Transcript

How Multibaggers Are Really Found in Real Market Cycles

Ms. Akshara Menon: Hi everybody, welcome back to the fund manager interview series with PMS Bazaar . Honestly, you guys know how long I've been doing this—taking fund manager interviews and talking about the markets, on bull runs and the crashes. When we spoke about a lot of these things, the question that always arises from investors in times like these is, "Should I be worried?" When questions like these come in, we understand that the confidence of the investor has already dipped. 

The question that initially comes is "Should I invest?" or "Where should I invest?", but now the questions are like "Should I be worried?" So these questions really need a real-time answer, not jargon or textbook theories. So I have brought  Mr Anil Rego along with me, who is the CIO and founder of Right Horizons. 

The best word that describes him is "contrarian approach." When the whole market runs behind to exit, he finds an opportunity to stay in the market and to buy. Being of a contrarian approach for 30 years, I think that's a very difficult part, to be very honest. Before I welcome you to the show, if I were to ask one question: with 30 years in this industry, if you want to have one word that describes the market mood today, what would that be and why?

  Mr. Anil Rego: First of all, I think it's good to be on the show. I think if you ask me that one word—and you're making it difficult for me, just having one word—I would say "cautious." It's not yet a sort of panic time, but I think people are just saying, "Okay, what could happen?" They're not necessarily coming out and writing their checks and feeling comfortable to invest. 

So I would believe that it's still a cautious type of approach, and it's not unusual because it's almost now like one and a half years of the market probably being sideways to down. One is to see price action, which means that you see a big fall, but time is on the other side. When they look at some of the other options, when they look at gold, it's gone up so much. 

When they look at US tech stocks and AI stocks, you feel a little bit left out, and then you start wondering, "Are we doing the wrong thing?" The other part of it is the news flow that comes. At times like these, suddenly, FIIs are pulling out money, there's this whole war stuff, and of course, recently, we had a prime minister also coming on and saying, "Be careful." So suddenly people start wondering, "How much worse is it going to get?" So I think that's where "cautious" is what I would describe it as.

Ms. Akshara Menon: We have welcomed Mr. Anil Rego with the word "cautious" for this interview. Now, today's investors are both informed and a bit anxious about their investments. Most of them are checking them on a daily basis. Most portfolios were in an up-and-down state. If at all you want to say that one biggest mistakes that investors are making today, what would that be?

Mr. Anil Rego: I would believe it's about fear and greed—two important emotions—and how you are able to overcome them. If you are an investor and you're able to overcome fear and greed, then I think you'll do very well in markets. Most of the time, what has happened is people got carried away, let's say with a mid and small-cap rally, or with silver or gold. So you have a lot of these instances where people get carried away, and that is greed. Then suddenly, when it comes down, everybody's wondering, "How low can it go?" The news flow at such times is not going to be easy, and the ability for somebody to stay cool-headed through that is important. 

I will also come back to your point about investors being informed and tracking it regularly—I'm not sure that's good, because investing is a long-term journey. In fact, I tell people, how do you treat real estate? If the real estate market is down, what do you do? You wait. I think that is the thing: how do you look at it as a long-term asset? 

When you look at it as a long-term asset, it's the best-performing asset. By looking at the short term and trying to do too many things, investors don't realize they are actually hurting themselves rather than doing good.

Ms. Akshara Menon: Situations like these are not new. For example, you have seen a lot of crises, whether it's 2008, the dot-com bubble or war, but opportunities come in hindsight. However, the moment when your phone is ringing, and there is an investor on the other end asking about their portfolios, what would your answer to that be?

Mr. Anil Rego: If you ask me why you need a professional to advise investors, I would only say it's to handhold them from not making some of those mistakes linked to fear and greed. You really get worried when markets are down, and actually, data shows that at market bottoms, people are pulling out money, and at market peaks, they are putting in money—the exact opposite of what they should be doing. 

So, if you have somebody who's seen some cycles and is able to say, "Don't get overboard right now" and "At this time it's time to be cautious," or vice versa, that handholding is all that is required. I only do that. At times like these, how do I just hold back the investor from doing anything rash when markets are down? It may be okay after one quarter or two quarters, but I think it's how one is able to just hold them through that so that automatically, there's a correction that happens. You will see that whenever there's an extreme correction, you'll find there's a pullback—like we saw in March, which was a very good month, and it came from a point when everybody was so negative. 

Markets automatically self-correct, and in the long run, the longer it has pained you, the more it recovers in the cumulative. It will take care of the past returns and come back to averages.

Ms. Akshara Menon: That was beautifully said. If you see the lot of debate that's going on in the market now, it's about midcap, large cap, and small cap. Right Horizons, as a PMS, has made more value or more returns in this mid and small-cap space, given the valuations today. Do you still feel that bet is right, or do you see a rotation in that?

