Edited excerpts from a chat:
You’ve seen multiple market cycles over the years. How has your investing philosophy evolved, especially in the context of rising retail participation and global uncertainty?
Our core investing philosophy at Quantum AMC remains steadfast: a disciplined, value-oriented approach with a long-term horizon. This philosophy, built on robust in-house research, has served us well through various market cycles. In the context of rising retail participation, we emphasize the importance of educating investors on the inherent volatility of markets and the necessity of not chasing short-term returns. While retail flows have provided a significant counterweight to FII outflows in India, it’s crucial that this participation is sustained by a clear understanding of market dynamics and a commitment to patient investing. Global uncertainty, fueled by geopolitical tensions, inflationary pressures, and monetary and economic policy swings, only reinforces our conviction in a disciplined, fundamentally strong, diversified portfolio with prudent allocation. We remain true to our mandate and endeavour to generate consistent returns while controlling risks. We believe in focusing on quality businesses with reasonable valuations and less leverage, which tend to demonstrate resilience during turbulent times.
How big is valuation a problem in picking stocks at this stage?
Valuation is a critical factor in our investment process, and at this stage, it presents a nuanced challenge. While the near-term economic trend is gradually recovering; valuations appear reasonable in pockets within the large cap space. Benign inflation trends and the aggressive rate cuts and liquidity boost should augur well for earnings growth. Risk reward appears reasonable in the large cap space. Within the small caps, while aggregate valuations remain elevated as compared to the long term average, there are pockets of opportunities within the large universe that exist in this space. Having said that, there are only fewer opportunities where we have built our allocation and hence our cash remain slightly elevated. We continue to look for attractive opportunities that are reasonably priced to further build our allocation.
Cash allocation in your portfolio has been mostly in double digits in the last few months. What’s the rationale behind the cash call?
Our cash position is not a tactical call, but rather a residual outcome of our investment process. Given that markets, in aggregate, are perceived as expensive with fewer attractive opportunities, our cash levels naturally become slightly elevated. We are disciplined about adhering to our investment philosophy, which prioritizes value and long-term potential. When we find that the opportunities aligning with our rigorous selection criteria are not readily available at attractive valuations, we prefer to hold cash rather than deploy capital into overvalued assets. This approach ensures that we are positioned to capitalize on opportunities when they do emerge, rather than being forced to invest simply to deploy capital.
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There’s been a lot of chatter around India’s domestic growth story. What are the structural themes you’re most constructive on for the next 5–10 years?
India disappoints both the optimist and the pessimist and rewards the realists. On a realistic basis, we are positive on India’s growth story which we believe would continue to deliver real growth of 6.5-7% p.a over the long term. The economy continues to benefit from fundamentally stronger balance sheets in the private sector and the government’s supply-side focused policy measures which are invigorating capital expenditure. High-frequency indicators like PMI, GST collections, e-way bills, and credit growth all signal improvement. The weak recovery in China also contributes to a relative preference for India.Looking ahead, we are particularly constructive on structural themes driven by India’s internal dynamics. Themes such as financial inclusion, the transition to renewable energy and resource efficiency, import substitution, the China+1 strategy, and domestic consumption all present significant earnings potential over the medium to long term. These themes are well-aligned with the cyclical recovery we anticipate for the Indian economy in the coming years.Within equity markets, which sectors look attractive from a long-term valuation and earnings visibility perspective right now? Are there any contrarian bets you’re comfortable with?
From a long-term valuation and earnings visibility perspective, our portfolio is currently tilted towards cyclicals. We believe the current global macro challenges, while potentially delaying it slightly, do not derail India’s domestic cyclical recovery. As such, sectors like banking, consumer discretionary, materials, and utilities appear attractive, poised to benefit from India’s economic upcycle over the next couple of years.
Regarding contrarian bets, our process is fundamentally driven. We seek out quality, high integrity businesses at reasonable valuations. While we don’t explicitly chase “contrarian” labels, our value-conscious approach often leads us to sectors or stocks that may be out of favor but possess strong underlying fundamentals and a clear path to earnings visibility. For instance, while the IT sector experienced a significant fall, we remain comfortable with its medium-term growth prospects, and if the correction persists, it could present a good entry point.
How do you view the current rally in smallcaps and midcaps? Are you finding value there or does the risk-reward look stretched?
The small-cap and mid-cap spaces, while offering a vast and diversified universe of opportunities, broadly exhibit valuations that are above long-term averages. Some sectors and individual stocks within these segments are indeed expensive and should be approached with caution.
However, even within this context, we are finding pockets of value and compelling bottom-up stories where companies are growing rapidly and are available at reasonable forward valuations. The small-cap universe, being so extensive, presents unique opportunities that are often not present in the larger-cap segments.
Our approach to the Quantum Small Cap Fund is particularly disciplined about capacity and liquidity , aiming for a high-conviction portfolio of 40 to 60 quality small-cap companies. This allows us to focus on the long-term compounding potential that smaller businesses offer, while mitigating risks associated with illiquidity or over-diversification. While the overall risk-reward might seem stretched in parts, our meticulous research helps us identify those specific opportunities that still offer compelling value for the long-term investor.
Lastly, what’s the one thing investors need to unlearn today to be better prepared for the next decade of investing?
The one thing investors absolutely need to unlearn today to be better prepared for the next decade of investing is the habit of chasing returns. The recent past has seen significant gains in certain pockets of the market, which can often lead to a behavioral bias of seeking out the highest-performing assets without a proper understanding of their underlying fundamentals or risk.
Instead, investors must embrace discipline and a focus on predictable outcomes. This means:
Prioritizing fundamental analysis over hype: Do a deep dive into the sustainability of opportunities rather than falling prey to hyped stories.
Adhering to a robust asset allocation strategy: Maintain a prudent allocation of equity and gold, staggering investments to capitalize on volatility.
Adopting a long-term perspective: The market, while prone to short-term volatility, offers a robust long-term story, especially for India. Compounding in quality businesses, particularly in equities broadly and in niche allocations like under-researched small-cap segments, requires patience.
In essence, successful investing in the coming decade will require investors to shift from a short-term, speculative mindset to a disciplined, value-conscious, and long-term approach, focusing on wealth creation through fundamentally sound investments rather than chasing ephemeral gains.
