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00:00 Thanks for tuning in to The Portfolio Manager.
00:12 Here's a show where we try and talk to a portfolio manager about how she or he thinks
00:17 of the portfolio construct in order to generate alpha over the course of the next 12 to 24
00:23 to 36 months.
00:24 It could be a one year to a three year view that the portfolio manager may bring to the
00:28 table.
00:29 We have with us today Mr. Ramesh Mantri of White Oak Capital and we're going to be talking
00:33 to him about one of the benchmark schemes that he's been leading since inception at
00:37 White Oak which is the FlexiCap Fund.
00:40 And Ramesh, thanks so much for joining on the show and it's the first time we're having
00:43 you in our studio, so welcome.
00:45 Thank you, Neeraj.
00:46 Thank you for hosting.
00:47 The pleasure is entirely ours.
00:48 So, the idea of taking the FlexiCap amongst many other things, Ramesh, because it gives
00:51 me a chance to ask you about the whole gamut of market cap, right?
00:55 So, how are you approaching the portfolio construct at this point of time wherein we've
01:01 seen a bit of a rally for the markets and the year is filled with a number of uncertainties
01:06 including FOMC decision and the election results globally?
01:09 Yeah.
01:10 So, first I would say the world is always uncertain.
01:14 So, I wouldn't never give the confidence that there is no uncertainty.
01:19 The uncertainty is the degree changes and by the way, expected uncertainties don't impact
01:23 the market.
01:24 You know, it is unexpected events that really move the market.
01:28 So, I would say election is now less of an unexpected event and so, and Federal Reserve
01:35 has been around for a long time.
01:36 So, it's always Federal Reserve actions will happen.
01:39 So, I don't think these are big deals.
01:41 I think what has happened in India, you know, post the COVID is the economy has seen broad
01:46 based momentum.
01:47 You know, earlier a few sectors were doing well.
01:50 You know, in fact, the economy was quite weak going into COVID.
01:53 You know, the only sectors like IT, pharma, consumer were doing well.
01:58 Now, I would say a few engines were running and now the whole economy is doing well whether
02:03 it is cyclicals like capital goods, metals, commodities, infra, real estate, tremendous,
02:10 you know, economic momentum in real estate.
02:12 So, it's a broad based recovery and that's why the set of opportunities have expanded
02:19 in the market.
02:20 And of course, after a long period, after 17, a lot of companies got opportunity to
02:25 go public, right?
02:27 So, companies and entrepreneurs are raising capital.
02:30 So, we've seen a huge amount of companies go public in the last three years.
02:35 So, that expands the opportunity set.
02:38 And you know, every trillion dollar of GDP needs to, you need to create new companies,
02:42 new business models, you know, new industries.
02:44 So, if that cycle of new companies stop coming into the market, the market loses their economic
02:50 vibrancy.
02:51 Sure.
02:52 You know, so, you know, I'll just give an example, something like electronics manufacturing
02:57 is something that has happened in the last five years.
03:00 A number of companies have gone public.
03:01 You didn't have scale electronics manufacturing companies in public.
03:05 For example, now you started seeing interesting consumer tech companies also started going
03:10 public.
03:11 Many of them were loss making, but they made very interesting pivots, many of them and
03:15 some of them very successful pivots to profitable business models.
03:18 So, you need constant churn new companies to come into the market.
03:23 Like for example, healthcare services sector, hardly a few companies listed a few years
03:28 ago and now you have a large number of, you know, healthcare companies available.
03:32 So, the opportunity set has become a lot more interesting.
03:35 It's a better market to be an active manager.
03:38 Better market for an entrepreneur, great.
03:41 So, in light of that, I'm again looking at one particular aspect of your AMCN, which
03:48 is the FlexiCap fund, as we said at the start.
03:51 I see a very interesting allocation thus far.
03:53 This is as a fair band, I believe.
03:55 But despite having the choice to be different, you still have about 40% or slightly over
04:00 that in the Smith space and 28% in the small cap space at a point of time and everybody's
04:06 crying horse about the valuations in the small cap universe.
04:10 So, you clearly believe in this thing about emerging themes, which will likely become
04:14 larger over a period of time and you're putting your money where your mouth is.
04:18 Yes.
04:19 So, one, I think clearly valuation, the ask rate in small caps is higher than it has been
04:25 for the last three, four years now.
04:27 So, I wouldn't say there's not a challenge in small cap space.
