"Large caps to track GDP over next 5 yrs"

Though a flexi-cap category will provide some flexibility to fund managers, it would be confusing for investors as they will not know what they are getting into, Manish Gunwani tells ET Wealth.Do you feel the market is entering a consolidation phase after the sharp run up?The market ran up a lot from its March lows, almost without any intermittent correction. When the market gets overheated in the short term, corrections come about naturally. A part of the disappointment is coming from global, apart from domestic factors. The resurgence of the virus in Europe and failure in the US to get the fiscal stimulus bill passed are raising doubts about expected global economic recovery. Along with the uncertainty around US Presidential elections, investors are taking some profits off the table. On the domestic front, the virus issue is much deeper than we anticipated. It is taking longer for us to flatten the curve. Some consolidation or correction is healthy as the frontline index was getting expensive.Is there any sanctity to frontline index valuations given that the run-up has been powered only by a few stocks? A lot of index re-rating has come from price-earnings multiple expansion rather than earnings outpacing expectations. The broader market appears more attractive right now. It can provide a three to five years earnings upcycle, considering we have already seen a seven to eight years earnings downcycle. This space has more opportunities since it has been correcting since January 2018.How is the mid- and small-cap basket faring in the current turmoil?A lot of pain in the economy is in the SME segment and among mid-low tier players. Their ability to withstand this turbulence is limited with no balance sheet strength, lack of funding etc. We are definitely seeing consolidation of profit pools across industries, where top players are getting bigger share of the pie. But the listed mid and small-cap names are also among the top players in their own right within their respective areas. These are not really getting hurt. For the next 4-5 years, a lot of companies in auto ancillaries, cement and industrials in the mid-cap space can see strong earnings growth if recovery picks up.Any pockets have surprised positively on earnings resilience amid the pandemic? Consumer staples and other essentials like pharma were expected to do well and those have reported good numbers. But earnings have genuinely surprised in the IT sector. Earnings and commentary have been better than expected. Even among consumer durables, automobiles and FMCG, may companies have surprised not on the revenue front but margins. With cost containment, managements have been very agile.Nippon India Multi Cap offers diversifi cation across market caps, along the lines drawn by Sebi. Is this by design? Will it continue with the same mandate? For many years, we have maintained that a multi-cap fund has to be different from a large-cap fund. It needs to have a mix of stocks across the market cap spectrum. That is the way to go forward and we will continue with the same mandate.Are you in favour of redefining the investible universe for other categories? Will a flexi-cap category make sense? After the recategorisation in 2018, several adjustments were needed. But I don’t think the current set up needs a big overhaul at this time. In isolation maybe one can argue that the investible universe is restrictive for the mid-cap category, but if you relax one category, you will encroach on other categories. A mid-cap fund manager will probably want the basket of 150 stocks to be widened to 200, but the small-cap fund managers’ opportunity set will decrease. Now that things have stabilised, we don’t see any compelling reason to drastically alter the norms.A separate flexi cap category will definitely afford a lot of flexibility. But the entire point of categorisation was to have certain boundaries for every category so that the returns don’t deviate from what the investor expects. From that perspective, a flexi-cap category may provide some challenges as investors don’t know what they are getting into. It is up to the regulator to see how it aligns with the existing framework.How will Nippon India Large Cap improve its return profi le after sharp underperformance in recent years? A part of the underperformance is owing to this unprecedented crisis. A lot of the stocks in the fund were in sectors which got impacted directly like hotels, retail etc. It just happened that the crisis hit these sectors that were coming out of a long downcycle. These are otherwise very strong enterprises and industry leaders. It is just that the Covid crisis come out of the blue and affected a lot of stocks in that fund. We are trying to introspect about the overall risk management. We do believe the portfolio was too cyclical. We think the fair values of the companies in the portfolio are much above the current prices. The earnings may not flow through quickly but we are sure that this portfolio has great value from medium-long term perspective and will make a comeback as the economy recovers. A lot of these stocks can deliver healthy return over 2-3 years.Should investors moderate return expectations going forward?Corporate earnings and nominal GDP will move together as will the market and corporate earnings. It seems inflation will remain low. When inflation is low, nominal GDP growth will also be low. Over the last 30 years, Sensex has delivered 14-15%, when consumer inflation was at 8-9%. For the next 5-10 years, the frontline large cap index will track nominal GDP growth of 10-11%. The broader market should give better return over the next two or three years.

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