I understand PGIM has launched or are looking at launching soon a multi-cap fund. Why should investors right now look at a multi-cap fund as one of the better investment opportunities?
Vinay Paharia: When we look at Indian markets from almost two- to three-decade perspective, we saw that there is a very common thread in outperforming portfolios and this common thread is portfolios that contain companies that have higher than average growth businesses and higher than average quality, which means higher than average return on equity businesses.
These have outperformed almost all other types of businesses. Having said that, in the last year, we saw the reverse happening. We saw low-quality and low-growth companies deliver significantly higher returns compared to high-quality and good-growth businesses. So, there is a time for this mean reversion. The markets have already started to rotate back into the high-quality and high-growth segments of the market post the election results and post the BOJ decision. So, we are already seeing the green shoots for that and hence,
PGIM as a fund house follows good quality and high-growth business investments. That is a great strategy for long-term investing and is especially good now. Hence that should be a great opportunity for investors.
What will be your stock selection criteria? Will you be more focused on midcaps or smallcaps or largecaps? What would be the breakup of these three categories?
Vinay Paharia: As the name suggests, this will be investing in all segments of the market, be it largecaps, midcaps or smallaps largely driven by bottom-up stock selection and that is the beauty of this entire construct of the fund. Since it can go around investing in large, mid or small, whichever is an attractive segment of the market, it is enjoying that sort of flexibility and at the same time, it is semi-passive as far as capitalisation construction is concerned because the portfolio managers have to invest a minimum of 25% of the fund assets in either largecap, midcap or smallcap.
In all three segments there is a minimum of 25% of the fund assets that have to be invested in. So, there is a good balance of all segments of the market and clearly, the portfolios will be constructed completely on a bottom-up basis.As you mentioned you would look to invest in a sector which looks attractive. So, what according to you is attractive right now, largecap, midcap, or smallcap?
Vinay Paharia: On the margin from a valuation perspective, large-caps are attractive. Having said that, when we look at midcaps and small-caps, they are valued at a rich valuation today, but there are a large number of these small and midcap companies that are growing at an exponential pace. And if they are held for a minimum period of three- to five-year period, they should turn out to be good investments.So, in the near to medium term, large-caps steal the show, but from a medium to long term perspective there are lots of high quality, high growth, mid and smallcaps which are very attractive. So, there are themes, there are sectors which we are very positive on, and some of the sectors, like for example, healthcare, consumer discretionary, financials, these are sectors where we can spot opportunities in terms of both these high quality and high growth companies.
What will be the differentiating factor you think versus the rest of the multi-cap funds? What is the USP as to why somebody should look at this NFO versus the rest that are there in the markets already?
Vinay Paharia: So, most of the investors diversify their portfolios based on asset classes or different capitalisation segments of the market. But today, if we look at investors’ concentration, they are largely concentrated in the low-quality or low-growth segments of the market or segments that are currently in momentum. I think PGIM portfolios will be invested in the high-quality, high-growth segments of the market, which are seeing a turnaround and they have seen a very long-term outperformance from a business construct perspective. So, I think that is going to be a very big differentiating factor for PGIM portfolios versus rest of the fund houses.
And I remember having this conversation with you earlier and you said a very interesting line that we are taking borrowed returns from the future that we have run up ahead of the fundamentals and it looks like we are just running ahead further because we are staring at the all-time high levels. How difficult it is to pick stocks in this kind of market and what would you recommend investors do – trim some profits, book some profits, or just stay invested?
Vinay Paharia: So, yes, we have borrowed returns from the future and this is very pronounced in the low-quality and low-growth segment of the market. Remember, I said there is a big wedge between the type of returns both these segments have delivered. Like, for example, the high-quality and high-growth segments have underperformed the low-quality, low growth by almost 35% to 40% in the previous year.
So, a bubble is blowing in the low-quality and low-growth segment of the market, which is what we would want to caution most of the investors about and that is an area which you should avoid while constructing a portfolio. Whereas if you are optimistic and you want to create a longer-term portfolio, there are a lot of opportunities in companies that are growing faster than average and companies that have got returns and equity better than average.
