Managing portfolio risks amid macro uncertainties

The risk is never in the market; the risk is in your portfolio... and yet there is a 24x7 circus out there to understand what will happen in markets and to analyse and explain what is happening in the markets.

Just look at the following sets of facts or call them experiences of mine in recent times.

• Wherever I travel, investors and advisors alike ask questions like, "What will be the impact of a Trump Presidency on markets?"
  
• On a trailing one-year basis as of November 30, 2024; of the Rs 3.85 lakh crore net deployed in active equity funds, investors have invested about 5 per cent of incremental net money into large-cap funds as opposed to 38 per cent in thematic funds (a huge preponderance of small and midcaps due to the nature of themes) and 10 per cent, 9 per cent and 11 per cent in small-, mid- and multi-cap funds, respectively.
  
• Over the last 10 calendar years, where we have seen every kind of market scenario, on average, around 70 per cent of our total market capitalisation has been in the top 100 companies (large cap) and the rest 30 per cent in mid, small and rest of the listed universe. At the worst time of market conditions, the top 100 companies have accounted for around 77 per cent of total market capitalisation. As of November 30, 2024, they accounted for only around 60 per cent of the total market capitalisation.

I hope you understand that the original question on the Trump Presidency (or any such macro question) and its impact on markets and, hence, impact on investors' portfolios now falls into the domain of the below question, which I am suggesting as a re-phrasing of the original Trump Presidency question. Here goes.

"In a soccer formation, if all 11 of my players are playing aggressively in the opponent's penalty area, what is the chance the opposition will score a goal against me?" The answer is - 100 per cent; the moment you lose ball possession.

Or let me try again.

"In a thali, if I place spicy chillies pickle where rice is to be placed and I place rice where the pickle is to be placed, will I get gastric trouble"... you get the drift now.

When life serves you lemons, what comes out of you, tears or a lemonade business depends on what's inside you. When markets go for a toss based on some macro event, what comes off your portfolio is what's inside it.

In the past three years, the data suggests that, on average, investors' portfolios are overweight micro, small and mid caps, overexposed to PSUs, cyclical, defence, railways, infrastructure, energy, utilities, manufacturing and the like. For high-net-worth investors, it has been overexposed to unlisted equities and private markets/ alternate asset classes. If your portfolio has followed trends, then it's time for you to correct your portfolio balance because if not a Trump Presidency or a Biden administration-inspired missile aimed at old or newly acquired cold war enemies, or unexpected currency moves, something or the other is bound to come up and cause a goal to be scored or a pickle to play truant with your tummy. And when that happens, how an investor will react and make peace with situations is yet another story...

Mr Buffett is quoted as saying: "Be greedy when others are fearful, be fearful when others are greedy". Ever wonder who is the "others"? Mr Buffett, I doubt, not!

The one you see every morning in the mirror or if I want to go easy on you, I'd say your neighbours and social circle. In March 2020, with the Nifty at around 8,700, the 'others' were convinced we are all dinosaurs, and the world will come to an end and within 18 months, in October 2021, with Nifty at record highs of around 18,490, 'others' were convinced we are about to begin 'Amrit Kaal'. But then, instead of Amrit Kaal, we saw the Nifty down to 15,200 by June 2022. Talking heads and experts were brought on to provide explanations, and we were told, "Amrit Kaal, yes, for sure, but right now, it looks like we may have begun the much-anticipated WW3 and oil being $129 to a barrel is bad for external macro." So we say OK, understandable.

But once you digest that explanation, you find Nifty at around 18,900 again by November 2022. Again, explanations are trotted out, oil prices have come down, disaster is averted, Ukraine has not been taken into NATO, etc. You feel great, and then yet again you find Nifty around 16,700 by March 2023, this time you are told Silicon Valley Bank, Signature Bank... you get the drift. There is no end to post-event explanations, highly insightful and intelligent no less, just that they are post facto and by that measure trifle too late.

But what really surprised me was a new behavioural bias. Investors do not focus on making their portfolios bulletproof. They want to maximise returns and then spend time predicting macros and market events, most of which they miss in the end, only left to draw comfort from post facto explanations as to why it happened. When highly convincing, intelligent and insightful story format post facto explanations are provided, they start believing that we will handle it better next time and that these explanations have predictive power. Even more amazing, if the explanation is provided without laying any blame at the investors' doorstep, the explainee can sleep well at night, finds closure for 'why I made losses', and the explainer gains respect and adulation.

There is no end to seeking explanations, and a lifetime is available to collect insights after events wreck your portfolio. But the only way to be smart is to understand that events are unpredictable and that markets' reactions to events are even more so.

The risk is never in the market; the risk is in your portfolio. The only solution is to eat rice like its rice and pickle like its pickle and if you find yourself on the soccer field, stick to your formation and
play the strategy, not the field. Play your portfolio, not the market.

Aashish P Somaiyaa spearheads WhiteOak Capital Asset Management Limited as their CEO.

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