In an interview with ETMarkets, Kothari who manages AUM of Rs 1400 cr said: “Agility is very important. Focusing not only on what to buy but equally focussing on when to sell is very critical,” Edited excerpts:
You have an experience of more than two decades. How is the environment changing for the PMS industry here in India?
Well, there is a significant change. The entire industry, if I can use the word, transformation probably would be the right word, because I remember way back in 2009 when I started my PMS, I had to actually explain what is the full form of PMS, it is a portfolio management service.
And today, thanks to the regulator, the way in which they have changed the entire rules and regulations for the industry made it trustworthy as well as comfortable from the investor’s perspective to invest into PMS as a structure.
I think there has been a sea change in the last 10-12 years.
Where do you see the PMS industry heading and the markets especially in the new financial year?
The industry has a great future because, unlike the mutual fund industry, the PMS industry is more oriented towards the HNI side of it. I do not know whether HNI is the right word or not but yes it is for the higher ticket compared to retail, retail is kind of a thing for mutual funds.
And one very important advantage that PMS offers to the investor is that your behaviour impacts your performance. Unlike mutual funds where somebody else’s behaviour can impact my performance.
The future looks bright for both PMS and MF because financialisation of the savings has already started. Equity as a culture is improving and as the per capita income, affordability, and awareness increases for PMS, the size is going to probably become 2x, 3x, 4x, 5x, 10x over a period of time.
I was doing a bit of reading and what I found is that AlfAccurate Advisors is definitely one of the best in the industry and it follows the principle of protect capital and create wealth. Now, tell us something more about this methodology as well.
Yes, a very good point. That is our investment philosophy, protect capital and create wealth. Because when it comes to the equity market, the first question which usually comes to your mind is — kitna paisa banega?
More than important kitna paisa banega is you make sure that you do not lose money because the equity market is also an underlying risk.
Let me tell you 100 to 50 is a 50% decline. But for 50 to go to 100, it is a 100% increase. So, the less you lose, by default will allow you that when the market again starts doing well, you actually make much more than that.
Therefore, the first important thing when we manage money, it is the hard-earned money of our clients and we are just trustees, we need to make sure that we lose less and, of course, we create more alpha and that is wealth creation.
The combination of it, if you do both, every time, lose less in a down market and go up in a rising market, if you keep doing that consistently and that is what we have been doing.
Over a period of time, the kind of wealth that you can generate is sizable and therefore, that mantra is very-very important.
AlfAccurate Advisors IOP, PMS, the flagship product has in fact delivered 17% CAGR kind of return in the last 13 years. How are you able to beat the benchmark return consistently and is it the stock selection or better risk management that is actually giving you that kind of edge?
The three factors which has worked for this kind of, what I would say superior risk-adjusted returns, as well as consistent performance, is because of these 3 factors —
First, the first important thing is risk management. We are pioneers of 50 stocks diversified portfolios in the PMS industry in India. We strongly believe in diversification because that is the only free lunch available in finance, there is no other free lunch.
Second, very important is that we are agile. Agility is very important. Focusing not only on what to buy but equally focussing on when to sell is very critical. The discipline exit strategy basically makes you sure that you always have a portfolio of companies that has underlying growth.
Third, of course, the important thing is what we buy. And here we have a very effective 3M approach, the market size, market share and margin of safety.
So, just to put in a nutshell, these three things combined buying businesses which are market leaders, with the best of management, best of governance, best of financials, and best of growth.
Buying 40 to 50 such companies helps in diversification to reduce the risk, and then making sure that you exit those companies when you think that the business cycle is not going to be in your favour.
It is the combination of that approach that results in the consistency of the performance, through the last 13 years one crore has become roughly about nine crores, thanks to that approach.
How do you pick small to midcap stocks for your portfolio? And is this segment an attractive space for the next financial year as well?
We launched this AAA Budding Beast, which is an offering in mid and smallcap space about two years back. And in the last two years, this PMS has delivered about 22% compounded annualised returns compared to benchmark returns of 14%.