04:31 At the same time for AMC, which is extremely well resourced on research, you know, for
04:35 us, you know, small cap, by the way, small cap, mid cap is a higher alpha pool for everyone.
04:41 If you have a lot of your own research, then you have a lot more ability to generate alpha.
04:45 So, it is like our ability, our confidence in our team's ability to generate alpha, even
04:50 when valuations today are less attractive in the small cap space than they have been.
04:56 And there is also constant churn happening in the small cap with new companies coming
05:00 in into the markets, new IPOs and all.
05:03 So, and I would say the new emerging India, you participate actually through small and
05:08 mid caps.
05:09 You know, only when companies become large and mature, they transition to large cap.
05:13 So, a lot of those, you know, emerging teams in India, whether you talk about, you know,
05:17 growth in, you know, defense, capex, or for the matter, electronics manufacturing, healthcare
05:23 services, number of sectors that have been doing exceedingly well, they typically tend
05:28 to be in small and mid cap.
05:30 And so, would it be safe to assume that your view, I'm paraphrasing or maybe I'm putting
05:35 words in your mouth, but would it be fair to assume that you believe that even if the
05:40 mid space were to go sideways or even correct, but there'll be bottom up opportunities, wherein
05:45 earnings growth, etc. is in favor, which might do well, independent of what the indices do?
05:50 Yes.
05:51 So, you know, in small cap and mid cap space, you know, managers can have, portfolios can
05:55 behave very differently from the benchmarks, because it's a very bottom driven, you know,
06:01 risk investment.
06:02 Macro teams matter less than micro teams, like what the individual company does matters
06:07 a lot.
06:08 So clearly a lot of confidence that, you know, you can do substantially different.
06:12 In fact, a very strong small cap and mid cap rally, which we have seen in the last 12 months,
06:17 is actually difficult for active managers, because in a very strong market rally, highest
06:23 risk taking gets rewarded, not balanced risk taking.
06:27 But as market transition and volatility now emerges and has emerged clearly in the last
06:31 few days, you will start seeing very clearly that active managers start doing well.
06:35 Ah, okay.
06:36 So, you know, looking forward, looking forward to doing this show one year from now to try
06:39 and assess that as well.
06:41 But no, I mean, it's great for times like these to happen, because then the weed gets
06:45 separated from the shaft, right?
06:47 Otherwise, everybody is painted with the same brush.
06:49 So, I'll talk about multiple themes as well.
06:54 But are there, Ramesh, any risks as a portfolio manager who's looking at multiple portfolios,
07:01 FlexiCap and others by virtue of what you do, direct or indirectly that you do, oversee
07:05 at Ytalk?
07:07 What to your mind is the biggest risk?
07:10 And I know you said that the known risks will not impact, the unknowns will.
07:13 I'm still tempted to ask you what worries you the most?
07:16 Yeah, so one, you know, the valuations in the smaller the market cap, you know, when
07:21 you can start from SME, then micro cap, then small cap, you know, the valuation curve is
07:26 reverse.
07:27 You know, today, the mega caps are the most attractive, then large caps, then mid cap,
07:31 and then you can go down the market cap, it gets keep getting worse.
07:34 So, the quality clearly, and secondly, markets have not in the last 12 months differentiated
07:40 between quality businesses and poor quality businesses and managements.
07:44 So, enough capital has been made available to even poor quality companies and management.
07:50 So, and by the way, supply also keeps turning up because a lot of companies are constantly
07:54 raising, you have practically in capital raising every day today, you know, apart from IPOs.
07:59 I'm talking of either a large, you know, big investor exit or companies raising primary
08:04 money.
08:05 So, I think the supply is really the issue, the quality of supply that is really the issue.
08:10 I'm trying to look at the pockets that you bet on and where is it that you are overweight,
08:15 underweight, maybe related to the sector, but independent of the weightages as well,
08:19 would love to understand what is it that you believe had the highest chance of generating
08:24 alpha over the next 12 to 24 months.
08:27 So, if you ask me where does the value lie in markets, fundamentals are good and value
08:31 and prices are right.
08:32 I think clearly BFSI sector is where, you know, the fundamentals are still very good.
08:38 You're still not seeing a credit cycle, you know, which is what damages BFSI on the lending
08:43 side.
08:44 So, that part of the market, I think valuations are actually below average, particularly for
08:48 very high quality financials.
08:50 So, that's really, I would say on a three-year basis, that is really the pocket that looks
08:55 very attractive to us.
