What has resulted in the outperformance by the fund in the last one year?
Our money-management philosophy is defined by the attributes of 'active', 'absolute' and 'unconstrained'. In the multi-cap fund, the attribute of 'active' - which implies a dynamic approach towards money management in contrast to the traditional 'buy and hold' strategy - is even more emphasised. Under the dynamic approach, liquidity analytics and assessment of market-risk appetite, in addition to the underlying fundamental aspect, is given importance. We believe that the last one year's outperformance is a testament to the efficacy of our VLRT (volatility, liquidity, risk and time) framework.
This multidimensional approach entails that our scheme follows a 'multi-manager' approach, whereby each domain specialist is responsible for each parameter in the overall VLRT framework. Portfolio management is, therefore, the responsibility of a specialist team rather than an individual, thus also significantly reducing key-man risk.
How do you pick stocks for this fund?
Our predictive analytical toolbox formulates a multidimensional research perspective to various asset classes, including equities. Research has shown that optimal entry and exit points into various asset classes, and, within an asset class, specific securities can be identified through the identification of bouts of extreme fear in the market, which is captured by the 'quant Capitulation Index'. Identification of inflection points, based on our VLRT framework, helps guide us in identifying the optimal stocks for our portfolio.
When do you sell a stock?
Our predictive analytics helps us in capturing euphoric moves illustrating extreme greed in sectors and stocks, which, in other words, implies that the prices have moved beyond value. This objective framework helps us in taking a decision to prune exposure in specific sectors/stocks or even exit completely. In addition, our liquidity framework helps us in executing the appropriate sector rotation.
How do you determine allocation across large, mid and small caps?
The underlying theme driving the relative allocation is based on our proprietary VLRT framework, wherein we incorporate the full spectrum of data along with deeper aspects related to the three axes of valuation, liquidity and risk appetite, and view it in a dynamic setting - time. The formulation of this macro narrative guides our micro-level stock selection. As an illustration, in a declining liquidity environment, we increase weightage towards large caps and vice versa.
Do you have any special safeguards for mid and small caps?
We emphasise the quality of management and consistency of earnings - as opposed to hypothetical growth stories - in shortlisting stocks in the mid- and small-cap space. Objective application of this approach, in our view, substantially reduces the degree of risk. In addition, we have taken approval for the use of derivative-based hedging techniques for our scheme.
However, we do recognise that in case of mid- and small-cap stocks, hedging tools often have limited efficacy. Therefore, as a macro-centric approach based on our VLRT framework, we automatically prune our exposure to the mid- and small-cap space during periods of rising risk aversion and/or declining liquidity.
The debt holding in your fund stands at 15 per cent. What is the reason for that?
Around the beginning of the calendar year, various parameters in our VLRT framework had started indicating signs of caution. Accordingly, our subsequent portfolio allocation emphasised (1) debt allocation within permissible limits to impart a degree of return stability and (2) skew towards large caps and away from mid and small caps within the equity part of the portfolio.
Since markets have now corrected and our indicators signal that at least a medium-term bottom has been formed, we have now increased equity exposure of about 100 per cent and at the same time also started taking selective exposure to the mid- and small-cap space.
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