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ETMarkets Fund Manager Talk: A Small Manager’s Investment Choice in a High Interest Rate Environment

“While debt as an asset class creates negative returns in a rising rate environment, gold sovereign bonds or floating rate notes are investment avenues one can consider, as they pose limited interest rate risk,” said Abishek Banerjee, petty cash manager and founder of Lotusdew Wealth and Investment Advisors.

“Also in terms of bank deposits, I would recommend doing short-term auto-renewal until rates peak,” Banerjee told ETMarkets in an interview. Edited excerpts:

Tell us about you. What drove you into equities and what was the turning point?

I am a straight arrow in a round world. I’ve always wanted to experiment and remember setting up a chemistry lab with a friend at his house. The fact that you could mix things up to produce something new was fascinating – something like portfolio building.

Plus, I’ve always been fascinated by the elegance of how stock investing works.

The fact that you can think and make money attracted me to the markets and to start with the world of stocks.

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Even as a child, I remember plotting prices in the newspaper as graphs and thinking we could predict it.

The turning point was really when after my MBA, I got a job as a quantitative analyst. I was able to work in a world where my passion for fairness and programming met.

Speaking of markets, Indian equities have rallied strongly from their June lows and now look poised for new highs. Do you see the momentum continuing or would you urge caution?

It’s always prudent to be cautious in the markets, but I’m downright bullish on small caps.

The fact that India is a deep and scalable investment opportunity while India is almost seen as a safe haven makes me even more excited about Indian markets.

I think this will be a watershed moment where, due to high large cap valuations, smart money will seek to take advantage of attractive small and mid cap valuations.

We are looking for a credible board governing a management that is creating a micro monopoly in its industry.

How many assets under management do you manage and how has your fund performed so far in 2022?

We oversee less than Rs 500 crore in AUM. Few of our strategies such as Small cap High Frequency, where we look at high frequency indicators, and Deep Momentum, where we apply deep learning to stock momentum, have both performed very well.

Long-term strategies available through smallcase like Listed Venture Capital and Nanocap Champs have both performed very well, generating 50% 3-year CAGR and 21% 1-year performance respectively.

How have you managed market volatility and improved returns for your clients?

I think the job of an investment advisor is to help clients stay on course during volatility and adjust the portfolio based on the risk profile. While one way to manage volatility is to mix low volatility asset classes like fixed income with stocks, a second way is to add time to your portfolio to manage volatility.

We help clients regain conviction and as a result have seen results where they have stayed invested longer and accumulated wealth.

What are your top holdings and have you reorganized your portfolio recently? A new entry or exit in your portfolio?

We specialize in small businesses and our major holdings include custodians, regional real estate finance companies, infrastructure and food processing companies, to name a few.

To manage the overall liquidity profile as our asset grows, we have added new positions in services.

We have reduced our exposure from consumer discretionary to infrastructure and materials. We have also recently added companies that help with immigration services like visa processing.

Equity funds experienced sustained flows in 2022 month after month. Do you see a similar trend in 2023 or could we see more money moving into debt funds?

Yes, I think the financialization of assets is a growing trend and will continue. Debt in a rising rate environment will create negative returns, but one can consider gold sovereign bonds or floating rate bond funds which have limited interest rate risk. Also in terms of bank deposits, I would recommend doing short-term auto-renewal until rates peak.

SIP contributions have increased significantly and retail investors have somewhat shielded Indian markets from global shocks. Do you see the trend continuing? A ballpark number you see by the end of FY23?

SIP is a culture in India now. I think the trend will continue to accelerate. Additionally, given the crypto markets fiasco, people will return to traditional asset classes in search of unconventional ideas where something like a small box fits well.

What would be your best bets for 2023?

Small caps and gold are our best bets.

I think the cost of capital for small caps, which are generally less leveraged, is insulated from inflationary pressures.

Moreover, given their monopolistic micro-niches, they can continue to thrive in a difficult macroeconomic environment.

Compared to large companies, small caps offer an attractive future opportunity.

Gold is also a hedge against currency volatility which we can expect to see in the coming months.

We advise a combination of physical gold and gold-related stocks in our small Golden Opportunities portfolio.

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

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