Meet DSP Mutual Fund's Abhishek Singh. He manages over Rs 17,600 crore.

Abhishek Singh, fund manager at DSP Mutual Fund, oversees five schemes in the equity and hybrid categories, with assets totalling over Rs 17,600 crore.

Singh has been managing funds at the AMC since May 2021. Starting with overseeing some of their hybrid funds, he took over the large-cap fund in June 2022.

In this interview, he discusses his views on market valuations, investment framework and more.

Do you think large-caps will begin outperforming mid- and small-caps after such a long period of underperformance?

Everything has rallied a lot. But the rally itself, looking at the price, doesn't give you the correct picture because, in some cases, the earnings themselves might have gone up significantly. But markets are expensive no matter how you cut it.

The larger weights in the index end up dragging or pulling up the aggregate numbers. But, if you look at all of the mid- and small-cap space, i.e., 101 to 500, the median multiple today is in the 40s. Even during 2007-08, it was in the 20s. If you look at how many stocks are trading lower than their own 10-year history, the number is significantly lower. A couple of weeks ago, almost 58 per cent of the mid-cap and small-cap space was trading at more than 40 times P/E. These numbers are at their all-time highs.

I believe it's time we temper the return expectations from this point. I don't know how markets will behave over the next one year. I don't think anybody knows. But over the medium term, if you're buying at these levels, your expectation should be closer to 10 per cent. Please note that even MFs from 2007 peaks delivered 10 per cent odd returns over the next 10 years and Indexes much lower. So it has happened in the not too distant past.

Large caps are somewhat better placed. If you look at how expensive they are based on what is being built into the implied expectations, it's not that it's conservative for large caps, but it's conservative relative to average mid- and small-caps.

Help us understand your stock selection framework. How much role does benchmark play here, or while taking sectoral bets?

I've been managing DSP Top 100, the large-cap fund, for about one and a half years now. The approach is benchmark agnostic. It's a bottom-up approach, and we take positions wherever the risk-reward is favourable. I typically run a 30- to 35-stock portfolio, which I believe is a well-diversified portfolio. But if you look at how the industry operates, it is typically considered to be a relatively concentrated portfolio.

In the Top 100, for example, we probably have the highest active share in the category. So, most of the industry runs at 40 per cent active share. But we end up having a high active share of about 60 percent .

To give you another example, at a time when the index weight in pharma was 3 per cent, our large-cap fund had an 18 per cent exposure, and it worked out well. As for how I judge at what point I have to take these active calls, one year ago, the visibility in pharma was not so great, and even the managements were not so confident about the future outlook, but the price was great and some export businesses were getting ascribed negative value. This is what I mean by lower implied expectations because markets typically surprise the consensus. When consensus is already building in very conservative numbers, you do not have to predict; you do not have to know that growth will be 5, 10 or 15 per cent when the market is factoring zero. If you think that even at these expectations, you will end up making 11-12 per cent then you take that trade because the market ends up surprisingly positively if your expectations are conservative and you will end up making high teens which is what we are happy with.

Low implied expectations combined with the fact that markets consistently surprise the consensus is how we operate. And we take significant active calls when we see these opportunities. We have done this in the large-cap fund. In fact, most DSP funds have a benchmark agnostic approach, we run very high active shares across the board.

One of your key considerations for evaluating ideas is, 'Can I hold the business for 10 years?' How do you assess whether the industry or company will continue to exist even after 10 years? For example, the telecom industry has gone from a 10+ player to a four-player industry

That is why I was never able to buy telecom companies. You will notice that in the Top 100, the turnover that I expect is 25-35 per cent. A 25 per cent implies that I'm changing my portfolio every four years, but at the same time, I'm saying I would like to hold business for 10 years. So, is there a contradiction here?

There's no contradiction. This 10-year criterion is just to exclude tactical calls. I'm not buying because there is some overhang or trigger in the stock for a quick trade but because I'm okay with owning the business for 10 years. If you do that and your basic hypothesis holds true, you should be able to make decent returns over 10 years.

In case the stock rallies 30-40 per cent, and something else is available after one year; again, a company I'm okay with holding for 10 years, but at a much more favourable risk-return, you sell this initial idea and buy the new one. The 25 per cent turnover does not contradict the key consideration of whether I can hold the business for 10 years. I want to make very few tactical calls except for some forced changes due to a change in the classification of an index constituent (moving from large-cap to mid-cap).

The second thing you rightly pointed out about the telecom industry is that you want to be in somewhat predictable businesses. And that is one of the reasons why I do not own any new-age companies. Some of these new-age companies will do very well, but it's very hard to predict which of these businesses will be around 10 years out and what their profitability numbers will be. Some of them will do well but I have no way of knowing which one of these will survive. If, at some point, say, five years down the line, you get that confidence that there is visibility and the 10-year picture looks decent, then you start evaluating the idea.

What are usually your triggers for exit?

There are three good reasons to sell something. The best reason is if you find something extremely attractive.

The second reason to sell is if your initial thesis is wrong.

The third reason to sell is when the implied expectations move to the other end, where the stock is pricing in too much. In my buying decisions, I want valuation to be in my favour—extremely conservative expectation, and I'm okay holding a stock if it is somewhat expensive. When they become obscenely expensive, then it's a sell for me. These three reasons cover 90 per cent of the 'sell' decisions.

Also read: Interview with Vinay Paharia of PGIM India Mutual Fund