08:58 Then the other reasonably large sector where valuations are very normal and fundamentals
09:03 continue to improve is pharma sector.
09:07 This again, that sector did well during COVID and then went out of favour.
09:12 Again, fundamentals have improved both on US generic and clearly there's a very large
09:16 opportunity on the CDMO, CRO side, which is, I would say, another Indian version of the
09:22 IT industry.
09:23 You know, there's a large potential there and of course, even on healthcare, while some
09:28 regulatory challenges have emerged on healthcare, the opportunity in medical tourism still remains
09:33 very large and again, this sector again has seen a lot of discipline.
09:36 So, these are the two real sectors where valuations are reasonable or attractive and fundamentals
09:43 remain good.
09:44 Unfortunately, a number of other sectors either are seeing much above average valuations or
09:51 too much just poor quality of companies and just too much stretch valuations.
09:57 So, I'm slightly cautious about them, but otherwise, these are the real two pockets
10:03 for me on a sector basis.
10:04 So, banks have been showing value for a while now, but the movement isn't happening.
10:10 Was it a supply side issue and in the foreigner selling which was leading this and do you
10:13 think that is the reason which will change, which is making you so constructive?
10:17 Because fundamentals have been good now for a while.
10:19 Yes.
10:20 So, let's understand this, you know, a large part of FI selling, you know, in the last
10:24 two years in India have happened in financials.
10:27 That number is 60 to 70% of the selling that has happened.
10:30 So, they've gone from significant overweight and they've cut that position and it is very
10:35 difficult for domestic capital to absorb that kind of selling and by the way, market also
10:41 become much broader.
10:42 Today, there are opportunities in all sectors, so people don't have to allocate only to financials
10:46 and number two, particularly on couple of large banks, you see management transitions
10:53 and you know, in the sense and one in a management transition, one in a merger and of course,
10:58 we are going through a very difficult liquidity cycle.
11:00 There is a massive fight for deposits which is causing a lot of pain in the banking side
11:05 on the cost of the funding side, but I would believe these are intermediate challenges
11:11 and as the liquidity situation improves.
11:14 The biggest risk in banking is always a credit cycle and we don't see any signs of a credit
11:20 cycle.
11:21 Yes, there are pockets in below 50,000 loans, very narrow pockets where generally banks
11:26 don't participate.
11:27 We have seen some spikes in credit quality, poor quality, but otherwise, there is no signs
11:32 of a credit cycle as yet.
11:33 So, banking typically struggles when there's a credit cycle.
11:37 Deposits eventually, they will figure out to price it to the customers.
11:41 You got it and you clearly betting on the private bankers because I see the weightages,
11:46 I am not asking you to comment on stocks of course, but I am just laying it out that ICICI,
11:50 HDFC banks right up there, not too many PSU banks.
11:53 So, you are betting on the private banks doing better than the PSU banks.
11:56 Yes, so one, you know, the valuation differential between private banks and PSU banks are not
12:01 narrowed significantly, you know, when you adjust for the quality of franchises.
12:06 We do own public PSU banks.
12:07 Yeah, you do.
12:08 Within the pack.
12:09 But I would say clearly when you look at very long term, even long term averages, you know,
12:14 clearly today private banks are more attractive than PSU on a, even on a relative basis.
12:18 Fair call.
12:19 The other aspect I heard you mention about CDMO, CRO being an opportunity, healthcare
12:24 presence about 5% in the portfolio.
12:27 Does that, is that an overweight stance or is an equal weight stance?
12:29 Part one of my question.
12:30 Part two of my question.
12:32 These are in some sense also slightly longer gestation businesses in their returns are
12:37 maybe lopsided back-ended related to the investments.
12:41 You think, I mean, and companies have been around for a while now, they're making some
12:45 of these investments.
12:46 You think the returns are now closer than what they were earlier?
12:48 Yeah.
12:49 So, you know, if the businesses are short gestation, right, then actually you can see
12:54 a lot of competition, you know, because if someone starts doing when other people will
12:58 jump in.
12:59 If a business is a very long gestation business, just think of another very different example
13:04 of life insurance, right?
13:06 Then it becomes very difficult.
13:07 It's the, you know, the pot of gold is much later in the cycle.
13:11 So actually it creates large entry barriers.
13:13 The fact that the business is a long gestation and the terrain is in favor of the incumbents.
13:18 You know, it's like people who are there, it favors them.
13:21 So competition becomes harder actually over longer term.
