Here’s how Asit C Mehta’s PMS scheme rallied over 100%, Director Prasanna Pathak explains

Select portfolio management schemes managed by Asit C Mehta Investment Interrmediates managed to deliver robust alpha to investors in the last one year till March 2024. The benchmark equity index BSE Sensex gained 25% during the period, while the broader indices the BSE MidCap and BSE SmallCap rallied 63% and 60%, respectively. In an interaction with Business Today, Prasanna Pathak, Director of Asit C Mehta Investment Interrmediates, shared his insights on PMS schemes and equity markets. Edited excerpts:

BT: Ace-Multicap and ACE-Midcap PMS schemes delivered 102.73% and 96% returns in the last one year. Can you shed some light on your investment strategy?

Pathak: At Asit C Mehta, our primary investment aim is to provide the best risk-reward ratio to our investors, recognising that equity inherently carries high risk. We’ve devised the scientific investing framework to accomplish this goal, employing quantitative techniques to mitigate portfolio risk. Additionally, we use fundamental and qualitative methods through vector-based investing strategies to enhance returns.

The composite investment framework helps us identify mispriced stocks and hidden investment themes. Identifying a theme at the take-off stage is the key to generating supernormal returns. We could identify themes like capex cycle, defence, railways and PSU which is reflected in the significant outperformance of our schemes.

Our ACE Midcap strategy uses the same framework for building the portfolio. The framework eliminates risk and focuses on long-term growth opportunities available at reasonable prices.

BT: How do you pick stocks for these schemes?

Pathak: We use quantitative methods to reduce risk in our portfolio. We first screen companies based on liquidity parameters, as we would never want our investors to face liquidity issues even in any black swan event. From the remaining companies, we then eliminate risk by removing companies that are loss-making, high leverage, negative cash flows, low return ratios, high valuations, etc. We also use the corporate governance matrix and capital allocation history to eliminate stocks. This gives us our safe investment universe. From this, our next objective is to focus on growth to provide better returns to our investors. We use a vector-based investing methodology, which embraces the whole ecosystem around the theme. Thus, this gives us more options than traditional sector-based investing and helps us to generate significant alpha in the medium to long term.

BT: What is your view on mid- and small-caps after the strong rally in FY24? Is it time to stay away from broader markets?

Pathak: The valuations in broader markets have become less lucrative than earlier. However, India’s growth story is still intact in the long term. Certain pockets of fair to below-average valuations would still be available based on forward earnings. We need to keep a close watch on quarterly earnings. Corrections should be used to accumulate shares of these companies.

BT: Which pockets will deliver solid returns to investors now?

Pathak: In the near term, markets are fairly priced, and quarterly earnings would determine companies’ prospects. However, the global interest rate scenario would be the deciding factor in the medium to long term. The rate cut cycle could begin towards the end of CY24. From a medium to long-term perspective, financials, technology, auto and other rate-sensitive sectors would deliver better-than-average returns. The Budget of the new government post-elections would also give insight into the focus sectors for the coming five-year term.

BT: What kind of returns do you expect from markets going ahead?

Pathak: The markets will remain volatile in the next few months due to major domestic events. Any disappointment in quarterly results could keep markets under pressure. Global events and geopolitics will also play an important role. FY25 is expected to be a year of consolidation after the run-up that we have seen over the last 1-2 years. Having said that, there will be pockets and themes where decent returns can be made. The performance should improve from the second half of the FY25 onwards.

BT: Which factors do you think will drive market sentiment?

Pathak: The markets will remain volatile in the next few months due to an important event of general elections. Post this event, quarterly results would determine the way forward for the next one to two quarters, and any disappointment here could keep markets under pressure. Global events and geopolitics will also be watched carefully. However, performance should improve from the second half of the FY25 onwards, as by then, the global rate cut cycle should have begun or is nearing its start.