'Volatility will continue until US trade policy clarity'

As the Indian equity market remains turbulent, investors are growing impatient, waiting for a rebound. However, Mayur Patel, Fund Manager, Equity at 360 ONE Asset Management, believes volatility will persist for now, driven by global macroeconomic factors. Despite this, Patel maintains a positive outlook, noting that the ongoing market correction has uncovered "high-quality small and mid-caps" at attractive valuations, with the "risk-reward improving" across the broader market.

Presently, Patel manages three funds at 360 ONE, with a combined AUM (assets under management) of Rs 8,500 crore, including the four-star-rated 360 ONE Focused Equity Fund.

In this interview, Patel shares his investment strategy, the factors driving the consistency of his Focused Fund and why he's not overly concerned about its recent performance challenges.

Having worked at CRISIL, Spark Capital and DSP BlackRock, how have those experiences shaped your approach to fund management at 360 ONE Asset?

From my early days as a research analyst, I was naturally inclined towards businesses having very strong returns on capital and witnessing substantial growth opportunities while trying to seek some comfort in valuation. But after seeing multiple cycles, including cycles of sharp drawdowns when expensive growth stocks take most of the beating, I became more and more convinced about the importance of having a good mix of growth and value ideas in the portfolio.

The idea is to have more consistency in performance over a long period, and what truly matters to me is to develop conviction. This confidence comes from a depth of research, and one can have a high conviction in growth and value ideas. Simply put, my style has evolved to be conviction-driven bottom-up investing across growth and value segments.

What's your investment philosophy, and how do you select stocks?

As mentioned, I take a blended approach that balances growth and value well. So, I focus all my energy on identifying bottom-up, high-conviction ideas. Our firm's philosophy, which employs a framework known as SCDV (secular, cyclical, defensive and value traps), fully aligns with this style and guides our portfolio construction.

Secular growth forms a core part of the portfolio, while value traps are the least preferred. In between, you have value cycles and defensives, which are of higher quality. We aim to adjust our allocations between these segments based on our view of the economy and the prevailing valuations. This helps to make our long-term portfolio obvious, irrespective of changes in the economic environment. This structured approach helps us achieve a very good amount of diversification, even in a concentrated scheme.

In addition, I highly regard several core principles. I try to avoid investing in narrative-driven stories, even if they have high momentum and valuations that can't be justified based on fundamentals. Therefore, I avoid investing in such bubble areas.

I strive to strengthen my convictions by thoroughly understanding the business. Finally, when uncertainty arises, it's crucial to concentrate on cash flows. When evaluating a company's quality, the track record of cash flow generation over a long period speaks a lot, and how these cash flows have been deployed is critical. These are some of the principles that I hold dear when it comes to investing.

Could you walk us through the stock selection framework at 360 One AMC? How many stocks do you actively track and keep within your potential investment universe?

Our research universe includes around 500 stocks. Our team of eight analysts, who track most of the core sectors, conducts in-depth research on these stocks.

We have a very strong technology system, known as a digital research system, where all research meeting notes are stored on the cloud. We have also integrated artificial intelligence to help us reduce the time spent on data crunching and some mundane work.

Regarding investments and portfolio construction, we first use a top-down approach, where our framework comes into play. This process shows us what part of the portfolio has to be in growth, what should be in value, especially cyclical, and what should be in quality. That's a call based on the view of the economy and the valuations, among other parameters.

However, the real work happens at the bottom-up level, where we focus on building strong confidence in individual stocks. Our processes for financial analysis, forensic analysis and fraud detection are robust. Before devoting even 2-3 days or more to research a new idea, we review our system for governance, forensics and fraud detection hygiene. If we identify any red flags, we don't even spend a minute on that stock.

In addition, we have a basic threshold of quality, regardless of whether it's a value or growth investment. Later, it involves a standard financial and valuation analysis process, meeting management, visiting plants, getting a sense of the business and developing conviction.

How do you see the current market environment, and do you think the volatility will continue in the near term?

We saw massive FII outflows in January 2025 and February 2025, but this pattern started in September last year. I believe this is driven by a broad-based sell-off across emerging markets, the hardening of the US Treasury yield, and a stronger dollar. These global factors were followed by our market valuation, which was at a significant premium to our median. It went to 4.25 times the price per book versus 3.2 times the 25-year median.

The valuation was high, and our growth slowed. While this correction could be transitory, it's a function of these factors. In the near term, until we get more clarity on US trade policy, I think volatility will continue.

With key indices down by 15 per cent, do you think valuations are more attractive now, or are there still pockets of overvaluation?

We believe that price-to-book value is the most important and reliable valuation parameter. In September 2024, Sensex's price-to-book increased to 4.25 times, but following this correction, it has now dropped to 3.76 times.

The 25-year median is around 3.2-3.3 times in that region. So 4.25 was a massive premium to price-to-book, and we always see that 2-4 times is a band, and above four times it becomes expensive.

So you've noticed that the premium is coming down a lot. Still, there are some pockets of premium left, but the risk-reward is improving in the broader market. But if we do the same analysis on the small and mid caps, that premium is still very high on a price-to-book basis versus the history, and there are pockets of exuberance left still in the small- and mid-cap space.

This correction reveals a plethora of intriguing and high-quality small- and mid-cap ideas now being offered at reasonable valuations. But there are still other pockets of exuberance in that small- and mid-cap space. The view is more positive for large caps and selective for small and mid caps. We would love to add more of the written-down small and mid caps, where the reward is interesting, but we are not painting the brush broad-based across small and mid caps as of now.

Your Focused Strategy has demonstrated consistent performance compared to both the benchmark (BSE 500) and peers. What's the key to this consistency?

Our focused fund is our flagship fund, which has completed 10 years. It is a journey of following a disciplined approach to investing in a balanced way across the four quadrants of our framework, which I explained earlier, while having a very bottom-up strategy.

Sometimes, we have strong confidence in a mid-cap stock due to its valuation and fundamentals. We do not hesitate to include it as one of our top five ideas. However, there are occasions when our top 10 ideas are large caps. What I am trying to say is that we have been flexible in terms of investing and sticking to our forensic tools to reduce mistakes. We have always committed small mistakes and will have winners and losers in the portfolio. However, the idea is to minimise mistakes and focus on more risk-adjusted returns. So 2024 was a soft year for us compared to a 10-year trajectory; the performance was closer to the benchmark, and there was very little or no alpha.

This was the ideal outcome, but we became cautious in small and mid caps a bit early in the year, and the rally in the tail end of the market continued simultaneously. Some three or four large active bets didn't perform in line with the very strong rally in the tail end of the market. However, despite their failure, our conviction in these active bets remains strong, and our disciplined approach has once again proven beneficial during this correction period.

While overall performance has been steady, certain periods - such as 2022 and 2024 - posed challenges. What were the key factors behind these struggles, and what adjustments have you made in response?

2022 was a modest year, and our performance was slightly below the benchmark. However, from the portfolio perspective, I had no discomfort because our portfolio has one of the lowest turnover rates in the industry. So, we don't get into churning portfolios to optimise three to six months of performance because we are looking at more long term and want to create performance over long periods of time.

Hence, you will sometimes find that many of your active bets suddenly consolidate. There will be periods such as 2022, but it's fine as long as you are very convinced about your portfolio positioning from a long-term perspective and not worried about short-term volatility.

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