ABSL Large Cap Fund (erstwhile Frontline Equity) has a rich 23 year history of wealth creation, delivering over 19% CAGR and Mahesh has helmed this fund for over 20 of these 23 years – a remarkable feat indeed.
Its not just the compounding story that’s a lesson for investors – Mahesh says every drawdown in this period has been a valuable learning experience. In these 23 years, the market has seen drawdowns in excess of 10% on 20 occasions and over 20% on 5 occasions.
New investors must understand that expecting a 10% drawdown perhaps annually and a steeper 20% drawdown perhaps once every 5 years is what market history is teaching us.
Most new investors who came in after covid have not yet experienced a 20%+ drawdown. Don’t believe that it won’t happen – understand that it can happen anytime.
When drawdowns happen, this fund’s 23 year history provides another valuable lesson: on average, the fund has come back to its previous peak within 6-9 months, with the worst being 18 months.
So next time new investors hear experts say that they must ride out corrections rather than panicking, consider the 23 year history of this fund’s bounce back each of the times and ask yourself whether its really that difficult to wait for 9 or 18 months.
Mahesh also cautions new investors to pay less attention to 1 yr return of funds when taking investing decisions and look a lot more at 3 and 5 year returns. A fund comes on top in a year either because some calls worked very well or the manager took a lot of risk which paid off. Ask yourself what the chances are of this repeating next year – when you will be invested in the fund if you chose the fund basis last year's performance.
Mahesh’s philosophy is to aim for higher 2nd quartile on a year-on-year basis and allow that consistency to take the fund into top quartile over longer timeframes.
If you expect nominal GDP to grow at 10% long term, corporate profits can grow at 12-13%. Add 1% alpha and you get an expected return from equity funds over the long term at around 13-14% p.a. – not annually – but over say a 10 year period.
On the debate of running concentrated portfolios vs well diversified portfolios, Mahesh’s take is that it finally boils down to fund managers’ comfort and conviction with individual styles.
Equally, when investors choose either style, what matters most is their own comfort with respective styles: do you prefer a bumpier path towards your destination with a possibility of reaching there earlier, though that may not always happen, or would you prefer a smoother journey.
His own preference is to have a well diversified portfolio that smoothens an investor’s journey of wealth creation.