In conversation with Aniruddha Sarkar, Chief Investment Officer of Quest Investment Advisors

My recommendation to investors would be that use the current pessimism in the market to build a quality portfolio, advises Aniruddha Sarkar, Chief Investment Officer, Quest Investment Advisors

Could you discuss any current market opportunities or risks that you have identified, and explain how you are positioning the portfolio to address these factors? 

Current market conditions with its fair bit of uncertainty and fear among investors are providing the right opportunity for long-term investors to build a quality portfolio without paying a high price for the same. 

If I look at the triggers which could be driving the market currently, I would put them into the following order: 1) Interest rates peaking out which would make the equity risk premium also start coming off and the market getting into the risk on mode again; 2) Inflation cooling off which would aid in improving both demand and also the raw material prices would come down and improve margins of companies; 3) No major recessionary news in the US and a soft landing in the worst case which would then not derail the global growth; and lastly 4) A normal monsoon as against a weaker monsoon which was predicted some months back by various global met departments.  

The beneficiaries of the above triggers would be domestic consumption in a big way and as such we are positioning our portfolios in a way to capture the whole India story, whether in the form of Industrials and Defence manufacturing, Autos and its ancillaries and other Discretionary Consumption including Real Estate and finally financials which includes banks and NBFCs. 

The risks I see in the market could be in the form of further significant rate hikes from the US Fed if inflation doesn’t cool off and economic strength continues to show up. Though RBI has also paused on rate hikes a further 50 bps hike in our rates could hurt growth across various industries.  

What is the current state of the PMS industry amidst high volatility in the Indian capital markets? Additionally, what factors do you believe are attracting investors to PMS? 

Equities as an asset class are prone to volatility irrespective of the mode of investment viz. direct investing, mutual funds or PMS and AIFs. Having said that, volatility provides opportunities for long-term equity investors as it allows them periods when good companies are available at a discount to their intrinsic value. 

PMS as a platform has increasingly found acceptance among the HNIs and Affluent investors. PMS AUM growth over the past few years has been led by factors like long-term outperformance of equities as an asset class, larger average ticket and higher wallet share of affluent investors. Historically, Indians have preferred investing majorly across real estate, gold, and fixed income. Over the years as investors have realized, equities have emerged as an upcoming investible class and have seen higher interest on account of factors like favourable long-term risk reward dynamics, excellent liquidity, high transparency, multiple service providers, coverage across ticket sizes, ability to add in or remove monies piecemeal along the way, among others.  

In addition to the above, PMS offers a high degree of customization for portfolio curation, a choice of fees based on investors’ comfort, excellent disclosures, and a way to participate in the nation’s growth story.  

What are the primary drivers behind investor interest in AIFs? 

The AIF industry, owing to the flexibility it offers to a wide spectrum of product offerings, has seen massive product innovations with varied underlying assets in the portfolio. Pre-IPO, Private Equity, Startup investing, high yielding debt structured debt products are some of the key unique offerings where the bulk of the money in AIF has flown into. 

The AIF industry has seen healthy growth of AUM both in Category 3 and Category 2. These monies are raised from a mix of UHNIs, Family offices and corporates. The industry is expected to grow aggressively going forward because of offerings which would be exclusive to this category. As the Indian start-up ecosystem picks up steam, coupled with more opportunities in the listed Equity space as well. The growing interest from ‘Bharat’ for such products is encouraging and could pave the way for the next leg of growth for alternatives as an asset class. 

These factors have led to AIFs becoming a must-have allocation in any HNI’s overall portfolio allocation to diversify risks from plain vanilla equity and debt mutual funds of the past.  

Can you share insights into your investment philosophy, and highlight some key factors that inform your investment decisions for the portfolio? 

The key investment philosophy around which we construct our portfolio is following Sector rotation and blending it with a bottom-up approach of looking at the companies having the highest growth potential within these sectors identified. We look for sectors where tailwinds are present, and earnings trajectory is on an uptrend. We also look out for companies where there could have been some past headwinds which are now fading off and hence valuations would be attractive since it would be the least favoured part of the market.  

We look for companies that meet our investment parameters primarily among which is the management track record of execution and taking the business profitably higher through business cycles. We follow an active style of management wherein we do not hesitate to book profits if we believe our valuation objective has been reached. At the same time if there are companies where there have been changes to the investment philosophy due to external factors that would have emerged after our entry, in such cases also we do not hesitate to exit from such companies. We also as part of our investment strategy take cash calls from time to time to keep dry gunpowder for bad days where we deploy into our selected names.  

Given the high volatility currently present in the market, what advice would you offer to less experienced investors? 

My recommendation to investors would be that use the current pessimism in the market to build a quality portfolio in 2023 as valuations are getting more and more attractive as we speak. With headline index trading between 18-19x one-year forward earnings, I would say the valuations are much more comfortable compared to where we were at this time last year. 

Over the next two years, earnings could grow at 16-17 per cent CAGR and I would expect a similar type of return from the market keeping the multiples where it is today. Use a staggered deployment process during the year as volatility will be high considering it’s a pre-election year coupled with a lot of macro announcements from the global and local arena could keep markets on the edge.