The market is in an inexplicable state right now. Contrary to investors’ expectations of the market taking a beating following Fed regulations, it is on an upswing. Investors feel confused. Many are rushing to new investment options. Others are withdrawing money from stocks and mutual funds fearing a prolonged recession. Umeshkumar Mehta, CEO, Samco AMC in an interview with MintGenie explains why investors must stick to quality companies to compound their free cashflows to grow and that will eventually trickle down and reflect in price returns.
Edited Excerpts:
Q. In this current situation of market flip-flops, should one resort to value investing or park money in funds that invest in value stocks?
Value investing doesn’t solely depend on the timing of market cycles because more often than not many stocks with cheap valuations also turn out to be value traps. Instead, volatility in markets should be used as an opportunity to accumulate fundamentally strong quality stocks. Quality companies will continue to compound their free cashflows to grow and that will eventually trickle down and reflect in price returns.
Hence, investors should not blindly run to value stocks in unnerving times but should instead look for very resilient stocks with robust return ratios, minimal debt, good pricing power, intangible value and strong moat which can deliver high compounded returns when markets normalize again. At the end of the day, an investor is looking to invest in a company with flourishing prospects and earnings growth, thus growth of companies should play a much bigger role in the investment decision process as a shareholder instead of running to value stocks because markets are volatile.
Q. This time recession is likely to be sticky with the inflation effect unlikely to cool off soon due to geopolitical tension. Is silver likely to replace gold as the ideal hedge against inflation?
Inflation is definitely here to stay but it isn’t the first time that India is facing periods of high inflation. In 2010, India’s inflation had crossed 11 percent and in the 1990s it had crossed 13 percent. Hence, the best approach would be to stick to businesses which have the ability and pricing power to navigate periods of high inflation efficiently without having any material effect on their margins.
Investing in such gems would be a safer hedge than investing in gold or silver because even in the past few months whilst the index was down by 4 percent, gold was worse at 9 percent and silver was down by 21 percent. Hence, from a capital appreciation point of view equities offer the best proposition although some amount of bonds and commodities in the portfolio will in totality be a good hedge during bad periods.
Q. Mid-cap and small-cap funds have performed better than their large-cap peers. Do you think these funds will continue their winning streak in the coming decade?
Markets have fourfold pressure from macros – high-interest rates, high inflation, geo-political risks and currency depreciation. Navigating these forces will depend on the internal functioning and strategies followed by a company. Hence, there could be pockets of such companies in the large, mid and small-cap space which may continue their winning streak in the coming decade. Such times are tricky hence one should be market cap agnostic and not stick to one particular category of stocks.
Q. Most flagship mutual fund schemes have failed to deliver. Do you think too large AUMs have made it difficult for the fund managers to churn their portfolios regularly?
A large AUM size isn’t a constraint for fund houses, but the issue lies in the dilution of returns which occurs because of the number of stocks in the portfolio. A famous American Economist Burton Malkiel in his portfolio theory states that 22-25 stocks in a portfolio provide the right balance between portfolio concentration and diversification, by adding more stocks to a portfolio, can dilute returns if some of the stocks don’t perform well. Therefore, all those fund houses that have a strategy to keep limited stocks in their portfolio have a better chance to deliver higher risk-adjusted returns.
