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Midcap-focused PMS makes a killing, delivers 29% amid broader market rout

The PMS carefully picked shares of asset-light companies that had reinvestment moats.

, ETMarkets.com|
Last Updated: Jan 22, 2020, 12.34 PM IST
The fund delivered second-best yields since inception among the PMSes that started their journey in last one-and-half years.
Midcaps and smallcaps were largely down in the dumps for the whole of last year. Yet, a newly-launched PMS strategy generated 29 per cent returns in last 14 months investing mainly in midcaps!

The secret? The PMS carefully picked shares of asset-light companies that had reinvestment moats, and avoided cyclical bets. The strategy is called Stallion Asset Core Fund, a PMS managed by market veteran Amit Jeswani.

The fund delivered second-best yields since inception among the PMSes that started their journey in last one-and-half years. Only largecap-focused Marcellus Consistent Compounders, run by Dalal Street veteran Saurabh Mukherjea bettered it generating 30 per cent returns in 13 months.

Jeswani says he invests in primarily two types of companies—those which do not need capital to grow and those which can consistently reinvest their capital at high ROIC (return on invested capital) and have a strong competitive advantage.

“Our portfolio is largely focussed on financials, consumer, pharma and technology stocks. We typically prefer B2C companies, but are open to buying B2B ones as well, if such businesses have a massive technology edge, like Bosch used to enjoy for decades in diesel engine,” Jeswani said.

The Rs 70 crore fund had 38.24 per cent of the corpus invested in financials, 19.66 per cent in consumer stocks, 8.24 per cent in consumer technology and 6.65 per cent in diversified businesses. Rest 3.28 per cent was in real estate, data available on PMS AIF World showed.

Size matters in Jeswani’s investment philosophy and, hence, the higher allocation to financials and consumer-focused stocks.

“The biggest problem in being a long-term investor is that most businesses deteriorate as the size grows, and growth rates begin to dip. Hence, it’s really difficult to hold stocks for the long term. However, intrinsically, consumer and financials get better with size,” he said.

Jeswani said these two sectors would be the biggest beneficiaries as the Indian economy grows from $2.5 trillion to $5 trillion in size.

In last one year, Nifty Financial Services index has gained 22 per cent while Nifty Bank is up 13 per cent. Nifty Consumption and Nifty FMCG indices added 6 and 3 per cent, respectively, during this period, mainly due to a demand slowdown.

Jeswani says besides the rally in financials, the September corporate tax rate cut helped him generate 15 per cent extra returns. He said his bet on the consolidation of the economy has also paid off.

The Kingston University-educated fund manager is also bullish on commercial real estate players and owns shares of a leading residential real estate player, something not many of his peers have done. “Real estate is a great business model if you can pre-sell. Companies like Godrej Properties have no problem with pre-sales. You cannot bet on smallcaps in real estate, as most of them have ethical issues. You need to bet on the sharks in the ocean,” he said.

Even though he doesn’t own them, Jeswani is very positive on commercial real estate companies like Nesco, Phoenix Mills and Embassy and expect them to do well in the long run.

The realty sector emerged the dark horse of last one year. Nifty Realty index advanced 37 per cent, riding on the consolidation of the industry and a Rs 25,000 crore government booster. The rally was led by Prestige Estate, which surged 100 per cent, Brigade Enterprises (up 66 per cent) and Phoenix Mills (up 51 per cent).

Jeswani also sees another trend emerging in the current market rally. “The idea that investors can make gains in the late stages of a bull market by switching into laggard stocks has failed this time around,” says he.

“Our new learning has been that bull markets do not always broaden as they age — they sometimes narrow. The current bull market started in 2009, when shares rose indiscriminately. Then among the developed markets, the US took the lead. Then the technology sector in the US. Then just the ‘FAANGs’ (Facebook, Amazon, Apple, Netflix and Google),” he said.

He said in the current environment where GDP growth rate has dropped to 5 per cent, it’s going to be a ‘winners take it all’ kind of situation for most industries. So, ‘the big getting better’ is his larger long-term theme now, Jeswani said.

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