Our thesis of the identification of stock remains the same. We actually do not buy any mid and small companies by revenue or profit size or market share. Something completely different I am now telling you.
We buy companies that might be mid and smallcap by market cap but companies should not be small when it comes to its market size, market share or net profit.
Coming to the second part of your question, what is our view on this space? I think the valuations have turned very attractive. If you look at the mid and smallcap valuations, compared to the last 10 years, the midcap is right now trading at below its 10 years average valuations.
The return on capital employed of the smallcap index has actually improved from 12% to 18% in the last 10 years. Earlier, smallcap index used to trade at say, 15-20% discount to Nifty but now the return on capital employed profile of both Nifty and midcap and smallcap, all three is almost similar, around 17% to 19%, very healthy ROCE.
I do not think they will now trade at 20%, kind of a discount to Nifty, which it used to trade at 10 years back. Valuations are reasonably attractive, the growth profile is, of course, little bit better compared to Nifty because mid-sized companies definitely can grow higher compared to the mega cap companies, top 50 or top 100 companies of the country.
A combination of these three things makes me believe that we are at an attractive valuation point. And from here on, if one has a little bit long-term view, because mid and smallcap has a little bit more underlying volatility compared to largecap, therefore, you require a little bit longer time horizon, then you can make reasonable additional money over the medium to long term.
Now, you also offer STP and SIP options for all PMS plans. How does this help in building wealth over a period of time?
Basically, we have seen that irrespective of whether the investor is small, mid, or large at a different point of time they get liquidity. Definitely, this kind of option allows you to invest your money at different intervals.
Secondly, at times markets are volatile and I always tell my investors to take volatility as your friend, use it to your advantage. So, for example, during the last three-four months or even during the Russia-Ukraine war, we advise many of our investors to do a staggered approach.
If you use STP, you are actually basically…, you are into the market and still you are not fully invested into the market, you have some dry powder and then markets are volatile, markets are uncertain, it gives you mental peace.
At the same time, it gives you the advantage of averaging it out if the market becomes unfavourable compared to your initial purchase.
Instead of putting Rs 100 at one go, I said, okay, let me spread it over three, four, five, six months and that actually allows me to stagger my investment and to cut through that noise of volatility of that time period which is generally critical from a mental comfort perspective over three-six months. So, these are really very nice options from investors’ perspectives.
Now, in fact, let me also come to the current news, in fact the new tweaks which are being introduced by the government in the finance bill. So, how will that impact your investors or the PMS industry at large?
Well, this government is basically, what I would say…, any gaps which are there from the tax arbitrage perspective, this government is closing all those gaps.
And with this new announcement of the debt product and before that the MLD and then insurance and now the debt mutual fund, very clearly there are only one or two or three products that are efficient from the taxation perspective.
Therefore, it becomes favourable for equity and therefore to that extent for our firm, in particular, because we are only into equity PMS and for my investors, it is basically net-net positive for us because earlier there was tax advantage, there was arbitrage but now there is no such tax advantage.
So, to that extent, it will improve the equity culture in the country, so net-net it is good for us.
Now any message to investors for FY24?
Message to investors is Rome is not built overnight, it takes time. If you keep watching your portfolio whether you are doing direct investment or indirect or any anywhere else third-party product on a daily basis it is not going to help you, you need to keep patience.
In a fixed deposit, you keep 10 years of patience; in gold, I think most investors take 20, 30, 40 years, I do not know how many years of patience they have in gold. But when it comes to equity, every month there is a fact sheet, there is reporting, there is transparency.
Make sure that you do not take it to your disadvantage, take it to your advantage. Give a little bit longer time period – three, years, four years, five years, and then, of course, monitor your investments on a periodic basis.
It is a great wealth-creation asset class and keeps faith in equity as an asset class. It generates huge wealth. We have miles to go and at times I feel bad that the Indians are actually not, what I would say, not participating fully in this beautiful wealth creation journey.
A country that is going to grow at 10-11% from the 10th largest, then fifth largest, it is going to become the third largest very soon. It gives a huge option of wealth creation to the citizens, you just require a little bit more patience.
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