In an interview with Cafemutual, Sachin Shah, Fund Manager, Emkay Investment Managers talks about the scope of PMS in India.
What is the scope of PMS in India?
Over the years, the PMS industry has grown significantly. In fact, I can say that the asset size of top 5 players is equal to what used to be the size of the entire industry size five years back.
The scope for the industry to grow will remain high considering the growth of income level and savings in the economy.
Besides, as mentioned in most wealth reports, the population of HNIs is going to grow in leaps and bounds. Investors with over Rs. 5 crore are our main target audience.
Why do you think that PMS has an edge over mutual funds?
In PMS, you get a much more focused portfolio with 20-25 stocks as against 50 stocks in the MF industry. Diversified portfolios aim to mitigate risk by increasing the number of stocks. Studies have shown, though, incremental risk reduction is immaterial beyond 20-22 stocks. Hence, there is no point in holding too many stocks if the purpose is risk reduction. In addition, an investor should know that every fund manager has a bandwidth. It is difficult to track too many stocks.
Secondly, investors get a personalized portfolio in PMS. Another benefit in PMS is that it offers more options in terms of fees like performance-based management fees and fixed fees.
In addition, PMS offers flexibility to fund managers to hold stocks for very long time. We do not have constant pressure to outperform the broader market to get inflows as HNIs understand the nitty gritty of equity markets. In fact, a PMS fund manager can hold on to their investment irrespective of market trends.
Emkay Capital Builder has underperformed the benchmark over the last two years, how do you plan to revive the performance of the fund?
Since inception, we have continued to outperform our benchmarks Nifty 500, Nifty 50. Emkay Capital Builder is actually a multi-cap portfolio where 50% of the allocation has been towards large and remaining 50% to mid and small-cap.
The recent underperformance is because 70% of constituents in Nifty 500 are large cap stocks. In the calendar year 2018 and 2019, the divergence between the Nifty 50 versus the mid, small-cap indices has been humongous to the extent of 50% or more.
In the last two years mid and small caps did not perform well. However, 2020 has begun on a positive note with clear signs of better price movement. We strongly believe that the stocks we own are of high quality with fundamentally strong companies.
However, there would be a couple of companies where although the company remains sound the business performance hasn’t played out the way we anticipated because of the external environment. We will take some corrective actions and make some changes in our portfolio.
Largely, we have got many winners in our portfolio like ICICI Bank, Divi’s Laboratories Nesco, and HDFC Bank. These are some of the stocks that have done exceedingly well for us. We continue to own them with fairly decent allocation.
Overall, the fund has outperformed its respective benchmark in the long term. What has contributed to it?
Many factors have contributed to this outperformance such as an extremely focused portfolio with 18-20 odd stocks, stock selection process and risk mitigation process. Â We also have our own propriety model E-qual risk that is Emkay quality risk analysis, which has helped us avoid unnecessary surprises in the portfolio at a time when companies are facing serious challenges with corporate governance.
We believe in investing stocks for a long period like at least 2-3 years. Our approach is not to trade in the market but to own the businesses.
How do you go about constructing your portfolio? How do you protect the downside?
First, we evaluate companies based on various parameters of management integrity, capability, wealth distribution to shareholders, investor communication and liquidity. We also have some red flags such as debt-to-equity ratio, percentage of pledged shares and so on.
Through our E-qual risk module, we evaluate the purchase price and make sure we pay reasonable price to own a security.
At the same time, to avoid concentration risk, we are extremely disciplined with allocation.
What is your three-year outlook on equity markets?
Things are looking much better as now we are behind demonetization and GST- the two major events that contributed to the economic slowdown to some extent. In addition, RBI has recently indicated that recovery in sectors like automobile, MSMEs and housing could bring the economy on recovery path again. These three sectors are the central point of economy and once these sectors start moving in a positive direction, we will get back to the corporate earnings growth story.
In the next two to three years, I expect earnings growth to be very strong.
Sachin Shah
Fund Manager, Emkay Investment Managers Ltd.
Sachin is a seasoned fund manager with over two decades of experience in the Indian equity markets. By virtue of his extensive research, Sachin realised early-on the need for a framework in which companies with evasively tricky standing needed to be filtered out very objectively, leading to the development of E-Qual Risk, EIML’s proprietary module which helps us to evaluate and compare listed companies on various aspects of governance. Sachin shares his knowledge and insights through various media interactions across print and digital platforms.
