1 week Ago By Moneycontrol
Shailesh Raj Bhan, a market veteran with an enviable track record, isn’t one to chase fleeting trends. Despite Nippon having one of the largest small-cap funds in the industry, worth Rs 61,646 crore, and delivering stellar 22,16% returns since inception, Bhan is calling it as he sees it—value lies elsewhere. In an exclusive conversation with Moneycontrol, the CIO of Nippon AMC, shares why he’s backing large caps and his blueprint for navigating 2025.
Edited excerpts: What worked for you in 2024 and what didn’t? 2024 was a strong year, driven by a disciplined approach to avoiding overpaying for growth and momentum sectors. We entered the year believing that starting with high valuations leads to lower returns. Our focus on large-cap-biased portfolios, which showed less market euphoria, paid off.
A surge in thematic investments created market excesses that we consciously avoided. While caution early in the cycle hurt performance initially, it proved beneficial as the year progressed. What’s your sense going into 2025? Significant foreign selling over the past months has made valuations more reasonable.
At the start of 2024, valuations appeared stretched, especially ahead of elections. Subsequent FII selling and a post-election rally normalised these valuations. Earlier, a horizontal bull market driven by flows over fundamentals made fund management challenging; this is changing now.
We see a shift in winners—sectors that performed well in the past two to three years may not lead the market in the next cycle. For instance, capital goods, which have high valuations, may see tempered performance despite earnings contributions. Earnings rebound in FY26 will be pivotal, particularly for small- and mid-cap sectors.
How do you position yourself for 2025? Starting valuations are crucial—higher starting points often result in lower IRRs, even with perfect earnings outcomes. We focus on areas with favorable risk-reward and uncompromised quality. Large caps offer better stability today, making them attractive.
We're positioning in sectors with muted growth expectations, aiming for positive surprises, particularly in quality companies that have seen valuation corrections. Are you confident earnings will rebound in FY26 to mid-teens? Quite confident – we expect 12% growth in FY26. Consensus right now is 14-15%, and we expect that to come off a bit.
The weak earnings over one or two quarters were partly due to last year’s high base and ongoing slowdown. We think the economy will rebound – assuming no major global disruptions. What makes you positive on large caps? What if FIIs continue to sell more? Large-cap valuations are more sensible now, though it’s unclear who will sell where.
Monthly inflows into large-cap funds were minimal, around Rs 500-600 crore, until the last three months, compared to Rs 20,000-30,000 crore in the mutual fund segment overall. Most money has flowed into thematic, flexi-cap, multi-cap, small-cap, and mid-cap categories, driving valuations in those areas higher. Money flow itself has been driving valuations.
Hence, small- and mid-caps are standing at a higher pedestal than they would normally be. Corrections in large caps have been significant, while flows have supported small- and mid-caps. Earnings growth is weak across the board, making higher valuations for the latter hard to justify.
So, large caps remain the best risk-reward space, offering stability even if they don’t deliver the highest point-to-point returns. The risk of holding overvalued businesses persists, especially during unforeseen events. Do you see mutual fund flows moving towards large caps to create more buying power? Money ultimately chases performance, no matter what.
As long as small- and mid-cap categories of funds do well, they will attract money. We discourage lump-sum investments as high starting valuations, as we see currently, can lead to inferior outcomes. Additionally, mid- and small-cap shares in investor portfolios have risen sharply due to extraordinary returns in recent years.
Many investors are now looking to rebalance portfolios, making it a good time for corrections. Do you expect valuations to sustain in mid-and small-caps? As earnings are weak, people are becoming more conscious about valuations, questioning why prices remain the same despite poor prospects. Stock selection will drive returns, especially during these shifts.
Corrections are good as they allow value opportunities to emerge. Unlike the past 1-2 years of one-way rallies, we see stock-specific opportunities emerging now. Would you think within sectors, companies, and stocks performance becoming starkly different this year as the going gets tough? Or would you prefer to take sector bets, based on rotation? When it comes to portfolio management, we believe stock selection is a key driver of medium-term returns.
We prefer to derive 70 percent of our returns from stock selection rather than sector rotation, as stock selection is more predictable and tied to earnings and management. Macros are less controllable, which we use for risk management. We have limits for sector deviations but allow fund managers to make decisions within those limits.
Anything you are worried about – the biggest risk to markets...
The main concern isn’t earnings, as they’re already at the 3-5 percent range, but whether earnings will rebound sharply. Growth is expected to recover, with double-digit growth for FY26. If this does not materialise, multiples for smaller mid-cap companies will compress.
We’re concerned because strong money flow keeps multiples high. However, if recovery is weaker in certain sectors, mid-cap and select small-cap companies, where valuations leave no room for disappointment, may struggle. Recent corrections mostly affected mini-cap, and frenzied companies, not mid or small caps in general.
The sell-off has been minimal in those spaces. That’s what we need to watch out for. In the post-Trump era, is there any sector you will be avoiding? It’s complex and difficult to judge.
We don’t fully believe in the consensus that it will only be positive for us, as things can change. We have no clear strategy yet because we don’t have full clarity on tariffs or the relative tariffs between nations. There’s a lot of noise, so we must be careful.
Large actions today may lead to no immediate change, but they can create uncertainty in decision-makers’ minds, affecting capital allocation and investments, which ultimately impacts growth. Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management.
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