Stocks went through a sell-off phase recently with both the Nifty and the Sensex entering `correction’ territory, though last week the benchmark indices rose up to 1.98 per cent. The Telegraph’s Vivek Nair spoke to Hemant Shah, Fund Manager at Seven Islands PMS, the SEBI-registered Portfolio Management Division of Mansi Share & Stock Advisors Pvt Ltd during this phase to get his views on the selling pressure and the road ahead. Edited excerpts.
Q. Stocks recently went through a correction due to both global and domestic factors. What is your outlook on the road ahead. Should investors be prepared for more negative surprises and volatility?
The Indian stock market, like global markets, has experienced an unprecedented bull run over the last three years, largely driven by economic recovery and liquidity inflows. During this period, corrections were shallow and short-lived, often viewed as buying at dip opportunities. However, the recent correction in the month of October, with the Nifty falling approximately 10% from its peak level of 26,277, is the steepest in the last three years and was anticipated by many for the past 10-12 months. Hence, it is a healthy correction.
The reasons for this correction are well-documented: geopolitical tensions, aggressive FII selling, over ?1.16 lakh crore has been offloaded in the month of October alone and the most important reason for the correction is high valuation in the market. As of September, Indian equities were trading at high valuations, with the Nifty 50’s trailing PE at 27, prompting profit-taking by FIIs. While geopolitical factors, like the U.S. elections, and China’s economic stimulus policies are often cited, high valuations was the primary driver of this correction.
Despite this, Indian retail investors and domestic institutional investors have shown remarkable resilience, providing some stability against FII outflows. However, the correction has made it clear that the "buy on dips" strategy may not work across the market this time. Investors must focus on sectors and stocks where valuations align with visible profitability and growth.
The second quarter 2024-25 earnings season has been mixed. IT companies have largely met expectations, while pharma and banking companies have delivered good numbers. Infrastructure and government-driven sectors also showed strength, while metals and chemicals, tied to global pricing and China, have faced challenges. However, high valuations across sectors have resulted in a correction, bringing stock prices closer to realistic growth projections for 2025-26, compared to earlier valuations which were closer to the projections of 2026-27 profits and beyond.
While the path to new market highs may take some time, India’s long-term growth story remains intact. Investors are advised to focus on fundamentally strong companies with reasonable valuations and clear visibility of profitable growth rather than sectoral trends, they should align their return expectations with a long-term holding approach and think about staggering their buying amidst the current selling pressure prevailing in the market.
Q. As a fund manager how did you navigate the turmoil. What is the composition in your flagship fund. Do you also invest in unlisted securities?
Navigating through market volatility requires a disciplined approach. One of the most effective strategies we’ve adopted is maintaining a significant cash position as a hedge. In September, we were at 20 per cent cash, and as the markets have corrected, we’ve started deploying this cash in a staggered manner over the past couple of weeks. Our portfolio has also undergone a stress test, and we believe it has performed well. For example, while indices are down 9.5% in the first week of November, our flagship fund was down only 6.7%, a relative outperformance despite the weakness.
Our core strategy remains rooted in the principles of valuation, visibility, and validation. We constantly evaluate whether the valuation is justified by the company’s profitability, balance sheet, and future growth potential. If the answers are affirmative, we consider these stocks for our portfolio with a long-term perspective. Additionally, we've observed that sector-wide rallies are no longer the norm; stock-specific actions are going to drive the market. As a result, we’ve tilted our portfolio towards mid-cap and small-cap companies, where we see strong growth prospects and interesting growth opportunities.
The composition of our Seven Island Multi Cap Fund as it reflects in its name itself spans across large-cap, mid-cap, and small-cap companies. Historically, we aimed for a balanced allocation of 50 per cent in large caps and 59 per cent in mid and small caps. However, in the current market conditions, our portfolio composition is a little more titled towards mid and small cap than large cap.
Our view is that the next 12-18 months will be driven by stock-specific actions rather than broad sectoral movements.
No, we do not invest in unlisted securities, as PMS regulations restrict us from doing so. Our focus remains on listed equities where we can apply our research-driven framework to identify opportunities.
Q. Have the crash in stock prices affected the incremental inflows into your PM?S
Surprisingly, the recent market corrections haven’t dampened the inflows into our PMS; in fact, they’ve increased. The inquiries we received six months ago are now translating into client conversions.
Investors have become smarter, they recognize two key factors. First, this will be a challenging year where stock picking will be critical, and many believe it’s better to entrust funds to experts rather than invest directly.
Second, corrections present a good time to invest, and investors are taking advantage of this.
Post-Diwali, we’ve observed a genuine uptick in inflows. That said, if the market decline continues for another month or more, we might see a slowdown in new inflows as investor sentiment adjusts to sustained volatility. For now, though, the trend remains positive, with increased investor confidence in professional fund management during uncertain times.
