Super Fund Manager 2024: Why this Flexi Cap fund manager believes a blended strategy is key to success

When it comes to a flexi cap fund, a blended approach is the key to success according to Invesco’s Head of Equity and Fund Manager Amit Ganatra. The Invesco Flexi Cap fund has given returns of around 41 percent this year. Talking about what worked, Ganatra says "Our portfolio is well-diversified, with the high-growth component spread across 43 names, reducing the impact of any single underperformer."

He also spoke about why India’s risks are more domestic than global, sectors on his radar and what about the market this year surprised him the most?

Edited excerpts:

Could you talk about what worked for your flexi-cap strategy?

The fund has maintained consistent positioning since inception and is approaching its third year. We focus on three types of companies: high growth companies expected to grow top-line, operating profit, or EPS by over 15% annually for the next two years, with sustainability thereafter; high-quality companies with stable ROE, ROCE above 15%, though growth may not exceed 15% CAGR in the next two years; and turnaround companies in a phase of recovery or transformation.

Have there been any specific bets that you've taken this year that have not worked?
This year, the high-quality component of the portfolio has underperformed. While markets rewarded high growth, high-quality stocks with strong ROCs but under 15% growth lagged. For example, HDFC Bank and ICICI Bank, once considered high-growth, now show lower credit and earnings growth, thus falling under the high-quality category. One specific underperformer was Honasa Consumer, part of our high-growth exposure. It faced growth challenges with its core brand. This highlights the risk of high-growth strategies -- if a company fails to meet expectations, it underperforms. However, our portfolio is well-diversified with the high-growth component spread across 43 names, reducing the impact of any single underperformer.

Are there any particular characteristics of the fund that you think worked in this volatile market?
In the last six months, our positioning benefited from market conditions. In March 2020, 62 companies in the BSE 500 delivered over 15% revenue growth, which went up to almost 350 by March 2022 but from that time, the number has been dropping and is now down to 165. During broad market rallies like the period FY20-22, stock selection was less critical, but as growth narrowed, stock picking became more important. Our portfolio's 60%+ companies delivered over 15% growth, which worked in our favor. These companies were rewarded with re-ratings, driving strong fund performance. The FlexiCap strategy, focused on growth, benefited in a challenging growth environment.

What sectors are you currently overweight on, and what are you underweight on?
In the last six months, we've been overweight in financials, but given its underperformance, we are now neutral. We remain overweight in healthcare and IT. Consumer discretionary is our largest overweight, driven by bottom-up stock selection, despite challenges in India's consumption sector. We are underweight in staples, preferring discretionary consumption instead. Energy and metals are also significant underweights in the fund.

How do you look at valuation?
To achieve high growth, you must pay a premium, increasing the portfolio's P/E multiple. Hence, balancing is essential. As mentioned, nearly 36% of the portfolio, comprising high quality and turnaround stocks—helps lower overall valuations. The portfolio's blend ensures valuations remain reasonable. Top holdings, ICICI Bank and HDFC Bank, reduce the overall P/E and price-to-book multiples, providing stability. Though these components haven’t performed well, we continue backing them for their role in maintaining comfortable portfolio valuations. Their stability outweighs short-term underperformance.

Could you also talk a bit about your exposure to tech?
Indian consumer tech includes companies like Zomato and PB Fintech, benefiting from India's increasing tech adoption. More consumers now make purchasing decisions online, boosting these businesses. This segment is seen as a long-term, structural play. While valuations aren't cheap, owning such businesses for the long term could capture substantial profit pools and deliver strong value creation.

What's your outlook for next year?
Overall macros remain strong, but we're experiencing a temporary slowdown due to slower credit growth and government capex. Government spending usually picks up post-election cycles, so that slowdown seems temporary. Credit growth has normalised with deposit growth, reducing further slowdown risks. From Q3 and Q4, we expect gradual improvement in numbers. Valuations, however, remain expensive across sectors except for financials and some autos. While there's a degree of slowdown, long-term opportunities are decent. Given the scenario, it's important to stay invested. Equity investments can still yield 12-13% earnings compounding, which is reasonable.

What will be your strategy for next year?
We need to be more cautious. While our portfolio comprises companies that are doing well, we realise that mistakes in markets with expensive valuations can hurt us. We need to be vigilant and avoid excessive risks. The current approach of FlexiCap, balancing growth with high-quality, stable stocks, works well. A diversified approach, including both growth and value, across large caps and small caps, will help navigate next year.

What are your top sectors for next year?
Sectors that are cheap in terms of valuation offer opportunities for P/E re-rating. The financial sector still looks attractive from a valuation perspective. Consumer discretionary also looks attractive, as the slowdown is already priced in, and a recovery is expected next year. IT and healthcare are promising from a growth perspective.

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