What the RBI rate hike means for investors
Raghav Iyengar: We have had a very interesting trip over the past almost nine months. We talked about asset allocation and said you need to have money in different asset classes – stocks, fixed income, gold, etc.
We did a little study on returns in 2021, and within stocks, we found that style is one of the main metrics for outperformance or underperformance.
Style happens in three different ways: you can break it down, and that’s specific to stocks – large, mid, small cap – then sector concentration, diversification, and finally, the big $100 billion question or $1 trillion between value and growth. Within growth, you have another sub-segment called growth investing with a quality bias.
We did a quantitative study last year and found 2021 to be a bright year for value. Surprisingly, the growth accelerated and literally caught up at the end of the year, especially during the last quarter, from October to December. Quality underperformed virtually for most of the year, except for May and June when it briefly hit the market and then came back down.
We realized that growth-oriented investing does very well when interest rates are low, when growth is quite visible. Value does very well when the opposite happens: markets become very volatile and interest rates rise. Obviously, the quality within this segment also tends to do poorly. But that was in 2021.
So if you break that down and give it a 10-year type of cycle, which is generally a good period to see returns, you’ll find that each of these three asset classes or styles have had their ups and downs.
We keep talking about the fact that investors need to have money in different asset pools to get a good investor experience. The same logic applies to style.
Coming to Axis, we are clearly focused on the fact that quality is how we make our investments. The first thing that happens in quality is that we like to look at the management team, the track record, not only the financial track record, but also their behavior with minority shareholders. Then we like to see the trades of the company, and we do the usual ratios, balance sheet numbers and all the other stuff. Generally, we believe that we own the business. So we are not a trading based fund, rather we like to buy it and hold it.
Most of my partners and clients now ask me that quality did so poorly in 2021, are you looking to turn? I don’t think we will, because if you look at the last 10 years, quality has actually topped seven out of 10. We’ll stick to what we know best. Obviously, we added many more companies thanks to our filters.
The markets were very dynamic. Companies have completely transformed, especially post-Covid. Many financial ratios have improved considerably.
Indian companies have a brilliant track record of overcoming adversity, unlike some of our neighbors or counterparts in other parts of the world. Indian companies tend to do well when the going gets tough. When the going gets tough, Indian companies jump in. In this sense, many more companies have been added to our investment universe and, obviously, we are doing our best there.
But no, there are no plans to change that and that’s the big risk for an Indian investor today, because if you try to keep choosing between styles based on recent performance, you may actually not not give your portfolio a long-term advantage.
Most of us tend to simply differentiate value from growth, or large caps from mid caps or just asset allocation. Now people may need to understand that within stocks as well you need to have adequate exposure to each style of investment because if you are too overexposed to one style it could lead to massive periods of underperformance or outperformance. You must have a mix of assets. You should also have a mix of styles in your equity space. And Axis, in this sense, will continue to be growth with quality. This is where we would be.