This star fund manager explains how ‘Algo’ system helped survive March crash

The portfolio continues holding such stocks until their momentum fades, at which point it replaces those with others.

Coming into July, our portfolio had been holding a fair bit of midcap pharma and agrochemicals, which had already done reasonable well but then had an exceptional month.

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Q) This is a relatively new scheme but if we look at the performance for three and six months or a year, it is an absolute stunner. So, what is the secret behind such robust performance?

A) I think three things worked very well for us based on how the rules for the portfolio are setup:

Downside protection

We fell less than half of the market when it corrected sharply in March. The reason being every stock eligible to be included in the portfolio needs to pass a set of price and volume conditions.

In late February and early March that universe of eligible stocks shrank dramatically and we started moving into cash. Through most of March and early April, we were up to 70 percent in cash.

We have refined the model to try and keep deep drawdowns to a minimum and it was good to see that worked well in such a violent correction

Allocation to other assets

One thing that probably separates our strategy from the bottom-up fundamentally-picked portfolio is we can move into other asset classes if they show strong relative price momentum.

While the universe of stocks shrank, gold was showing strong momentum, and so we allocated up to 25 percent to gold. The combination of gold and cash meant we were better placed through the drawdown and also coming out of it

Relying on rules over emotion

While the speed and extent of the March correction surprised everyone, I think the bounce back also caught most investors unawares.

Understandably so, it's very hard to convince yourself to buy when your portfolio has just been decimated. Because our momentum strategy is based on a set of rules, it reduces (I won't say eliminates) the impact of human emotion and judgment.

So, when stocks again started fulfilling the momentum criteria, we went back into equities and were fully allocated by the end of May.

Our overall performance came down to losing much less than the market in the correction, and gaining more on the upside as it bounced back.

Q) As a fund manager what is your investment philosophy? Any market guru you follow or books that you have read?

A) There is a quote by Warren Bennis, an accomplished professor of organisational studies at the University of Southern California, about the factory of the future

"It will have only two employees, a man and a dog. The man will be there to feed the dog. The dog will be there to keep the man from touching the equipment."

My investment philosophy is a bit similar to that ie a systematic rule-based investment approach that is built on a robust set of rules and applied consistently will outperform most purely discretionary portfolio management approaches.

This is not to say there are not several brilliant stock pickers. It is just that consistently picking five and 10-baggers is much harder than how it looks when we read biographies of legendary investors.

My investment reading has spanned the classics to some esoteric books only loosely related to investing.

A few that have stayed with me long after reading them:

Thinking Fast & Slow by Daniel Kahneman—how our decision-making is susceptible to context even when we believe we are being objective

More than you know by Michael Mauboussin—applying multiple perspectives to important decisions, including investing

What works on Wall Street by James O'Shaughnessy— the importance of hard evidence in choosing your investment approach

I don't subscribe to the idea of having gurus because what worked for them will almost certainly not work for you, given your unique combination of personality traits, but I've learned from following the evolution of early hedge funds like Commodities Corporation and subsequent investing greats like Paul Tudor Jones and Stanley Druckenmiller.

Q) What do you like to do when you are not crunching numbers?

A) The pandemic has certainly brought the things that really matter into focus. Spending time with family both in person and over video calls, sharing the occasional meal with friends, taking care of body and mind, and most importantly, realising how fortunate we are in being able to do these things.

Q) How did you start your investment journey?

A) For a fund manager, my background is distinctly non-traditional. I've been a professional for almost two decades. I started my career as a programmer and then post my MBA from the Indian School of Business, worked as a management consultant across a few different sectors, and led the strategy function for companies on a range of problems from developing a growth strategy to improving profitability.

Got interested in investing at the same time since my job involved forming an understanding of sectors and companies.

But, this also helped me appreciate how incredibly hard it is to forecast industries and company performance accurately.

Complex financial models look reassuring but because of the number of assumptions built-in, even minor differences, in reality, have a multiplicative effect on the overall error in the outcome.

Going through the 2008 crash was when I started enjoying investing. While I saw peers swearing off markets, I felt it was one of the rare times where everything was on sale.

Enjoyed being a deep-value investor for that period but realised “usual” markets aren’t as easy to pick undervalued stocks. Started looking at more quantitative evidence-based approaches, one of the outcomes of which is the current Momentum Strategy.

Q) What is your advice to investors who started their investment journey in 2020? More than five million demat accounts have been added this year, so far.

A) If you look at all the literature on investing, most philosophies fall into one of two core beliefs about the market. According to me, both of these are entirely valid but diametrically opposite beliefs.

The more prevalent belief says you know or can know more about a company than the market. The bottom-up fundamental method of picking stocks falls in this category.

You find stocks the market says are worth "x", but your assessment of their future cash flows says they are worth 2, 3 maybe 10x, and so you buy and hold till future business performance proves you right

The other belief is that you know less than the market about any given company. This means you rely on the collective wisdom of the market to tell you what companies are on the right track to improving their business to justify higher prices.

This could be companies that are bottoming out and finding their way back or those that were already dominant getting even better.

Start with which style you suits you the best. Be honest with yourself.

And, realise that investment performance is almost as much about executing your ideas, as it is about having the right ideas. So aspects like asset allocation, position-sizing, your entry and exit strategies are critical foundational elements in making money from your investments.

Finally, enjoy the learning process and the returns will follow.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.