigenization.

The end result was a heavy push for local manufacturing, which performed well for the domestic industrial space. We picked up on this theme early and played it successfully.

Currently, where are you overweight?

At this juncture, we are overweight on utilities. Recently -- about two quarters back -- we became more bullish on the pharma space and added exposure there. The third sector we remain overweight on is consumer discretionary.

What about underweight sectors?

We have been underweight on metals and mining, consumer staples, and energy (oil and gas). Financials remain underweight as well, though we have reduced the extent. For example, if we were 500 basis points underweight earlier, we are now more than half that level.

Given the relative underperformance of large caps compared to mid- and small-caps, how challenging has it been to manage a large-cap fund?

The challenge is primarily related to fund flows, as investors gravitate toward mid- and small-caps when they outperform. However, large caps offer the advantage of liquidity, making entry and exit relatively painless. Even if a stock does not perform as expected, it is easier to cut losses and move on. This flexibility is harder in mid- and small-caps due to liquidity constraints.

Have there been any surprising calls this year -- positively or negatively?

One instance was our exposure to ferrous metals. When China announced its largest stimulus since the global financial crisis, we expected it to benefit local steelmakers. However, the stimulus led to increased Chinese output, causing price damage in neighbouring markets. We quickly exited that position. On the positive side, real estate performed well, but its low index weight in large caps meant that missing it did not significantly impact us.

How are valuations looking in the large-cap segment right now?

Looking broadly at the Q2 earnings season, starting with the large-cap universe, the forecasts were in the range of 13-14%, a modest expectation. However, the actual delivery was not as weak as anticipated. Excluding the oil marketing companies, which faced challenges like subsidy payments and inventory losses, the actual growth was closer to 11%.

There were minor impacts from slower government spending in the first half, influenced by electoral dynamics, and slightly softer growth in certain segments. Despite this, large caps showed resilience compared to mid- and small-caps. For mid- and small-caps, where expectations were higher (20-24%), the disappointment in growth rates was more pronounced.

From a valuation perspective, large caps are trending in line with their long-term averages on FY26 earnings. I am not particularly concerned about large-cap earnings. However, mid- and small-caps, which experienced brisk growth last year, might need another quarter or two before the base effects turn favourable. Until then, headwinds in growth rates could persist into the third and fourth quarters.

What is your market outlook for 2025?

We expect low double-digit returns for the market. While small and mid-caps may take another two quarters to show earnings growth, large caps are well-positioned for steady performance.

Any significant risks for 2025, domestically or globally?

Globally, conflict hotspots like the Middle East and Russia-Ukraine remain risks. Domestically, challenges include achieving budgetary spending targets and slower-than-expected rate cuts due to inflation concerns.

Which themes are you optimistic about for next year?

Manufacturing, driven by initiatives like import substitution and defence localisation, looks promising. The energy sector, particularly renewable energy, also has long-term potential. Broadly, I would say that for 2025, the initial part of the year could see a scenario where the dollar stays strong. Exporting sectors—pharmaceuticals, dollar-linked players like metals, or even IT—could see some traction. However, the year might turn into a two-part story. In the second half, dollar weakening might begin, and domestic sectors could start outperforming.

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