13:24 The competition, the competitive space is much simpler if it's a long, longer term
13:28 gestation period.
13:30 Number two, the same, if you're talking of CDMO, CRO, CDMO, the same capabilities that
13:35 India has in IT, which is basically one highly qualified talent, you know, which is in, you
13:40 know, chemical engineers, you know, BSC chemistry versus tech engineers, low cost, highly talented.
13:47 And number two, the fact that India has a great reputation for, you know, history of
13:51 protection of IP, which is that's why the IT industry is scaled up.
13:54 Those two dimensions remain.
13:56 And number three is I think the US, you know, pharma companies are under significant pressure
14:00 to cut costs because the cost of drug discovery is going up a lot.
14:05 So India is, and number three, because of the geopolitics today, even on this industry,
14:10 India is better positioned today than it was.
14:12 So over longer term, but it's a harder industry.
14:16 It's also, if it's harder, it also means competition is going to be less.
14:20 Coming to healthcare, we are clearly overweight there.
14:24 You know, I like to say is that, you know, among all the industries you can think of,
14:27 healthcare is probably one of the most non-discretionary spending.
14:32 In fact, I would say, you know, when you're sick, you don't even like eating food.
14:37 So medicine is more, comes ahead of food, you know.
14:40 So it's a sector with very low, you know, longer term, you know, correlation with markets.
14:47 Long term returns are very good.
14:48 And it's a sector which requires very specialized knowledge.
14:53 So if you can do bottom-up research, you can add a lot more alpha in pharma and healthcare.
14:57 So that's the reason.
14:58 We're overweight not because we think the sector will do very well.
15:01 It's simply we have a lot more confidence in our ability to, you know, generate alpha
15:05 in that sector.
15:06 Okay.
15:07 And it's concentrated towards CDM or CRO as opposed to US generics, etc.
15:10 Yeah.
15:11 So we are participating in nearly all pockets, but I would say it is more balanced towards
15:18 CD, this bucket, then domestic branded generics, and also healthcare in India.
15:26 Okay.
15:27 So other than pharma, the healthcare services?
15:29 Yes, healthcare services.
15:30 Okay.
15:31 I mean, diagnostics, hospitals, what have you.
15:34 Yes.
15:35 Yes.
15:36 Okay.
15:37 Fair call.
15:38 I heard you speak about real estate.
15:40 Yeah.
15:41 A sector that has enjoyed great reputation in the past, great weightages in the past,
15:45 until 2008.
15:46 People who've been around that long would remember this.
15:49 The weightages have come off quite materially.
15:51 Yes.
15:52 Is it right to think of maybe the possibility of weightages going back to those levels because
15:58 almost everyone believes they are in the midst of a long term up cycle?
16:03 How are you thinking about real estate investing?
16:05 Yeah, one, you know, if you look at globally, while real estate happens to be the largest
16:09 industry in just about every country, yet very rarely you see very large index weights
16:14 in real estate stocks.
16:16 The two reasons for this, one, it's a sector that tends to fragment.
16:21 You know, it's a fairly fragmented, real estate tends to be very local.
16:24 Often, you know, the Delhi developers don't do well in Bombay and the Bombay developers
16:28 don't do well in Delhi.
16:29 So it's, even in US, it's a very localized business.
16:32 You know, so it's a very local dimension.
16:34 So you can't scale profitably.
16:36 People do try to go to other markets and when they will become very ambitious, but actually
16:41 success stories are far and people believe in up cycle that will go everywhere and will
16:46 sell and actually real estate being highly cyclical.
16:49 In the up cycle, anyone can set up a project and sell, but then invariably the cycle turns
16:54 down.
16:55 You've seen a lot of euphoria in the now last, you know, two odd years now in both
17:02 volumes and prices.
17:06 Prices more in select markets volume across the country.
17:09 So I believe markets where pricing has been stayed reasonable and price hikes are not
17:13 I think the market will stay firm and continue to absorb.
17:17 One of the things we are hearing from a lot of developers is this time the demand is more
17:21 on users than than investors.
17:24 So that makes the market more sustainable.
17:27 You know, of course, there'll be parts of the market in real estate India, particularly
17:31 in NCR and all which will have a lot more investor demand.
17:35 But particularly Southern India is more user driven.
17:37 You know, generally the construct of the market and generally you don't see very large spikes
17:41 in Bangalore, Hyderabad, all these markets.
17:44 They tend to be less speculative markets.
17:47 So we like markets which are less speculative.
17:51 You know, prices are reasonable.
