ETMarkets PMS Talk: 9 high-conviction stocks deliver up to 300% returns in Emerging Business Fund: Aditya Sood

In an interview with ETMarkets, Sood said: “This is primarily due to bottom-up stock selection and sizing the high conviction stocks 9 stocks in the portfolio have generated returns ranging from 100-300 percent in the portfolio” Edited excerpts:

The Emerging Business Fund delivered impressive performance in July 2024. Could you walk us through the numbers and what worked?

The Fund delivered 11.5% in July viz-a-viz benchmark (BSE TRI) of 4.4% thus generating an alpha of 7.0%. This is primarily due to bottom-up stock selection and sizing the high conviction stocks 9 stocks in the portfolio have generated returns ranging from 100-300 percent in the portfolio.

At the time of the launch of the fund in early 2022, we had identified capex as next driver of growth which is playing out well.

It is a long-only fund that has delivered over 28% CAGR in 2 years. How much wealth would one have generated if they had invested ₹1 crore during the NFO period?
Since inception the fund has compounded at 28.8% vs 23.2% thus generating alpha of 5.6% since 17th March 2022. If an investor had invested Rs 1 crore at fund lunch the value would be Rs 1.82 crore at end of July which means Rs 82 lakhs of wealth created in just over 2 years. For the benefit of our readers, could you explain what Category III long-only funds are?
Although Category III AIFs can invest in securities of listed as well as unlisted investee companies, derivatives, complex or structured products, or other AIF units. These can be open-ended or closed-ended funds.

Our approach at Incred Asset Management has been to launch Category III Long only equity fund are created to identify upcoming investment themes.

The underlying portfolio is equity investment but runs a well-defined mandate and focused portfolio approach.

We have thus identified emerging themes for AIFs like Capex in 2022 and late 2023, and subsequently we created an AIF investing in mean reverting businesses.

How do you select stocks for investment in the fund?
The stock selection is completely bottom-up in line with a well-defined portfolio mandate. We are constantly seeking to find companies that are undergoing structural changes in the market or are undergoing significant internal restructuring, facilitated by rational, honest, and competent management.

It is our endeavour to invest in great businesses at a fair value, as great businesses are rarely cheap and great businesses compound in the long run.

Additionally, we seek to buy good businesses at a discount, to its intrinsic value. We strive to identify investment opportunities which can compound in earnings and have the optionality of earnings multiple expansion.

You also invest in debt and debt-related instruments. Given that markets are trading at record highs, have you rebalanced the portfolio to slightly tilt towards debt, or are you still overweight on equities?
The portfolio mandate is primarily to invest in equities oriented and at times depending on market conditions we take 15-20% cash/debt allocation.

The theme of the fund is Capex, and we saw plenty of it in the Budget, which could drive the next leg of the rally. Which sectors are likely to benefit the most?
Government focus on capex has been visible post covid since 2021 either through direct allocations or schemes like PLI, Atmanirbhar Bharat, housing for all etc.

We believe that we are at an early stage of a multiyear capex cycle and there is a decent probability that India could emerge as a manufacturing powerhouse.

This prognosis is well supported by the fact that Indian market being one of the fastest growing markets would be large and important market for any global corporation and India growing importance on account of China plus one on account of changing geopolitical dynamics.

The sectors benefiting from capex are Capital Goods, EMS, Infrastructure, Defense, Housing, Automobiles, Cement, etc.

The Indian market witnessed a knee-jerk reaction earlier in August, but it seems to have stabilized now. What are your views on the markets?
Corrections are a normal course of a bull market typically in a bull market if index corrects by 10-15 percent stocks tend to correct more than 20-25 percent.

This rally from March 2023 onwards has only seen a 9 percent pullback in the Nifty only once. The opportunity set has narrowed after a good 2 years of returns, still there are pockets of opportunities in stocks on a bottom-up basis. Our portfolio building approach has been agnostic to market capitalisation and sectors.

Markets are slaves to earnings, and the June quarter earnings were largely in line. What are your expectations for the rest of FY25?
We expect earnings growth to moderate to 10-12 percent for FY25 this coupled with the upcoming US elections and the recent volatility induced by the actions of the BOJ and the unwinding of the yen carry trade, hence one can expect heightened volatility in the market.

Which sectors are you overweight and underweight on?
The market segments where we are overweight are Consumer Discretionary, Healthcare, IT, Auto & Auto Ancillary, Building Materials and Underweight on Commodities and Financials.

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