We speak with Daylynn Pinto, Senior Fund Manager - Equity, IDFC AMC, about his distinct market-cap allocation, what has worked for his funds and why he believes in active fund management.
In the part-one of this interview, we learnt about his 'BARP' investment philosophy, his assessment of the volatility in equity markets and the process he follows for selecting a stock for his portfolio. In this part we get to know about the reason for his unconventional approach to portfolio-sizing across market-cap segments, reasons for the outperformance of his funds, along with his rationale for why active management is still alive and kicking.
Your funds do exceedingly well in rising markets (2017, 2021) but they also fall more when markets correct (2018, March 2020), perhaps due to the higher weights to mid- and small-cap stocks than the peers. What's your approach to position-sizing across the market-cap segments?
Your first point is valid that our exposure to mid and small caps was much higher than our peers during 2018-20, which we have already discussed. The other thing that people don't talk about was that even within the large caps, the market rally was very narrow and concentrated in maybe 10-20 stocks that performed and everything else slumped.
When you're running a portfolio that's much more broad-based, you are taking the view that there is growth in the underlying economy that would translate into earnings growth for the companies that you hold. Unfortunately, in 2018-19, we had several quarters of GDP slowing down going into 2020. That had a huge bearing on the overall earnings growth of our underlying companies. That was one area where we were different in our portfolio positioning and unfortunately, the overall economic conditions didn't work for it.
Going into 2021-22, with GDP expected to rebound sharply from COVID lows, you're already seeing that broad-based portfolios, like mine, are doing better. So, it's not really about market ups and downs, but what macro environment favours your portfolio positioning that determines its performance.
Another thing that we've done in terms of market-cap sizing is we keep evaluating whether mid and small caps are cheap or not cheap as against the large-cap space. In the current rally, we have found that there are pockets of both over- and undervaluation across the market-cap segments. So, we've actually used this rally to change the complexion of the portfolio by having almost 30 per cent large caps as compared to 2018, when they constituted less than 15 per cent of the portfolio. So, we've used this opportunity to change the portfolio to move across the market-cap segments and this is something we will continue to review every quarter in our quest to find value, given the value-oriented mandate for the fund that is also market-cap agnostic.
Today, almost one-third portfolio allocation is towards each of large, mid and small caps because we are not seeing too much of a difference in relative valuation between them. So, I'm very open and flexible about my market-cap weightings. I'm more focused on what is the overall macro scenario and I will go where I can find value in the market.
How is your multi-cap fund managed differently from your value fund, considering that the latter also carries about 45-55 per cent of mid and small caps?
One basic distinction is that by regulatory mandate, the multi-cap fund needs to have 25 per cent allocation to large, mid and small caps. The second is that we internally have some soft limits where we don't want small and mid caps to go beyond 30 and 35 per cent, respectively. We believe that these limits would make the multi-cap fund a little more resilient, especially in the bear markets. The only way you can do that is not going overboard with more small caps at the peak of the market - a mistake most of us tend to make in good times. In the case of IDFC Sterling Value fund, our sheer focus is just to find value, irrespective of which market-cap segment we find it in.
Secondly with the multi-cap fund, I am running a blend of growth and value. We have our own internal guidelines of how to classify a company as a growth or a value stock and we also look at the benchmark Nifty 500 Multicap 50:25:25 TRI. So, when we analysed its constituents, we found out that the index has about 53 per cent growth and 47 per cent value stocks. So, the multi-cap fund portfolio will also be constructed in a similar blend of growth and value, whereas my value strategy is primarily value-oriented. So, that's how the two funds are different.
Last year was extraordinary for your funds. What worked so well?
The first reason is that the portfolio earnings have shown great improvement over the last six-seven quarters. The second is that there was a huge amount of undervaluation in many of these companies led by the fear that smaller companies would die a slow death with COVID and only large companies would survive. That fear has receded now and therefore, their P/E multiples have now normalised. The third aspect is that many of the companies that we held saw a huge improvement in their balance sheet, which also led to an improvement in their P/E. So, all of these have provided the kicker to the performance.
All your funds have a provision to invest in foreign companies but we are yet to see them in portfolios. Are there any plans to make use of it anytime in the foreseeable future?
Many funds have enabling provisions to invest in debt, foreign securities, gold, etc. These are just options available to the portfolio manager. It's not that because the fund has a resolution to invest abroad, I have to do it. Think of it this way - it's just another sector in my portfolio. For example, I might choose not to own any oil/energy stock. Just as my view on oil might change and I go on to choose an oil stock, in the same way I may choose to own a foreign security/fund.
But if prospects appear to be better in India, then why look outside? The need to look outside is much more of a macro call and therefore, if we are not bullish on India, believing that the 'India story' is over, that is when the foreign aspect comes into play.
You come across as a staunch supporter of active fund management. But how do you justify that in the wake of a large number of active funds struggling against the benchmarks in recent years?
With the large-cap category, the problem is that you're only looking at a limited number of stocks and a large part of the benchmark is actually further weighted towards only a few of them, wherein the top 10 stocks make up about 60 or 70 per cent weightage in the benchmark. So, the benchmark itself is constructed in such a way that it is semi-passive. So, how active one can be in a large-cap fund is the question.
But if we look at more diversified categories like tax, multi-cap, flexi-cap, value, etc., funds where there is more flexibility to go beyond the benchmark in terms of mid-cap and small-cap allocations, we've seen some pretty good performance over a three-, five-, seven-year horizons beating the benchmark.
If you want to go passive, you would probably be underperforming the benchmark every year. So, what is the point in going passive?
It was a very narrow market in 2018-19, when you're talking about active funds' performance. Every market goes through its own cycle and every cycle people will talk about what is the current trend. So, that was the trend then, but today it is a different trend that is in favour of active management.
This is the second part in the two-part story. You can read the first part here.
This interview was conducted in January, 2022.