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Summary: JM Financial Mutual Fund’s CIO – Equity Satish Ramanathan discusses his funds’ recent underperformance and the steps he’s taking to improve their returns.
Over the past year, JM Financial Mutual Fund’s ELSS, Flexicap and Value Funds have seen a dip in performance. But Satish Ramanathan isn’t losing sleep over it. The CIO – Equity attributes the slide to global market volatility and a higher allocation to mid- and small-cap stocks. At the same time, he’s able to find value in these segments, as some stocks are still undervalued and have the potential to deliver high-profit growth over the next 2-3 years.
Ramanathan currently manages assets worth Rs 11,000 crore across nine equity schemes. In this interview, he shares his take on the current state of the Indian equity market, sheds light on his ‘growth in earnings with earnings quality’ philosophy, the steps he’s taking to improve the funds’ performance and why the Value Fund remains overweight on mid and small caps.
What is your perspective on the current state of the Indian equity markets? Do you think we're entering overheated territory, or is the optimism well-supported by fundamentals?
The fundamentals are sound. The valuations may be questionable in certain pockets, of course. Still, we are quite enthused by the earnings growth that is likely to unfold in the next few quarters, following five consecutive quarters of decline. And we think that the global volatility, whatever had to play out, has been pretty much played out. There may be bouts of it, however, but I think we have come through most of the pain.
Can you share your core investment philosophy and the approach to stock selection across various market cycles?
We generally focus on structural growth stories, and we believe that these themes are prevalent across multiple industries at various points in time. For instance, we have seen the Auto sector experience a decade-long growth. The two-wheeler sector has experienced two decades of growth. Cement, steel and even plain-vanilla commodities have had long-term growth trajectories, and it's our job and philosophy to track these longer-term growth trajectories, pick them up at reasonable valuations and build them up.
We have our own philosophy, called 'growth in earnings with earnings quality', where we identify both the longer-term structural growth drivers and the company-specific growth drivers. Then, we examine the valuations and earnings quality. For us, return on equity (ROE) is paramount, as are the cash flows.
Your ELSS Fund, Flexicap Fund and Value Fund have posted strong long-term returns; however, when examining their returns over the past year, they have underperformed significantly. What factors have contributed to this underperformance?
Global volatility was one of the key issues, and we were more aligned with the higher-growth sectors, which perforce meant that we were more exposed to mid- and small-cap stocks, which faced a higher level of volatility. Additionally, we were less exposed to the banks, particularly private sector banks, which performed reasonably well during the period of volatility. So, this combination of factors set us up.
Apart from this, are there any other major factors in the portfolio that have contributed to this underperformance, as these are key funds of the fund house?
It is indeed three to four funds of the fund house, and there is nothing structural or anything of that sort which led to their underperformance. It was simply our market positioning, which was slightly off from what the market was moving towards; we had to realign ourselves, regrow and restart from there.
What steps are you taking to get these funds back on track and reclaim their previous top-tier performance?
Of course. One of the key aspects we have implemented is a tactical shift back to large caps, which we undertook during March and April. As growth emerged, we are now using this opportunity to rebuild growth stocks. We are no longer necessarily as defensive as we were two months back. And we see significant growth opportunities emerging in corporate India, and we are exploiting those opportunities to reclaim our position.
What lessons have you learned from the recent dip in performance?
I believe the key aspect that occurred was the drying up of liquidity, and the impact it had on small- and mid-cap companies was quite significant.
We have seen this time and again, but we did not anticipate the severity of the fall. Some of our peers, who were better positioned, naturally benefited. So that is the primary lesson. And I think the key aspect that we see as we speak is that liquidity is returning in a significant way. The central bank is priming domestic liquidity to ensure that economic growth persists, which is a substantial positive for the overall market. As interest rates drop, the cost of capital drops – all of these are lubricants for a better market recovery.
The JM Large Cap Fund had strong returns in 2023 and 2024 but is struggling in 2025. What do you think is causing this underperformance? Is it stock selection, sector exposure or something else?
It's a combination of both. I would think that there was a period when the markets were grappling and experiencing very rapid sector rotation, and I believe that was one of the reasons the fund underperformed during that time. I'm happy to say that the fund is back on track on both a one-month and a three-month basis, and we should see more pleasant returns in the future.
Given how short market cycles have become, with sectoral trends shifting every three to four months, how challenging is it for you to reposition the portfolio from one sector to another in such a dynamic environment?
I think the sector rotation is a classic case of the market being indecisive about whether growth will occur or not. This period of indecision can both hurt and benefit people. However, the best way to tackle this phase in the market is to maintain a balanced portfolio, not necessarily ignoring any particular sector and to have a high-quality portfolio so that we can withstand volatility.
Will you classify this phase as a temporary setback due to market volatility, or is there a deliberate portfolio shift underway?
I would say it's a temporary setback due to market volatility. Our stock-picking skills are essential to achieving performance, and I believe we have a very good team focused on selecting high-quality stocks.
You're launching the JM Large & Midcap Fund soon. What's the role of this new fund in your lineup, and how will it differ from your existing offerings?
The large and mid-cap fund, in our view, offers the right blend of both growth and stability. What we found, based on our research, is that it accounts for approximately 82 per cent of India's market capitalisation and 93 per cent of corporate India's profits. Unlike the pure large-cap fund, which lacks a proper representation of sectors, large and mid-cap funds have a much more balanced sectoral overlay. You have a better representation in chemicals, healthcare and a lower allocation to oil and gas and financials.
If you examine the large-cap names, there is a bias towards financials, oil and gas and various commodities. The blend of large-cap and mid-cap stocks somewhat offsets this bias, resulting in a high-quality portfolio that strikes a balance between growth and stability.
How much does the benchmark influence your portfolio construction? Do you prefer a high-conviction, index-agnostic approach?
That varies from time to time, as there are periods when the market narrows, as we saw in the last three months from the JFM quarter (January-March), and other times when the market becomes broad-based. And accordingly, our strategy will also align with that. It will not be something that we adhere to a single philosophy. There are numerous growth stocks, and while we aim to build a portfolio with higher conviction, which is what will ultimately be reflected, the number of stocks may vary depending on market breadth and liquidity.
Most of your funds (barring the focused strategy) have a relatively compact portfolio of 50-55 stocks. What's the rationale behind this level of concentration?
The materiality of the size to have an impact on the portfolio is key, and anything less than 1 per cent typically does not impact the portfolio meaningfully. It can get lost in the portfolio. Therefore, we prefer to have a slightly higher allocation to make a noticeable difference.
Your Value Fund is overweight in mid- and small-cap stocks despite their rich valuations. Where are you still finding value in these segments?
It's a misnomer to say that mid- and small-cap stocks are overvalued because many sectors are relatively undervalued. Our focus is on identifying companies that can achieve high-profit growth over the next two to three years. So, naturally, on a historical basis, when we look at such companies, they appear expensive, but not so when we consider them on a forward earnings basis. We see many companies with projects underway that can double their profits in the next three years, and these are the companies we aim to build into our portfolios.
Also read: What's behind DSP Large Cap Fund's strong run?
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