Value, visibility & validation for picking stocks

“Our core philosophy is to “Buy growth stories”, prioritizing growth opportunities in our investment decisions and we believe in value, visibility, and validation,” says Hemant Shah, Principal Officer and Fund Manager of Seven Islands PMS.

In an interview with ETMarkets, Shah said: “We believe successful investing hinges on a trifecta: value, visibility, and validation,” Edited excerpts:

Thanks for being part of the segment. Please take us through your performance of the fund so far in 2024 and 2023 and since inception.

Hemant Shah: Our benchmark index is the BSE500. We’ve introduced our maiden PMS in the name of Seven Islands Multicap Fund.

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While the BSE500 has surged by approximately 23.5%, our annualized return stands at 41.70% and since our inception in 2022 is 52%.

How much would investors make if someone invested Rs 50 lakh at the start of the fund?

Hemant Shah: If someone invested Rs. 50 lakhs at the start of the fund it would be more than 75 lakh today.

What is your call on markets – we are seeing some volatility at higher levels – is it profit-taking or external factors?

Hemant Shah: Market sentiment appears to be driven by profit-taking due to steep valuations rather than negative external factors, with selling by FIIs being offset by domestic buying, whether from retail investors or mutual funds which is visible in SIP numbers.

Volatility, particularly in March, is not unusual historically, with profit booking being a common occurrence among traders and short-term players.

We believe that the current turbulence will soon settle aided by the positive growth momentum we’re seeing in the economy over the next year. In the next few days, we anticipate the continuation of the midcap rally coupled with favourable buying opportunities due to the corrections.

There may be shifts in stock performances, particularly among companies whose prices have surged dramatically, with prices cooling off.

The upcoming elections in April and May could introduce additional volatility. Hence, while acknowledging potential short-term fluctuations with technical triggers like profit booking and year-end commitments in this month, our call on the markets, especially regarding specific stocks, remains optimistic.

Who should invest in Seven Island PMS? What should be the ideal time horizon and risk profile?

Hemant Shah: Investing in Seven Islands PMS is open to individuals, corporates, or HUFs. Our clientele includes HNIs, and individual retail investors with a minimum ticket size of 50 lakhs for investment. Currently, HNIs represent a major chunk of our clientele.

For optimal results, we recommend a time horizon of at least 3 years. If one cannot commit to this duration, we advise against investing, as the risk profile essentially aligns with the time commitment.

What is your fund philosophy?

Hemant Shah: Our fund philosophy at Seven Islands Multicap Fund is centered around investing across all market capitalizations, including large-cap and mid-cap companies.

We aim to generate more alphas by focusing on midcaps, while maintaining a balanced portfolio by investing in large-cap growth companies and hence, balancing the risks.

Our core philosophy is to “Buy growth stories”, prioritizing growth opportunities in our investment decisions and we believe in value, visibility, and validation.

We believe successful investing hinges on a trifecta: value, visibility, and validation. We invest in companies with strong fundamentals and a clear path to growth, ensuring their stock price reflects true worth and holds potential for significant returns. But value alone isn’t enough.

We delve into business visibility, understanding the target market, competitive edge, and the overall sustainability of the business model.

Finally, we prioritize companies led by experienced, qualified, and ethical professionals. A strong management team with a proven track record inspires confidence and increases the likelihood of long-term success for our investments.

By focusing on this three-pronged approach, we build a diversified portfolio of companies with the potential to deliver superior returns for our investors.

We seek companies that demonstrate strong growth potential, alongside maintaining reasonable valuations.

We recognize that in today’s market environment, valuations may not always appear cheap, but we believe that high valuations can be justified by high growth prospects.

Additionally, we foresee many midcap companies outpacing the overall economic growth rate of the country.

Our strength lies in our ability to select promising stocks through rigorous stock picking processes, ensuring that our portfolio is positioned to capitalize on growth opportunities while managing associated risks effectively.

How do you pick stocks for your portfolio?

Hemant Shah: Our investment process follows a straightforward approach, emphasizing several key stages to ensure thorough evaluation.

Firstly, we scrutinize the company’s balance sheet, ensuring its financial health meets our standards. Following this, we delve into understanding the company’s business model and the competence of its leadership team.

Positive feedback from both aspects leads the way for further analysis. Next, we evaluate the company’s profit and loss statements to gauge its financial performance and sustainability.

Finally, we conduct peer comparisons to contextualize the company’s position within its industry landscape. Only after a company ticks all these boxes, we go ahead to invest in it.

Could you please guide us through your risk management process?

Hemant Shah: Risk management holds an important role within Seven Islands PMS. At its core, our process revolves around meticulously monitoring company performance, including its financial metrics, on a monthly basis.

While we do keep a close eye on quarterly numbers, the monthly check-ins help us to stay responsive to any emerging trends or shifts.

Regular engagement with company management and industry touchpoints increases our understanding of the dynamic landscape in which we invest.

This proactive approach means that we remain aware of any significant changes in the business environment, allowing swift adjustments to our investment strategies.

For instance, regulatory changes such as the imposition of anti-dumping duties or alterations in import regulations can significantly impact industry dynamics.

This necessitates a pragmatic approach, sometimes leading us to strategically exit positions, even at a lower price, to mitigate further risk exposure and seize alternative investment opportunities.

Our view on risk is simple: the risks we know and can prepare for aren’t the real risks. It’s the unexpected risks, like uncontrollable factors and big economic changes, that really test us.

Risk reward ratio has to be in favour barring in terms of the business model because we don’t have any control on the geopolitical factors.

Whether it’s dealing with sudden market drops or political tensions, we focus on quickly adjusting to what’s happening.

Even though macroeconomic uncertainty is normal, our ability to change our plans fast in response to these risks shows how we handle risk effectively.

In the end, it’s how fast and confidently fund managers act when things get uncertain that truly defines the approach to managing risk.

The portfolio is tilted towards small & midcaps which are facing the heat now – how are you looking at the space? Have you also rebalanced your portfolio?

Hemant Shah: We have negligibly rebalanced our portfolio, which is tilted toward mid, small, and large-cap companies.

We are quite confident in our midcap stock selections and are fundamentally convinced about the growth of the companies in which we have invested.

The recent volatility has been a good opportunity for us to buy stocks and we will continue buying at every decline.

The month of March is inherently volatile not because of the fundamentals but because of technical triggers such as profit booking and year-end commitments.

We follow discipline in our investments by following our philosophy of value, visibility, and validation. Despite the current negative factors, including SEBI’s small-cap stress test for mutual funds, we remain optimistic.

While there’s pressure to prove fund stability, we see most funds passing the test including us We have also conducted a good stress test and find ourselves comfortable placed.

With similar thought processes among fund managers, we expect no major issues. We view this market downturn as a chance to buy in.

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)

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