This ICICI Pru’s Rs 7,000-crore money manager explains why next 12 months will be better for stocks than FY23
Select portfolio management schemes (PMS) run by ICICI Prudential AMC delivered robust alpha to their high net-worth clients in the past 12-36 months. Data available with PMS AIF World showed that ICICI Prudential PIPE Strategy delivered 28.80 per cent annualised return to investors in the past three years till February 28, 2023, whereas Contra, Largecap, Value and Flexicap schemes also grew at the rate of 25 per cent, 22.10 per cent, 21.50 per cent and 15.8 per cent annually during the same period. On the other hand, the benchmark equity index BSE Sensex delivered an annualised return of 15 per cent since February 2020. In an interaction with Business Today, Anand Shah, Head-PMS and AIF Investments, ICICI Prudential AMC, explained what worked for PMS schemes and also shared his insights for the financial year 2024. Edited excerpts:
Business Today: A couple of headwinds including rising interest rates, sustained outflows by foreign institutional investors and the ongoing war between Russia and Ukraine kept sentiment jittery on Dalal Street in the last one year. So, what strategy of yours helped to achieve robust returns in the medium to long term?
Anand Shah: In the past two years, we were overweight industrials, capital goods, banking and manufacturing as a theme. At the same time, we were underweight IT, pharmaceutical and FMCG. This approach across our PMS portfolios helped generate outperformance over the benchmark in the medium to long term.
Business Today: ICICI Prudential MF is the second biggest player in terms of assets under management. How big is ICICI PMS as compared with the total AUM of the PMS industry?
Anand Shah: Overall, in the alternate space, we manage around Rs 12,000 crore. This includes long-short AIF and credit opportunities AIF on the fixed-income side. On the long-only investment side, we are around Rs 7,000 crore, which is again a mix of AIF and PMS. We have seen encouraging growth in both the PMS and AIF space over the past two years.
Business Today: How do you select stocks from the universe of listed companies?
Anand Shah: We have an in-house Business-Management-Valuation (BMV) framework that aims to identify resilient companies with a potential for long-term growth. Through this framework, we aim to identify strong companies with competent management that are trading at reasonable valuations.
Under the business filter, we aim to identify strong businesses that have the potential to grow at a healthy pace, wherein we identify industries that can potentially grow faster than the GDP and companies that can potentially grow earnings faster than competitors in those industries. The second focus is to try and identify companies with an enduring moat, or companies with a sustainable competitive advantage. And, lastly, we prefer industries that are consolidating over those that are fragmenting. These steps are important because we look at investing from a 5-to-10-year perspective. If we do not like a business, we do not proceed further in evaluating its management and valuation.
Once potential businesses have been identified and deemed appealing, we aim to focus on their management teams, who have a solid track record in terms of corporate governance standards, competency, and engagement with stakeholders. If the management does not pass these filters, we do not go ahead.
If we like business potential and management quality, the last step is valuation. A good business and competent management may not always come cheap. If the business has a moat and steady cash flow, we might consider paying a reasonable premium. But good business and good management at any price is not our approach. If the valuation is not right, we are ready to let go of some good businesses as well. Thus, we aim to buy good businesses run by fairly competent management at acceptable valuations.
Business Today: Can you tell us more about your PMS strategies? Which strategy of yours suits aggressive, conservative and risk-averse investors?
Anand Shah: Contra, PIPE and Flexicap are our top PMS strategies. Contra as the name suggests has a contrarian approach to investing. Here, we invest in a business with high entry barriers but is going through challenging times due to an unfavourable business cycle or a special situation or due to industry consolidation. When it comes to flexicap strategy, the portfolio has a ‘core’ and ‘satellite’ element. The core portfolio could be 60 per cent-70 per cent and is predominantly targeted towards sectors which are valued on an absolute and relative basis. The satellite portfolio will be a blend of investment strategies that are aimed to be in line with the GARP (Growth at Reasonable Price) philosophy. This bucket will be used opportunistically to book profit and increase weight of the core portfolio. On the other hand, the PIPE strategy predominantly invests in mid and small cap companies which have the potential to grow meaningfully over the next 4-5 years and become large businesses.
