How this Right Horizons’ strategy delivered 60% CAGR return in 2 years, founder Anil Rego explains

A smallcap strategy run by Right Horizons PMS has delivered a mindboggling 60 per cent annualised return to investors in the past two years till October 31, 2022. This is not a one-off performance by the fund. Data shows that the strategy has delivered an annualised return of 37.70 per cent in three years, 18.60 per cent CAGR in 5 years and 19.80 per cent CAGR in 10 years. Of late, the strategy has gained 14.10 per cent between November 1, 2021 and October 31, 2022 when the BSE Smallcap index advanced just 1.85 per cent during the same period.

This is Right Horizons Minerva India Under-Served PMS strategy which had 14 stocks in its portfolio with a price-to-earnings ratio of 18.1 on October 31, 2022. On asking how this strategy managed to deliver a solid return to investors in recent years?

Anil Rego, Founder and Fund Manager, Right Horizons explained that an ability to hold a concentrated portfolio of companies during volatile times gives them the flexibility to capitalise during the earnings rerating phase.

“Most of the stocks that we own in this portfolio have a holding period of more than three years but just now the companies are witnessing a rerating as the street has started to get conscious of the valuations assigned to the stock. We are hopeful that portfolio will continue to do well as earnings growth and rerating opportunity both exist for the portfolio universe,” Rego said.

His other funds including Right Horizons Super Value, Flexi Cap, Alphabots India Prime and India Business Leader have also delivered an annualised return of 46.08 per cent, 34.75 per cent, 27.27 per cent and 26.55 per cent, respectively in the past two years till October 31, 2022, data available with PMS Bazaar showed. On the other hand, the benchmark NSE Nifty index gained at a CAGR of 24.35 per cent during the same period.

Sharing his views on Super Value, Flexi Cap and India Business Leader strategies, Rego said these are bottoms-up stock portfolios from midcap, multicap and largecap space, respectively. There is a common stock-picking framework to scout for potential multibaggers. This includes bottoms-up stock selection opportunity which depends on market size, sustainable growth in terms of profits and promoter’s skin in the game with good and clean management wherein promoter holding should be over 35 per cent and promoter pledging should be zero.

“We also focus on companies which should be able to generate sustainable free cash flows and invest the same in the business to create shareholder’s wealth. Some filters are ROCE of over 15 per cent and revenue growth of more than 8 per cent,” Rego said.

Broader markets

While sharing his views on the midcap and smallcaps, the money manager said that India’s relatively strong positioning in times of uncertainty has led to investors preferring blue chips in 2022 as a flight to safety from volatility in the market.

“Large caps are expected to do better in the near term and as uncertainties in the global economy fade, as per our expectations of market pricing in lesser earnings growth, we expect midcaps to follow. We are still three to four quarters away from small and midcaps (SMIDs) narrowing the valuation discount to its long-term average as SMIDs roughly trading at 25 per cent valuation discount to its long-term average,” he said adding large caps will be dominant now but the New Year could well be the year for SMIDs to dominate its largecap peers as the market will gain more clarity on interest rate trajectory which will determine the terminal rate for the markets at large.

Themes to bet on

At present, Rego holds a positive view on a couple of sectors for the next 12-36 months. This includes banking, auto ancillary and consumer discretionary space..

“During the rising interest rate scenario, the banking sector is benefiting and the report of strong topline growth due to healthy disbursements and higher loan rates, robust earnings growth on the back of good advances, lower provisioning for loans, and expanding net interest margins (NIMs) are expected to continue,” he said. Rego further said that they believe in secular compounding growth stories that can do well across market cycles.

“Some of our past holdings such Neogen Chemicals, Dixon, IRCTC, GMM Pfaudler, and current holdings such as Sirca Paints, Hindustan Foods, APL Apollo Tubes, Affle and KEI have generated sustainable wealth for our investors,” Rego said.

Portfolio allocation

Considering the present market scenario, he advised risk-averse investors to give 40 per cent weightage to largecap and 25 per cent to specific midcap companies. Rego further added that investors can further give 5 per cent exposure to international markets until the first half of the calendar year 2023 and increase holding based on how the global economy evolves. Among other assets, investors can give 10 per cent weightage to bonds (government bonds 3 per cent and investment grade bonds 7 per cent), real estate 15 per cent and money market 5 per cent.

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