17:53 And secondly, clearly there is a shift in markets where people are less confident of
17:58 buying under construction property and buying, you know, delivered property.
18:02 And the market has consolidated in favor of large brands, trusted brands.
18:06 But I'll tell you again, there'll be a cycle of this consolidation.
18:09 So again, new players are jumping in.
18:10 Real estate is always that cyclical.
18:13 Everybody jumps in and up cycle.
18:14 So it'll play out in a few years the way the same way.
18:17 But I would say there are players who have been there in the last cycle and survived
18:22 and reasonably OK.
18:24 You look at them because they have a DNA of prospering across cycle and not just being,
18:30 you know, flash in the pan.
18:32 And you playing this via real estate developers mainly or are ancillaries also a big part
18:38 here?
18:39 You know, so you participate both ways.
18:42 You know, there are, you know, you invest through real estate developers.
18:46 There is another asset class that's been created in the last five, seven, eight years called
18:50 REIT.
18:51 But REIT has a very different dimension because there's no development element there generally.
18:56 So that is another way.
18:57 But you also participate through mortgage financials, through the whole, you know, ecosystem
19:03 of building materials.
19:05 So you participate across the board.
19:08 Got it.
19:09 You should have known I won't end the show without talking about IT services, right?
19:13 Because you guys have some brilliant thoughts there.
19:16 I would love to understand.
19:17 You have a weightage there, 10, 11 percent out there.
19:20 Is this market weight?
19:21 Is it over eight equal weight, part one?
19:23 And why is it that you have this 11 percent exposure to IT?
19:26 You know, one, you know, we are more or less sort of not more or less neutral to the market.
19:33 But it's a very, when you look at the portfolio construct, it is significantly overweight
19:38 small and mid versus large.
19:40 So the mid cap index tends to be very skewed towards large caps, while our portfolio has
19:46 a very large skew towards small and mid caps.
19:49 You know, one of our, you know, something that we believe for seven years in India is
19:52 that the small and mid caps will do well in IT and they've done well.
19:55 And there are a number of reasons on your show I've talked about earlier why, you know,
20:00 mid cap and small cap will do well.
20:02 I am seeing, I'm particularly invested in a very interesting space now in IT services,
20:07 which we generally don't talk much about in India.
20:10 It's called the enterprise software space.
20:13 So India has largely been IT services to Western world, to Americas and Europe.
20:18 That's typically the IT services model.
20:20 And whatever we say, AI is an emerging disruption.
20:24 And the pace at which things are changing, you can be sure what happens in a year, but
20:28 it's very hard to predict what happens even on a three year basis.
20:32 So let's be very clear, the space is fast evolving.
20:35 So I'm an optimist, but you know, but I would be a cautious optimist in that, you know,
20:41 things may be a lot more difficult in the middle for IT services, large companies.
20:46 Why I like enterprise software, because earlier it was always used to be the Western world.
20:50 Now we have created a number of enterprise software companies in India, which are catering
20:54 to the Indian market, but also doing exceedingly well in emerging market, particularly Middle
20:59 East and Middle East is doing very well.
21:01 So for example, your number of banking software companies in India, and now there are a number
21:05 of them in public markets in India.
21:08 And they are focused on the CapEx, which the private and the PSU banks are doing, the Middle
21:12 East banks are doing, emerging markets banks are doing.
21:14 And they are doing very well, growing well.
21:18 Margins are very fantastic.
21:20 They are not subject to a lot of these, you know, disruptions and the cyclicality of the
21:23 Western economies.
21:25 And valuations are very reasonable there.
21:27 And normally, if you look at the best tech companies in the world, think of Microsoft,
21:31 Microsoft is an enterprise tech company.
21:34 So ultimately, the highest valuations go to enterprise tech companies.
21:37 You're betting on that.
21:39 Okay.
21:40 Wow.
21:41 Well, we can go on.
21:42 But unfortunately, television compulsions, the show has to end because the time is up.
21:46 But lovely understanding this brief bit from you, Ramesh, and look forward to having you
21:50 more often where you can pick your brains on what the portfolio constructant is and
21:55 why so.
21:56 Sure.
21:57 Thank you.
21:58 Thanks a lot.
21:59 This is a pleasure.
22:00 Thank you for joining in today.
22:01 And viewers, thanks for tuning in to the eighth episode of The Portfolio Manager.
22:03 I'm Ramesh.
22:04 I'll see you next time.
22:04 Bye.