Mr. Anil Rego: When we studied it over the last 20 years, we found that in nine out of those 20 years, small caps did the best. Midcaps were the top performers in five of those years. So for 70% of the time in the last 20 years, mid and small have done better, 14 out of 20 years. That gave us the conviction that this is the place to be on a longer-term basis because this is what actually creates value for investors. The second point is our strength in identifying multibaggers. I've made a full process of it. In the last cycle, we had almost 25 multibaggers across our various strategies. 

We wanted to make this repeatable and focus on each individual stock. I think that is the reason why we like to be a little biased towards mid and small caps. Looking at the data, typically in cycles, at the peak in the past, we've seen alpha of almost 60% to 70% over Nifty. In the last cycle, it stopped at 40%, and from there it went down. Typically, you see a 221% average return of the small-cap index in a cycle. That is why in February, we gave out a call saying we think mid and small caps are likely to do well. We believe we are at the start of that 24 to 36-month cycle.

Ms. Akshara Menon: When you talk about the cycle of small caps, generally, how long does that rally stay in the market?

Mr. Anil Rego: The cycle is typically 24 to 36 months. There could be some outliers, but normally it's within that range. It's not very short in terms of time cycle, and it's also not very short in terms of percentage returns. One needs to be able to ride the rally.

Ms. Akshara Menon: You've been investing since you were 17, and you envisaged multibaggers then. When you select a multibagger today, do you think the fundamentals have changed from back then? How do you identify them now, and what has been the change?

Mr. Anil Rego: I don't think they have changed as much; I think I have changed. I've added a process to it. It's a simple thing: can the earnings double in 3 to 5 years? We've seen that earnings and stock performance are very well correlated in the long term. The second criterion is: is there an opportunity for the P/E ratio to go up, for rerating? If these two criteria are met, we add the stock. It's about bringing more rigor and studying the companies, which has made the ratio better. We had 25 multibaggers in the last cycle, and a lot of them are 3x-plus.

Ms. Akshara Menon: In a portfolio, what matters is diversification, but too much diversification kills the alpha. What is the ideal portfolio composition a PMS should have?

Mr. Anil Rego: If you want to chase alpha, you need to be reasonably concentrated. I think a 12 to 15, maybe up to 25, stock portfolio is right. If you go beyond 25, diversification doesn't help. Within those, how the distribution is weighted matters. We like 15 to 25 stocks. We like to manage risk more aggressively, and we know sometimes we are leaving alpha on the table, but when you manage risk right, the investor doesn't participate in the downside, and that creates alpha in itself.

Ms. Akshara Menon: India is not completely isolated from the US markets. All these factors—tariffs, crude prices, a weakening rupee—are affecting Indian markets. How much is investment performance linked to global macros today?

Mr. Anil Rego: We believe we need to bring in global macro as an overlay. It's not just that it moves in sync; sometimes it deviates. Money chases places where returns are best. We take a considered view and rebalance the portfolio, including sectors, risk, and the mix between large, mid, and small-cap stocks. I would place the global allocation at about 20% on average, but sometimes we give it a higher weightage, up to 40%, when we think it is going to impact India.

Ms. Akshara Menon: Let's talk about your latest offering, the Right Horizons India Opportunities AIF, which has a base in small and midcap stocks, with 60% of the stocks having fallen more than 30%. Imagine an investor sitting on the fence, seeing global macros on one end and your fund. How do you convince them that this is the right time and not six months from now?

Mr. Anil Rego: That position was based on our conviction. We are contrarian and like to pick it up from a point where we think markets will turn around. We've been very cautious to look at how to manage risk, including entry risk, which is why we have it as a close-ended fund with drawdowns. We expect markets to bottom out between March and July, and we wouldn't be surprised if there's one more leg down. The AIF gives the opportunity to take advantage of that. We have a bias towards mid and small, but we have the flexibility to move towards large caps if the cycle concludes. We are doing the heavy lifting, we are conscious of volatility, and we are managing risk very well with a hedging option, which allows us to be more aggressive on the hedging side.

Ms. Akshara Menon: What kind of sectors are you looking at with this particular fund?

Mr. Anil Rego: We like a number of sectors—wealth management, certain discretionary consumer spaces, and new emerging sectors like energy, especially green energy. We are trying to build on sectors we have conviction in, so we have the tailwinds of those sectors.

Ms. Akshara Menon: If I had to ask, is there any stock or sector where the industry was avoiding it, but as a contrarian approach, you moved in and got the rally?

Mr. Anil Rego: I avoid talking about specific stocks, but we did place bets around building materials and some of the PSUs in the travel side when they were reasonably down and not well-discovered.

Ms. Akshara Menon: We left off at the idea of the average wait time for a multibagger. If an investor is going to invest today without knowing if a stock will be a multibagger, what is that wait time?

Mr. Anil Rego: Typically, we've seen that 24 to 36 months is a good time to see a multibagger out there. Of course, you will not have all of them in that timeframe; some may be outliers. We had something in 9 months, and others in 6 years—or even 60 months. Interestingly, we took a call on one of the PSUs; it was contrarian, and then we got uncomfortable because it went crazy, so we had no other choice but to exit the stock. 

