Don’t manage volatility – ignore it
Head – Equity
Srinivasan attributes the outperformance of SBI Focused Equity Fund to a clear focus on quality, a go-anywhere approach which is agnostic to market cap sizes, sectors and index weights and a clear belief that market volatility should never distract the fund manager – only business model volatility should. He expects investors to have a genuinely long term horizon, which automatically reduces the risk of volatility and allows for wealth creation. Don’t manage volatility in other words – if you learn to ignore it, you can become wealthy over time!
WF: In this highly competitive space, you have sustained a top quartile performance over 1 and 3 yr time frames. What are some of the factors driving this outperformance?
Srinivasan: We run a high conviction bottom-up philosophy focused on generating absolute returns but in a long-only context. Our top holdings have remained pretty constant with a low churn. I guess that’s helped. Not to mention the fact that we accord a high weightage to the quality of business and the management, which, as a style, has worked in our favour in the last 3 years.
WF: You are considerably overweight in midcap / smallcap (~56%) as against benchmark (~21%). Given the volatility in the midcap space, what is the rationale for this overweight stance?
Srinivasan: As a philosophy, we are market cap agnostic as also sector and benchmark agnostic. Portfolio construction is entirely bottom-up and, in that, there is no a priori bias to market cap percentages. We also do not consider volatility as risk (read, that we implicitly expect investors, in the fund, to have a long-term perspective). The overweight stance is stock specific and based on the business, the management and valuations. In an ideal world, we would like to buy a good business run by great people at attractive valuations. These three seldom co-exist but the idea is think and act in that direction. In short, the risk, for an investor, is the risk of we going wrong in our assessment.
WF: You recently quoted that, “volatility is a friend and do not try to contain it”. How do you use it to your advantage?
Srinivasan: Well, I do not remember in what context, this was said. Let’s put it this way: say, we like a stock and it falls because of market volatility (on account of macro factors), we are very happy buying more of it; with the first two variables remaining the same, it brings the valuation in our favour.
This whole fixation towards volatility, if you think about it, runs contrast to the very concept of long-term investing. It is now, well established, that volatility reduces significantly with time. So, if you are a long-term investor, what you should be worried about is not stock volatility but the volatility in the business model or in management decision making. Short-term investors who are worried (maybe rightly so) about volatility should stick to debt.
WF: You have always been a firm believer in holding a limited stocks portfolio to optimize on diversification. How do you vary the number of stocks based on the market environment?
Srinivasan: We don’t. The ideal portfolio is 20-25 stocks. It goes up when valuations are not in your favour. Like now!
WF: You are currently 91% invested in equity, do you see an opportunity to deploy additional funds in the market in the near future? What is the fund’s policy on taking cash calls?
Srinivasan: Cash in the portfolio is restricted to 7%. We are, however, allowed to buy index futures when we are short of ideas.
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