Unconventional choices during uncertain times

Investing in beaten-down sectors can help you profit from this downturn

Two fund houses—sbi Mutual Fund and DSP Investment Managers— recently opened their smallcap funds to lump-sum investments. In a recent interview to Business Standard, S Naren, executive director and chief investment officer, said that times like these are the best for investing in equities. “Currently, equity valuations are cheap and investor sentiment is that of panic. Historically, such times have proven to be attractive for longterm equity investing,” he said.

With the major category indices (large- to small-cap) down 26-31 per cent over the past month, equity investors are experiencing stomachchurning volatility. At the same time, India has gone from being a market commanding premium valuation to one where quality stocks are becoming available at attractive levels. Investors will be better able to take advantage of these conditions if they don the hat of a contrarian investor — someone who goes against the tide of popular sentiment.

One approach that can boost long-term profitability involves increasing equity allocation as the markets fall, and decreasing it as they rise, instead of adhering to a fixed allocation. Those who find it difficult to implement this strategy on their own can opt for dynamic asset allocation or balanced advantage funds. “Balanced advantage funds can help investors take a counter-cyclical approach in these times when most investors tend to be pro-cyclical,” says Naren.

The market downturn has thrown up attractive opportunities for contrarian investors investing directly. “If you wish to engage in contra investing, look for stocks that meet the following criteria: sustained price damage; institutional ownership that is lower compared to previous years; continuous negative news flow both for the company and the sector; and attractive absolute and relative valuations,” says S. Krishna Kumar, chief investment officer-equity, Sundaram Mutual. Kumar plans to add consumer discretionary sectors and financials to his portfolio over the long term. According to Nilesh D. Shetty, associate fund manager-equity, Quantum Mutual Fund,

“The downturn has brought quality private-sector banks within our buy limit.” He suggests opting for private banks with enough capital adequacy, which also have superior risk management capabilities.

Another sector where Shetty sees opportunity is automobiles, especially twowheelers. “The sector remains attractive from a four-five-year perspective, given the current penetration levels. The twowheeler industry will gain whenever the rural economy revives. And even if the environment worsens, these cashrich companies will survive,” says Shetty.

The value fund category has also been badly hit over the past month. Value fund managers back companies trading below long-term average valuations. Over time, as the economic cycle recovers, profitability improves. They then get the benefit of both earnings growth and P/E rerating. “Earnings have been depressed for the past several years. This year we were expecting to emerge from past disruptions, but got hit by the Covid-19 pandemic. That has postponed both the economic and the earnings recovery,” says Amit Ganatra, fund manager, Invesco Mutual Fund. Ganatra is optimistic that value-oriented funds will be among the biggest beneficiaries of a turnaround in the economy and earnings, whenever it happens. Have a 10-15 per cent allocation to value funds in your equity portfolio with a five-year horizon.

The number of quality stocks with adequate liquidity tends to be limited the smallcap space. When the segment does well, it witnesses large inflows. Due to capacity constraint, many small-cap fund managers close their funds to lump-sum investments.

SBI and DSP Mutual Fund have both opened their smallcap funds to lump sum investments recently. Says R Srinivasan, head of equity, SBI Mutual Fund: "From a bottomup perspective, several businesses with sustainable models are trading at attractive valuations."

While opening up to lumpsum investments should not be treated as a signal of an imminent revival in small-caps, investors who don’t have a small-cap allocation can start building it. These funds can constitute 5-20 per cent of your equity portfolio, depending on your risk appetite. Enter with a seven-10-year horizon via the SIP route.