An aggressive investor may consider contra and PIPE strategy while a conservative investor can consider flexicap strategy. For risk-averse investors, they may need to evaluate a hybrid or fixed-income product or our ICICI Prudential PMS Multi-Manager Strategy which is a bouquet of equity and hybrid equity mutual Fund schemes. We select around 4 to 7 of our ICICI Prudential Mutual Fund schemes product suite and these are handpicked based on our various internal research on asset allocation models, sector allocation and valuation frameworks.
Businessv Today: Coming to the domestic equity market, how do you see the movement of Sensex and Nifty going ahead?
Anand Shah: From the external macro front, we believe the next 12 months will be better than the last 12 months. This is because we are just stepping out of a time when external macros were challenging, there was a China lockdown, fears of an energy crisis leading to a slowdown in Europe and one of the fastest rate hikes in US history. As a result, we had significant dollar strengthening, leading to outflows from all the emerging markets, including India. From here, we are moving onto a stage where China’s growth will come back to an extent, energy price in Europe has softened, and the fears of a Europe recession has abated significantly. Today, even if a recession were to play out in the US, the Fed has significant room to help the economy. Separately, any slowdown in the US will benefit India by way of lower commodity prices and lower interest rates. Having said that, we still believe markets will remain volatile and uncertain in the first half of FY24 before it stabilises, and thus one should use the volatility and invest in a staggered way over the next six months.
Business Today: Which sectors do you think may throw big gainers and why?
Anand Shah: Manufacturing as a theme looks attractive. This is one space which has been under pressure for over one decade and despite the gains seen over the past two years, there is still a lack of investor interest in manufacturing and allied themes. As manufacturing improves allied industries like metals, auto ancillaries, engineering goods, textile yarns, capital goods, industrial products, logistics and utilities stand to gain. Another sector which looks promising is banking, especially corporate banks. Owing to the developments of the past few years, the existing book has been stress tested and thus banks had to provide significantly for the past NPAs. Incrementally, we believe asset quality and thus credit costs for the corporate banks will be more benign than last few years. On the contrary, we have seen recoveries and we may see some more recoveries from their past NPAs due to resolution under IBC or otherwise. We believe banking can also be one of the beneficiaries of the revival in manufacturing and manufactured goods exports. Within manufacturing, while metals have been under pressure for the last one year, we believe the worst is behind and valuation-wise, this space is fairly valued.
Business Today: How do you see beaten-down IT stocks? Do you think this is the right time to pick quality stocks from the sector?
Anand Shah: While IT companies’ valuations have corrected from the recent peak, the valuations are still above long-term averages. We believe over the next 2-3 quarters we will have better visibility of growth risks emerging out of recent weakness in the US economy and individual company’s commentary around the same. Thus, we believe, that would be time to reevaluate our view on the IT underweight position we are running.
Business Today: How investors can make money in this tepid market? What is your advice?
Anand Shah: Irrespective of the market conditions, there are two things an investor should always be mindful of. First, invest with a long-term horizon. If you are investing in equity markets under the current market condition, it should be with a mindset of at least five years if not more. Second, to keep short-term volatility under check, always use STP as a route to invest.
Business Today: What are the top holdings of ICICI PMS? How you have diversified across the market cap?
Anand Shah: In our contra portfolio, our largest allocation is towards large caps and sector-wise we are overweight metals, transportation and telecom. When it comes to flexicap portfolio, we are overweight industrial products and capital goods, banks and auto ancillaries with a large cap bias. In our PIPE strategy portfolio, 52 per cent allocation is towards small caps and 44 per cent midcaps and the portfolio is overweight banks, transportations and metals.
Business Today: How many stocks do you prefer to keep in a PMS portfolio? Why?
Anand Shah: We prefer to manage a 25-35 stock portfolio of high-conviction ideas. Multiple studies over the years have shown that the benefits of diversification starts diminishing once the number of companies in the portfolio starts crossing 35-40 names. At the same time, a highly concentrated portfolio with very few companies too are not healthy.
Business Today: Can you tell us more about yourself?
Anand Shah:
a) Your hobbies – I am an avid sportsperson and a health freak. At present, I regularly play cricket, badminton and occasionally do gym workouts.
b) What works as a stress buster for you? – A good workout session or a good game of cricket/badminton.
c) How much money do you manage at ICICI Pru PMS?– Around Rs 7,000 crore
d) Your age: 48 years
e) How a day of money manager looks like? – The day starts with reading, followed by morning meetings, followed by more reading and again more discussions around micro and macro. All of this acts as an input for a clear interpretation of the economy and companies and this cycle continues.
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