Ms. Akshara Menon: That was a positive side of being a contra investor.Just to build on that, you might miss out on a rally because you've taken a contrarian approach. Was there any scenario of that sort?

Mr. Anil Rego: See, today I think "contrarian" is misunderstood. At certain points of time, you take action and take a contrary view, but you may not have an opportunity for the next period of time; then you have to ride that wave. It's not that when the market is going up, I keep doing contrarian. At extreme points is where you want to be contrarian, and in between, you want to follow the trend. We should not use the word "contrary" to mean that at every point of time we will do exactly the opposite of what other people are doing.

Ms. Akshara Menon: Perfectly answered. If an investor stepped into the market in 2021, initially, they would have seen a boom, but eventually, there was a lag. What is the piece of advice you give to that investor?

Mr. Anil Rego: Like I said, how do you invest in real estate? You wait. My second advice is to just sleep over it. Sleeping over it is one of the best ways to make money as long as you've been disciplined. You cannot invest in a stock that is trending in a market boom and then sleep on it. If you're diversified and you're investing in a diversified fund, professional fund managers are very ruthless with their stocks; they aren't going to be married to them. If you go back and see, the index has gone up significantly since 1979, 850 times. That's why you should look at it long-term. Be disciplined, look at your asset allocation, understand your risk, and do systematic investments. If the market goes down and it does worse, you must say "wow," because I'm investing, I'm not selling. I believe the ideal timeframe is a lifetime, because the money is for your life goals—your retirement, your needs.

Ms. Akshara Menon: This is the truth which is not spoken much: in US markets in the last 10 years, passive funds have given better returns compared to active funds. India might replicate the US trend eventually. So, if Sensex has given 850 times returns from its start, why should an investor go for a professional or AMC that charges a 2.5% fixed fee, which eats up returns in times like these? Is it right to compare PMS and Mutual Funds?

Mr. Anil Rego: I go back to: what is the objective of the investor? Probably to get the best returns. Performance is reported after expenses. If I were the investor, I'd look at which is doing better. In the past, actively managed funds have done better on a compounded basis over 3, 5, and 10 years. We haven't yet seen India move toward the efficiency of the US. If I am still able to get a higher return than the benchmark post-expense, I think that's fine. It shouldn't be an issue if it adds value. Regarding PMS vs. Mutual Funds, it's about diversification of styles. There will be cycles where mutual funds do better, but in the long run, you're allowing niche asset managers to work. When a fund size becomes very large, you may not be able to invest in small caps due to liquidity. If my returns go below the index for an extended period, then definitely it makes sense for somebody to be in a passive fund, but I don't think we are there yet.

Ms. Akshara Menon: What kind of allocation should an investor give to passive funds?

Mr. Anil Rego: At this point of time, maybe about 25–30%—maybe one-third—can be passive. One reason why passives sometimes fail is that they are market-cap weighted. Whenever a company does well, it goes higher in allocation and may go into bubble territory. The index cannot see it, but a fundamental manager can if we move to a more advanced mechanism for indices; possibly.

Ms. Akshara Menon:  then passive funds would do better.You stepped out of a stable, high-paycheck job at Wipro to start Right Horizons in 2003. What was the conviction behind that?

Mr. Anil Rego: I had that entrepreneurial bug from a very young age. I planned my retirement at the age of 35, but I was able to do it 5 years earlier. I modeled my finances on an Excel spreadsheet, bought a rental-yielding house, and diversified. I didn't want my family to be impacted by a decision of mine. When I went to my boss—a person from GE who worked in the US—he asked me, "Anil, are you crazy?" But because I planned for it, I didn't have the hesitation. If you define your goals, that's 50% of the job. The other 50% is the hard work of continuously tracking and monitoring.

Ms. Akshara Menon: How does your own portfolio look today? How much is in debt/equity?

Mr. Anil Rego: From an early age, I was 100% equity. I take tactical calls. Today, I also plan for liquidity, but I remain significantly equity-oriented. My own portfolio, I don't manage; part of it is invested in the funds we have, and the rest is managed like a client's portfolio. I have gold and debt, but the core is equity.

Ms. Akshara Menon: For an investor looking to invest in gold and silver now, is it the right option?

Mr. Anil Rego: We invested in gold, and it did very well; similarly for silver. We got uncomfortable with both and ended up cutting our exposure. With silver, we exited early because it's a very volatile asset. Gold we kept with a stop-loss. At this point, I think there is more left for gold and silver. Gold is one of the best hedges against currency and will continue to do well for the long term.

Ms. Akshara Menon: It was a brilliant interview. Wealth is not only built in the bull market; it is built in times like these, when there is a dip. Thank you, sir.

Mr. Anil Rego: Definitely, always a pleasure to be on the show. Thank you for all your insightful questions.