'I don't believe pure buy-and-hold works'

Manager of two five star rated funds breaks down his stock-picking playbook, why ‘buy and hold’ is no longer enough and how he's turning around underperforming strategies. Known for his grounded, research-first approach, Manish Gunwani focuses on identifying stocks that can potentially double in three to four years while maintaining style and sector diversification. The Head - Equities at Bandhan Mutual Fund also manages seven schemes with combined assets of around Rs 35,700 crore, including the five-star-rated Bandhan Small Cap Fund and Bandhan Large & Midcap Fund. In this conversation, Gunwani explains why buy and hold alone doesn’t cut it anymore, the rationale behind a broad-based portfolio in the large and mid-cap fund and recent changes that are helping realign underperforming strategies like the flexi-cap fund. Can you share your investment framework for small caps and what qualities you look for when selecting stocks in the portfolio? I think any kind of investing we, as institutional investors, do is a mix of benchmark-led investing and absolute return investing. When you look at the small-cap space, I believe you should have an absolute return DNA rather than being purely benchmark-driven. The way we think about the small-cap space is that we’re much more focused on absolute returns than on the benchmark. What we try to do—rather than thinking solely about a style, sector or theme (which we do, obviously)—is follow the overriding philosophy of trying to buy stocks where we see a good possibility of them doubling in three to four years. Now, this can happen in various ways. It could be, say, a metal or PSU bank trading at 0.5x book, which we feel could go to 0.8x or 1x book in three years. Or it could be a very thematic technology company, like a software product or internet platform, growing at 30–40 per cent. We’re not fixated on how this doubling will happen. We tend to be value-conscious, so we typically struggle to buy stocks above 30–40x P/E. But there’s no hard-and-fast rule. For example, we have owned several internet platforms that have been loss-making. That said, we’ve struggled to buy capital goods stocks at 60–70x P/E at this point. If you look at the overweight sectors in our portfolio, they include lenders and financials trading below book value or real estate and textile companies that tend to be asset-based or valued at 10–15x earnings. We aren’t buying too many 50–60x P/E stocks. But again, P/E multiples and price-to-book