Q. In the current market conditions, what are your clients’ goals and investment preferences?
We’ve been clear with our clients that the returns achieved over the last 18 months, since we started our PMS journey in January 2023 are unlikely to be replicated in the next 18 months. This has been a period of exceptional performance, but as market conditions evolve, we’re encouraging a more measured outlook. We’re requesting clients to adopt a three-year perspective, emphasising the importance of patience.
Our preference now is for protection and quality investments, focusing on companies that are showing strong fundamentals and future growth visibility. We’re also being upfront- if clients are not prepared to give their investments the necessary thousand days or three-year horizon, this may not be the right time for them to enter. However, for those who remain committed, we believe in delivering good returns over the long term, even if the short-term portfolio performance reflects the current market challenges.
Q. What is the current AUM of Seven Islands Multicap Fund. Where do you see that growing over the next 3-5 years?
Our AUM is ?168 crore and Year-to-Date returns are 42 per cent. Since inception (January 2023) our returns have been 88 per cent vs BSE 500 (benchmark) of 41 per cent.
Our AUM target of ?200 crore within two years of operations is right around the corner. Looking ahead, we’re optimistic about growth over the next few years, driven by several factors. If market conditions remain supportive, which we believe will be driven by India’s strong GDP growth, healthy corporate balance sheets, and the overall economic resilience, we foresee managing ?500 crore in AUM within the next two years.
This confidence stems from our belief in the India growth story, supported by deleveraged corporate balance sheets and well-capitalized banks. Additionally, we are planning to launch an AIF within the next six months, which will complement our PMS offerings.
Q. Small cap and mid cap stocks also took a hit. Has that affected your fund’s performance vis-à-vis benchmark like BSE 500?
It has indeed affected us, as we are tilted towards small and mid-cap stocks in comparison to our benchmark. However, our portfolio has shown resilience. Over the last one and a half months, our portfolio has undergone a stress test, and we believe it has performed well under these conditions.
To provide specific numbers, while the indices were down by 9.5 per cent in the first week of November, our flagship fund was down only 6.7 per cent. This represents a relative outperformance despite the market weakness. Year-to-date, our returns stand at 42 per cent, and since our inception in January 2023, our returns have been 88 per cent compared to the BSE 500 benchmark's 41 per cent showing the strength of our investment strategy and the stability of our portfolio, even in challenging market conditions.
Q. What is your outlook on the mid-cap and small-cap segment. Is this the right time to nitpick or one should wait for some more time for the dust to settle?
When considering investments in the Nifty 50, you're limited to 50 companies. However, our benchmark is the BSE 500, giving us the investment universe to invest in 500 companies within this index, whether they are mid-cap, small-cap, or large-cap. This broader investment universe offers more opportunities for growth, particularly within the mid-cap and small-cap segments.
We see significant potential for both organic and inorganic growth in companies within the BSE 500, compared to just focusing on large-cap companies. As mentioned earlier, our portfolio is currently tilted towards mid-cap and small-cap stocks, even amidst market fluctuations.
We believe this is a good time to invest in mid-cap and small-cap stocks. However, investors need to consider visibility and validation, which are critical questions that we also ask ourselves before making investment decisions. While we might not always be right, we proceed with investments only when we have confidence in our analysis.
Rather than waiting for the dust to settle, we recommend a gradual approach to investing in mid-cap and small-cap stocks. This means buying in multiple tranches, that is two or three, for example. Whether stock prices go down or up in the short term, a gradual investment strategy can help mitigate risks and not miss out on the market opportunities over time.
Q. Recently, the SEBI introduced a new asset class product that will compete against mutual funds and PMS. Will that new product affect inflows into PMS or few clients opting for the new product. If not why?
The idea and thought process behind the new asset class proposed by SEBI is commendable. However, I believe it is unlikely to impact PMS or mutual funds significantly. Firstly, the minimum ticket size for PMS investments, which is currently ?50 lakh, was considered substantial a few years ago. Today, many individual retail investors can comfortably afford this amount.
These investors are unlikely to opt for products with lower ticket sizes, such as ?10 lakh or ?15 lakh. The new product essentially serves as a middle ground. It won't impact mutual funds because investors who are accustomed to systematic investment plans (SIPs) in mutual funds are not likely to shift to this new product.
Similarly, those who have invested in PMS with a ticket size of Rs 50 lakh will not downgrade to a smaller investment size.
For instance, once you have a priority or premium account in a bank as a customer, you remain in that category and don't revert to being a standard saving account customer. Similarly, investors who have chosen PMS will stick with their investment choices rather than switching to the new product in my personal view.
The intent behind this new product is also to protect investors from the risks associated with trading in futures and options, which is a positive initiative.
Q. Lastly, what is the minimum ticket size for investment into your fund. Do you also plan to launch more PMS funds in the future?
The minimum ticket size for investment into our fund is ?50 lakh. Currently, our company offers only one strategy- the Seven Islands Multicap Fund. We don't plan to launch another PMS strategy in the near future. However, we are planning to introduce an Alternative Investment Fund (AIF) within the next six months. This new offering will provide our investors with additional options and diversify our investment products.