"SEBI has been proactive in promoting financial inclusion and systematic saving"
With increased equity awareness and ease of access, household savings are expected to move towards mutual funds. There may be an element of cyclicality in flows, but the structural trend is unlikely to be disturbed, asserts Trupti Agrawal, Fund Manager, WhiteOak Capital AMC.
Can you elaborate on your investment philosophy, especially WhiteOak Capital's approach to identifying great businesses at attractive valuations?
The investment philosophy is that outsized returns are earned over time by investing in great businesses at attractive values. It is a stock selection-based approach to investing in businesses rather than betting on macro. The two critical elements of this philosophy are business and valuation. We want to invest in the companies that present the most compelling combinations of these two elements. To be considered great, a business should possess three attributes: (1) superior returns on incremental capital, (2) scalable, and (3) well-managed in terms of execution and governance.
The second important consideration is the value equation, which is the present value of the future cash flows that the business is expected to generate. Superior return on incremental capital is a prerequisite to sustainable free cash flow generation. Scalability is about growing the business manifold over time compared to its present size relative to the industry. When you have such potential for free cash flows and growth, you need the right management to execute it with a long-term value creation focus.
Lastly, but most importantly, the governance DNA of the company should be robust. This is critical because absent quality governance, a business possessing all of the above wonderful attributes may be excellent, but only for controlling shareholders or the management and not for the minority shareholders. The best way to profit from such poorly governed companies is by staying away from them.
WhiteOak’s proprietary OpcoFinco™ valuation framework, built on principles of economic cash flows and returns on incremental invested capital, is integral to the disciplined research process. Under this overarching investing framework, the portfolio consists of companies that are industry leaders with dominant positions in the segments they operate in. These businesses tend to have strong balance sheets and robust cash flow characteristics. In such uncertain times, business resilience matters more than ever.
How does your bottom-up approach to stock selection differ from other fund managers in the market?
What truly stands out is the team's depth and breadth of investment experience. Collectively, the team has over 120 years of research experience across India, the U.S., emerging markets and frontier markets. This aspect uniquely sets the team apart and provides an edge in less widely researched pockets of the Indian market, including Mid-Cap, Small-Cap and off-benchmark stocks.
India, like any other emerging market, also exhibits a broad spectrum of corporate governance standards, and a significant differentiator has been the team’s strong focus on corporate governance. It is one of the key attributes one looks for in a great business. In fact, a rigorous governance assessment is the investment process's starting point. This aspect has helped steer clear of any fraudulent traps, which has been a source of alpha generation.
Further, the team believes in evaluating ideas to pick the stocks with the highest alpha potential and not be driven by macro or thematic views. We view macro as a source of risk, from which we try to shield the portfolio’s relative performance rather than seek any opportunity to generate alpha
How have the WhiteOak Capital funds under your management performed in the last year, and what strategies contributed to this performance?
On the mutual fund side, since August 2022, we have launched 15 schemes in line with our mission of providing best-in-class investment products to retail investors. Each of our schemes is in the top quartile by performance in its respective category.
We typically don’t make top-down calls. The attributes of our performance show that alpha has been driven by stock selection, which is considered to be a function of the team’s stock-picking abilities.
Given the current market conditions, what sectors do you find most promising for investment, and why?
Concerns are always present in the market; there's never a time without them. People naturally look for risks, and there will always be something to focus on. These concerns aren’t new. In the near term, we see slower economic growth as just a part of a normal business cycle. Over the years, there have been periods of slower economic and earnings growth, followed by times of faster growth.
Our sector exposures reflect our robust and rigorous bottom-up stock selection process. Within the Flexi cap scheme, the team currently finds more significant opportunities in private sector financials, IT services, industrials, healthcare, and specific consumer discretionary industries.
Systematic Investment Plans (SIPs) have gained popularity, with monthly inflows reaching Rs 26,459 crore in December 2024. How do you view the role of SIPs in promoting disciplined investing among retail investors?
SEBI, as a regulator, has been very proactive in promoting financial inclusion and systematic saving. In fact, SIPs and rising domestic participation in equity markets have been a strong counterbalance to the volatile FII flows. So far, in the recent market weakness as well, there has hardly been any moderation in domestic flows. The total equity AUM of all mutual funds is close to USD 500 billion, and there is a significant runway for growth.
The Securities and Exchange Board of India (SEBI) has proposed introducing small-sized investment plans to encourage financial inclusion. What impact do you anticipate these initiatives will have?
It is a step in the right direction and increases the universality of SIPs across the spectrum. The key is investor education and a strong commitment from investors to have positive investing experience. This will help create a virtuous cycle.
What emerging trends do you foresee in the Indian mutual fund industry, and how are you preparing to navigate these developments?
We see emerging trends such as 1) increased retail participation and adoption, especially if a low-ticket size SIP is introduced, 2) increased awareness of direct and passive investing – this will require direct customer out-reach programs and increase the prominence of online channels, 3) Rising SIPs – financialisation of savings has only begun.
With increased equity awareness and ease of access, household savings are expected to move towards mutual funds incrementally. There may be an element of cyclicality in flows from year to year, but the structural trend is unlikely to be disturbed.
Disclaimer: The opinions expressed above are personal and may not reflect the views of Dalal Street Investment Journal.