Sell right, churn often, focus on digital to find alpha: Raamdeo Agrawal and Co’s mantra

At a recent media interaction, Motilal Oswal’s Raamdeo Agrawal and the team behind the asset management company spoke about their high-quality, high-growth strategy, what makes them stand out and the importance of stock selection and risk management. Here are some key takeaways:

Sell right 

The management said that they tend to buy into sectors when there is a lack of a euphoric environment, and the risk-reward ratio is better. In India, buying tends to be overrated as everyone wants to know what to buy, no one wants to talk about selling. Agrawal and team feel that when you buy a stock and it rises two- or threefold, there’s a time when you have to react.

They said that while their idea is to follow a buy-right, sell-right strategy, since the markets move fast nowadays, a good idea can become 2x or 3X in a matter of months. They explained that historically, they used to hold stocks for longer. But now, the thinking is that if the target price is hit earlier than anticipated, it is time to react and move to the next stock or next sector.

Also read: Fund managers should respect client mandate while investing, says Raamdeo Agrawal

Cut your losses 

“We believe in having a very balanced portfolio and will not go with zero weights on any sector,” Agrawal and team said. What this means is that even if the team is underweight on a sector, they will ensure that they will hold at least one stock that will essentially be the best-performing stock in that sector. “Risk management has been very helpful for us,” they said. One risk management matrix that the Motilal Oswal team follows is that if a particular stock has underperformed more than 20 percent compared to the index it is benchmarked to, they exit the stock. And if a stock is doing extremely well, they keep adding at regular intervals if the thesis is playing out well. That has helped them in terms of ensuring that there are sustainable returns, the management explained.

Focus on ‘digital growth’ 

According to the team, as the Indian economy grows, we’ll see more prosperity in the country as industries grow, and industries will be powered by digital transformation. Agrawal said that over the next seven or eight years, India’s GDP could double to about Rs 8 trillion.

“I’m sure that there will be a lot more prosperity as more industries grow. Another aspect will be digital transformation to aid businesses. These digitally powered businesses are going to grow exponentially,” he added. This means “we will have to look for companies which are good in their business and are also digitally powered”. While globally the top 10 companies are all technology or technology-driven companies, Agrawal said, India is still a way off. Still, it will see the emergence of large companies from the digital side in the future.

Profit is key 

Concerns over valuations of startups and digitally-powered companies, which cast a shadow till two years ago when the segment was at its peak, have now settled, according to the team. “Now you are seeing the startups are struggling, they are not getting funding. But the valuation is more or less settled. The market will now buy at some parity. Just because you are a startup, you are not going to get some crazy valuation. I think making a profit is important,” said Agrawal.  “All the startup companies are struggling in their path to profit but the market is telling them, “Please show profit’.”

Also read: Tsunami of savings, doubling of equity investors to drive market, says Ramdeo Agrawal

Churn 

In line with their strategy of high growth, the Motilal Oswal management said that in mutual funds, one can find a higher churn in their portfolio. “A certain amount of churn is good because it helps in rebalancing the portfolio and delta growth in earnings is one source of alpha. Getting some discount to value is another source of alpha. You can get that discount to value only when you change or you rebalance. So now, we tell clients that when it comes to churn, you should expect around 25 percent name change and 10 percent in terms of rebalance in their portfolio,” they explained.

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