'New Investors Should Look At Markets Like A Long Marathon And Not A Regular Sprint': Ankit Agarwal of UTI AMC

How are you looking at the markets at current levels?
Valuations for the market have gone up and trading closer to or above their plus one standard deviation. However, it is on the back of an expected recovery in the earnings over the next couple of years. The valuation expansion scope seems limited today, but the earnings trajectory could drive any further market move. Our focus has always been to identify good quality businesses and hold them for the long term. As long as the long-term growth runway is intact and the company continues to generate a return on capital above its cost of capital, we are not very concerned about the near-term movement in the market.

The answer to the above question lies in the investor's expected return and also the holding horizon. We have seen empirically that over ten years, none of the indices (here referring to Nifty100, midcap 150, and small-cap 250) have given a negative return on a 10-year rolling basis. Moreover, the Nifty 100, Nifty Midcap 150, and Nifty Smallcap 250 have given a return of over 8 per cent (CAGR) on a ten-year rolling basis 95 per cent, 99 per cent, and 85 per cent of times respectively in each segment. Hence, as long as the holding horizon of investors is long enough and they go in for SIP way of investing, the near-term market movements should not matter in the longer term.

A year back, the gap between the valuations of midcaps/small-caps to large-cap peers had widened and also, the gap in 3-year/5 year rolling returns was at lows. The mid and small-caps have significantly outperformed in the last year, making up for the historical underperformance. The future returns would come more from good stock selection and earnings growth. Hence, the focus should be on buying good quality businesses run by outstanding management and those that offer a long runway of growth; it is in these fundamentally strong businesses that the smart capital would primarily flow into instead of looking at flows from a purely market cap perspective. We find that there are large-cap isotopes (mid-small cap companies with large-cap-like quality) that one can discover in the mid and small-caps that offer a long-term compounding potential.

Any new investor coming into the market should consider investing akin to a lifelong marathon and not treat markets as a sprint. The above means that one should have a long-term horizon when investing in the stock markets. Moreover, in the long term, to create alpha, one needs to get their stock selection right and hence, a retail investor should invest thru an institutional manager who is backed by a robust investment process and a large investment team that can do a thorough analysis and due diligence on the stocks chosen. Choosing the right stocks and avoiding losers is also essential, especially in the mid and small-cap space.

We are currently exposed to consumer discretionary themes that benefit from higher formalization, under-penetration and premiumization. We are also quite positive on the overall manufacturing capability of the country that benefits players in the contract manufacturing of specialty chemicals, APIs or ones that benefit from increased domestic production either owing to import substitution or beneficiaries of production linked incentives. We also like themes that benefit from investment in digitization, investment in cloud infrastructure etc. We are also constructive about the building materials space as the housing construction revives, and the auto space could benefit from a significant pent-up demand and revival in the auto cycle.

As a fund house, it is our continuous endeavor to educate current and prospective investors about the equity markets and the investment philosophy of various funds. We have seen increased investors' participation in the MFs and small, and midcaps as investors who have held on to equity MFs have made decent real returns for the long term.