Fund Manager – Equity, LIC MF
How important is portfolio weighting if one has to beat markets?
Two important considerations for building a portfolio to outperform the broader indices over the longer term are : (1) Identify stocks with a high price appreciation potential compared to the overall market and (2) Have a significantly higher weight on these stocks compared to the potential laggards. Hence, portfolio weighting is a significant element of portfolio construction.
As a fund manager, how to you decide on which stocks to give how much weightage?
Portfolio construction at our firm is the culmination of the following steps: (1) Quantitative model to identify stocks;
(2) Detailed review of the stock ideas from a fundamental perspective factoring in valuation parameters; (3) Drill-down to 30-40 stocks in the portfolio based on the philosophy of the fund. If it is a value-oriented fund, majority of the
AUM will be in companies that can justify their market capitalisation within 3-4 years of normalised profitability. If it is a growth-oriented fund majority of the AUM will be in companies with high scalability and healthy return ratios. Weight to a particular stock is a function of: (1) Gap between the current price and what we perceive as ‘fair value’ estimate of the underlying business assuming conservative projections; (2) Liquidity of the stock—a measure to check if we can exit the stock with minimal price disruption in case some of the underlying assumptions change. The individual weights to stocks is further assessed from a macro-perspective to check if we are taking too high a concentration on particular macroenvironment factors like interest rates, benign commodity prices, etc..
Is there any evidence that equal weightage portfolio can give investors an edge to outperform markets?
There is no single portfolio or a magic formula that can outperform the markets consistently. It is up to the individual investor's risk appetite and his/her appreciation of risks. Wise investors have emphasised that maintaining a conservative approach of capital protection, adopting a clear-headed approach to benefit from volatility from markets is a good way to make money over the longer term.