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What is your outlook for Indian equities from a medium to long term perspective i.e., 3 to 5 years plus?
India is standing strong amidst global uncertainties. Bulk of the high frequency indicators show positive momentum be it the Purchasing Managers’ Index (PMI), GST collections, E-way bills and credit growth. Also, the weak recovery in China is helping the relative preference for India.
Further, the corporate earnings cycle and macro environment continue to be conducive for broad-based growth. The economy continues to benefit from fundamentally stronger balance sheet positions of the private sector and the government’s supply-side focused policy measures that are reviving capex.
While relative valuations remain rich, India is in a comfortable spot due to the economic upcycle and strong earnings growth prospects. Hence, we are bullish on Indian equities in the medium to long term.
Small caps have seen a great rally this year amid rising retail participation. What are your views on valuations at current price levels?
Small cap indices and some small cap stocks are trading close to long term averages currently, however, there are pockets of value and several bottom-up stories which are not driven purely by the macroeconomic environment and would still be available at prices below the fair value.
Through our research, we are confident of building a robust portfolio of 25-60 stocks at reasonable prices to translate this into an upside for the portfolio.
Are there attractive investment opportunities from a long-term perspective? In which sectors you see good earnings growth potential in the medium to long term?
As the small cap universe is large and more diversified as compared to the large cap universe, we see many attractive investment opportunities at these prices from a long-term perspective.
Themes like financial inclusion, transition to electric vehicles, import substitution, China+1 and renewable energy are themes which we feel have good earnings potential in the medium to long term.
How will Quantum Small Cap Fund create a fruitful small cap investing experience?
While there are pockets of opportunity within the small cap space, investors should cautiously choose a fund that follows a robust investment process, prioritises liquidity and market capitalisation and sticks to its mandate.
Talking about Quantum Small Cap Fund, we are equipped to overcome the common risks in small cap investing - the risk of outsized position and over diversification.
Let me elaborate, large AUM can face liquidity issues in cases where a small cap portfolio owns a big share of a small cap stock’s market capitalization. Low liquidity in turn leads to risks of higher impact cost on exit. Also, when a small cap portfolio consists of holdings with weights below 1%, it indicates excessive diversification/over diversification and any positive performance in an individual stock may not significantly contribute to the overall returns.
Thus, in the case of Quantum Small Cap Fund, we will have sizeable stock exposure to small caps - a minimum weight of 2% (at cost) in each stock, and a maximum of 4% since a very high exposure may cause liquidity concerns. Further, staying true to the mandate we will prioritize fund performance and liquidity over garnering more AUM and use the bottom-up stock selection approach to invest across sectors.
Next, let me also talk about integrity and quality of the management which is another key evaluating factor.
Smaller companies may encounter governance challenges due to their limited financial resources which make it difficult to attract top-tier management talent. Thus, instead of chasing short-term gains, we avoid companies with governance issues even if that particular stock carries significant weight in the benchmark index.
How will Quantum MF leverage its expertise in the small cap investing landscape?
Backed by our strong research capabilities, we are set to help investors navigate the large universe of over 950 small cap stocks.
Based on financials and corporate governance parameters we will screen 400-450 names in this universe and use the Growth at Reasonable price (GARP) approach. Moreover, we will keep a long-term focus to capitalize on the compounding that these small businesses offer. Also, we will approach small caps where the average liquidity per day is at least Rs 2 crore.
Through extensive research and in-person visits, we will then curate a high-conviction portfolio of 25-60 stocks.
Also, as earlier said, Quantum Small Cap Fund will be disciplined about fund capacity to avoid being a large-sized fund that could hinder its performance. The fund will also be mindful of liquidity and market cap of the underlying stocks.
Quantum Small Cap Fund is currently open for subscription till October 27, 2023 and distributors can look at it as an opportunity to grow investors’ wealth that can make a significant difference to their portfolio.
