One should turn attention to high growth businesses backed by high-quality entrepreneurs. In the frenzy to keep monitoring only index movements, one might miss the woods for the trees and overlook these attractive money-making opportunities, Vikaas M Sachdeva, CEO, Emkay Investment Managers said in an interview with Moneycontrol’s Kshitij Anand.

Edited excerpts:

Q) Market scaled fresh record highs in the run-up to Diwali. What is your take on the massive out performance which we have seen?

A) People are adjusting to the new normal and are trying to get back to their regular routines, despite the overhang of the virus being around. There would be intermittent bouts of enthusiasm as well as ennui, basis how major events worldwide shape up.

However, the momentum for India is positive with each passing month. Here’s hoping this Diwali is the beginning of many more prosperous ones for India as well as the rest of the world.

Q) Equity investors are usually stuck in a ‘Chakravyuh’ of equity investing. What is value Shastra all about, and how it can help equity investors?

A) Some recent surveys have shown that the biggest concern most equity investors have is that they seldom get exit calls by their advisors, despite “market valuations” pointing to the same. When the markets do correct, investors normally view “losses on the books” as “actual losses” and get quite disillusioned.

In such a situation, it is quite natural for even the savviest investors to feel like they have entered a Chakravyuh through which they would never be able to come out (read book profits), when they are asked to stay invested perpetually in Equity

“Value Shastra” (VS) is the first asset allocation strategy accessible on the PMS platform in India. At its core, it is an algorithm designed to highlight the “Red Zone” points where investors have indicated Equity exits and “Green Zone” wherein indicating the entry point. Intermittently, the “Yellow Zone” indicator keeps adjusting the asset allocation basis the way market trends develop.

Q) What is the strategy followed by Value Shastra?

A) “Value Shastra” (VS) is an algorithm designed by MSJ MisterBond Pvt Ltd, one of the most respected financial advisory firms in India, in association with Emkay Investment Managers Ltd, one of the country’s most innovative investment management firm.

A simple strategy of an annual re-balancing of their asset allocation leads to sizeable incremental gains if handled well. The VS algorithm seeks to address this very point.

It takes into account various quantitative parameters to flag off exit (Red Zone) and entry (Green Zone) points in the equity investing, thereby trying to ensure that investors maximise their gains and control their downsides to the largest extent possible

VS invests in Emkay’s 12, one-of-its-kind investing in large-cap equity investment strategy which is one of the contemporary alternatives to large-cap MFs in India today.

Based on the “Smart Alpha” framework, the portfolio consists of 12 high conviction large-cap stocks which are equi-weighted and re-balanced once a year. The strategy in itself has been able to deliver consistent backtested benchmark beating returns as compared to its MF contemporaries.

Q) What is your call on markets & earnings which are on the verge of hitting fresh record highs? And, will we be able to sustain it?

A) I think the commentary has turned positive over the last few weeks across a lot of sectors. Demand is coming back not just from rural India but also from urban India due to the onset of the festive season.

The September quarter earnings should reflect just that. In addition, Indian companies have become leaner operationally as well as leverage wise which should reflect in numbers.

COVID-19 has accelerated the process of shedding excess fat, both on P&L as well as balance sheet, which should reflect not only in numbers for September quarter earnings but also for longer-term earnings.

On the markets, one should turn one’s attention to high growth businesses backed by high-quality entrepreneurs. In the frenzy to keep monitoring only index movements, one might miss the woods for the trees and overlook these attractive money-making opportunities.

Q) Your message to investors for this Diwali and your outlook for next SAMVAT?

A) Before Diwali, we clean our houses to welcome Goddess Lakshmi in all her glory. We pick and choose the highest quality decorations and sweets to celebrate her presence, and believe that she would bless us through the year.

Let us do the same with our stock portfolios. Look at your portfolio from a “Future proof” perspective and take out what you think has lived its course. Invest only in high-quality businesses (Large Cap) or high-quality management (Mid and small-cap).

“Quality” is the obeisance you pay to your portfolio for it to create wealth for you. It is the “premium” you pay for giving you peace of mind during volatile times and gyrations in the stock market.

Q) What is the importance of asset allocation and why is it more relevant when Gold and probably global investing might have delivered better returns than domestic equities?

A) To create wealth, one has to keep faith in equity investing. Asset allocation, be it in gold, debt, real estate or global equity or any other investment avenues should be looked at from the perspective of mitigating downside risk and stability of returns.

One should avoid the tendency to anchor oneself to the immediacy of returns in any asset class. For e.g.: while global equities look very attractive from a recent perspective, one must understand it is coming out of almost a 10-year cycle of higher than conventional returns.

It is probably more prudent to look at emerging equities, as the Fed looks to bring down interest rates in line with global reserve banks.

Q) The investment universe has shrunk dramatically post the COVID outbreak as many businesses have moved to a new normal. Do you think investors should focus on profitability (growth), and not so much concerned above large, mid or Smallcap?

A) Investors should focus on quality businesses run by quality management. A simple rule, but has profound implications. To evaluate quality businesses, leadership businesses with consistent profitability (High ROCEs over the last 5 years) and predictable earnings growth rates (> 10% over the next 3 years) should be bought into consideration.

Most of these are in the large and large midcap space. To evaluate quality management, one should look at Management Integrity, management Capability, Wealth distribution track record of the firm, quality of investor communication, and stock liquidity – particularly when evaluating small and midcap stocks.

This information is captured by the E-Qual model applied during our fund management process. The strength of the model can be gauged from the fact that the returns from such investments have been stellar, while there has not been a single case of a “blowout” in our portfolios.

COVID has only accelerated the separation of the grain from the chaff. Sticking to strict quality standards will ensure that you end up on the winning side, more often than not.