Widely read:
After a rough patch in 2023-24, PGIM India Mutual Fund's equity schemes have made a strong comeback. But what changed? Not much, says Chief Investment Officer Vinay Paharia, who oversees 10 schemes with assets under management (AUM) of around Rs 21,500 crore. The market, he believes, has simply rotated back to rewarding what has worked over the long haul: High-quality, high-growth businesses.
In this conversation, Paharia decodes the macro tailwinds pushing Indian equities higher in 2025, explains why staying disciplined pays off, and shares why stock picking—not market timing—remains central to his investment philosophy. Below is the edited transcript of the interview.
India's equity rally has been remarkably resilient. According to you, what are the key macro forces still pushing the market higher in 2025?
I think one of the key aspects that many of us are aware of and are working on in the background is that India is a large economy, and this large economy is growing at a very fast pace. From a global perspective, when we examine the projected growth in global GDP, it is expected to grow at a rate of around three or three and a half per cent. In contrast, India is anticipated to grow at twice that rate. In the overall context, and especially on a relative basis, India's growth rate is almost twice that of the global average despite being a fairly large economy.
So, think of it like this: for a foreign investor, India is like a large-cap stock which is growing at a fast pace. So, it is, in that sense, a reasonably attractive proposition for investors from a longer-term perspective. That, to me, is one of the key drivers of India's long-term potential as an investment destination.
Apart from that, I think one of the other aspects which have worked significantly in India's favour, especially in the last five years, is the deft handling of the monetary and fiscal policies. So, India has been ahead of the curve in terms of managing and controlling inflation, particularly by adjusting its interest rates effectively. Additionally, the fiscal deficit has been reasonably well under control.
Think of it and compare it with many other parts of the world. In the pandemic period, we saw fiscal deficits balloon across most of the economies. We saw inflation ripping out most of the economies. Interest rates are going from zero to almost 4 to 5 per cent. I think those were some of the key, significant changes that occurred in India, which altered the country's stature from a macroeconomic perspective.
How would you describe your core investment style? What are the must-have qualities you look for before buying a stock?
Our investment style is grounded in evidence. We have put out this evidence of what works for investing in India. It is a detailed study of the last 20-25 years of stock market data for all companies which are listed on the exchange. What we have discovered is that if we follow a simple strategy of buying companies with business quality and growth better than average, then our probability of outperforming the overall market is substantially higher.
To provide some context, historically, if you had followed this strategy, you would have outperformed the market 70 per cent of the time on an annual basis. The average returns you would have generated are almost two percentage points higher than the overall universe. In terms of drawdown, this strategy would have experienced a significantly lower drawdown compared to other strategies.
From our perspective, I think we follow a growth style of investing that has been successful in India for a long time. But I would caution that every strategy has its ups and downs. If it has worked in the past, it doesn’t mean it will also work in the near future. The proof of the pudding is the sharp underperformance of this strategy in the period 2023-24.
Therefore, there are periods of underperformance for every strategy; however, it is essential to understand the driving force behind each strategy. Investors must adhere to these strategies in a disciplined manner to generate the long-term benefits of the strategy.
PGIM India’s ELSS Tax Saver, Large and Mid Cap, and Small Cap funds have all jumped to the top quartiles in one year after lagging for three years. What key portfolio changes drove this turnaround (from their three-year quartile-four shows)?
It’s important to observe that while these funds have been top quartile, it is largely driven by other funds not delivering as much returns as these funds. A year back, they were in the bottom quartile because other funds were delivering higher returns than these funds. And why was this happening? These funds are predominantly investing in a strategy of high-growth and high-quality companies.
If you look at fiscal year data for 2023-24, the high-growth, high-quality strategy significantly underperformed the overall market, while a strategy of investing in low-quality, low-growth companies outperformed. So, if you have a portfolio that even includes some low-quality, low-growth companies, you would have had a much better experience in 2023-24, and the same thing would have worked against you if you look at 2024-25.
We have not made many changes to the portfolio. We have not made material changes to the style in which we are investing. The market has rotated out from low-quality, low-growth into high-quality and high-growth. Remember, low-quality, low-growth doing well was an anomaly. Now, the market is normalising towards high growth and high quality, which was what it has been doing over the last many, many years. So, I think now it’s what the markets are normalising, and that is a tailwind for all our funds.
Is it across the ELSS, Large and Mid Cap, and Small Cap, or any tweak in the strategy, or some stocks or the sector calls which have worked well for these funds specifically?
There are a few stocks and some sector calls which may have worked better for each of the funds. Of course, because they are also run by individual managers, some of them may be doing much better than others.
For example, we were overweight in IT at the right point in time and underweight in IT at the right point in time. We had significant exposure to private sector banks, which worked well for us. We had significant exposure to consumer discretionary, especially the new-age consumer discretionary companies, which once again worked very well for us. We have avoided most of the commodities. We have avoided investing in the utility space.
All of this worked very well for us this year, but the same things worked against us in the previous year. So, I think that is how these funds have done better.
That could be for the ELSS and the large-cap strategies, but for the small-cap, it’s completely bottom-up. So, what has worked particularly in the small-cap fund?
Even in the small-cap fund, as you absolutely rightly said, we follow a bottom-up stock selection approach. And there are many companies that have delivered superior returns individually, and it is actually superior stock picking that has done well. And hence, I would say that if we can continue doing that, that should help.
However, if you examine specific sectors, there are areas such as speciality chemicals, including some of the new-age companies that have been newly listed in the last three to four years and are part of our portfolios. They did exceptionally well in this year. Their profits actually have grown much higher than, in fact, their market cap. So, they, in fact, became cheaper on a valuation basis. Hence, we believe that the portfolios are experiencing a growth in fair value, which is higher than the actual returns delivered by the portfolio. And hence, we remain optimistic about the portfolios as well.
Apart from this, are there any other major factors that have contributed to this outperformance?
We have always maintained a strategy of adhering strictly to the mandate, which means we did not take any cash calls. We always maintained a diversified portfolio. We have a high active share relative to the peer group. So, I think broadly, that’s been a feature of the portfolio for the last few years, and that has continued.
As I mentioned, the primary reason the funds have performed better this year is that high-quality and high-growth companies have outperformed the rest. And in fact, we have been talking about this every quarter. It began in June 2024 and has continued ever since. I believe the primary reason our funds are performing better is that the market is normalising again, favouring high-growth and high-quality companies.
Your Large Cap Fund is still in quartile three over one year. With a limited universe of about 100 stocks, why is outperforming so tough, and what’s your plan to climb higher?
We have looked at our portfolios and looked at the attribution. There have been some hits and misses. To some extent, we also had a little exposure to mid-caps, which is broadly in line with the peer group, and that probably has hurt us a bit. However, we are taking steps to ensure that, on the margin, there are some tweaks in the fund.
However, broadly speaking, we believe that even if we follow the high-growth, high-quality strategy, the fund should continue to perform well. There are some strategies which will do better. Some strategies take time. But over a period of time, we remain confident that if we follow a low-churn, diversified portfolio of high-growth, high-quality company strategy, it will tend to do well over a long period of time. So, some portfolios would have done better. Some would take some time. I think it’s only a matter of time.
Also read: For PPFAS, cash is a by-product; not tied to markets
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