Why Arun Kumar of FundsIndia backs investment styles others are avoiding

In an interaction with Mint for the Guru Portfolio series, Kumar shared his contrarian approach when it comes to picking mutual funds for his portfolio. “I like it when certain investment styles or investment approaches are not doing well,” he says. 

What has changed in your portfolio in the last one year?

I have always been equity-heavy. Currently, my portfolio is 90% equity, and the remaining 10% is in debt and arbitrage funds. I’m comfortable with this because my wife and I have active income and contribute 10-15% of the portfolio value each year. 

Even during bear markets, we contribute to the portfolio. However, as our portfolio grows over time, our savings might not catch up with it. There will be a time when our portfolios will become so big that we’ll not be able to add meaningfully (less than 5%) to our portfolios. At that time, I will shift to a more conservative portfolio and keep it 70% equity, 15% gold, and 15% debt and debt-like investments.

How is your equity portion bifurcated?

A chunk of my portfolio, 55%, is in four funds. I have a natural bias towards value investing as a style and have invested in funds that fund managers manage with a value bias. It’s split across Sankaran Naren’s ICICI India Opportunities, Rajeev Thakkar’s PPFAS FlexiCap, Kenneth Andrade’s Old Bridge focused equity fund, and HDFC FlexiCap, which Prashant Jain earlier managed.

Another 15% of our portfolio is to make slightly concentrated bets. I am bullish on banking as a sector and put all this portion in one banking stock. I feel that the NPA cycle has been cleaned up, and the credit growth cycle is about to start. Banks also have a strong balance sheet because they had over-prepared for covid, but the impact wasn’t as bad as we thought. Banking is a good sector going through a bad time with decent valuations, and I’m hoping for a reversal in the future.

The other 15% is spread across the globe. I had taken a bet in Chinese tech through Mirae’s Hang Seng Tech ETF two years ago. It didn’t do well for some time, but started playing out in the last one year. I also had an SIP in a Nasdaq fund. When the markets crashed in 2022, I built up my position in a FAANG [Meta (formerly Facebook), Amazon, Apple, Netflix, and Alphabet (formerly Google)] stock, which was part of that index. That stock has gone up 4x, leading to slightly skewed exposure.

The remaining 5% is allocated to mid- and small-cap funds. I did not have any allocation to mid- and small-cap before and missed the whole rally. The only exposure I had was indirectly through flexi-cap funds that had some exposure to such companies. I was already too much into equities and didn’t want to get too aggressive. Over time, the plan is to gradually start building the small and mid-cap exposure.

Also Read: Why Marcellus’ Saurabh Mukherjea has 40% global weight

What are the hits and misses from your portfolio in the past one year?

I had missed the whole small and mid-cap rally. I did not have any funds from that category, and the only allocation I had was through my flexi cap. Learning from this experience, I have now put in place a framework to play small caps. SIP can also be a simple way to build exposure. 

What additions are you looking to make to your portfolio? 

I like it when certain investment styles or investment approaches are not doing well. Lately, momentum-oriented funds have not been doing great, and I am looking at it, although I haven’t made up my mind. We also didn’t have many options before, but now we have plenty of them.

Quality is another style that has dramatically underperformed in the last four years, and I see some early signs of a turnaround. I am now looking at quality schemes and will slowly build up exposure there. That is what I’ll focus on for the next few months.

Can you elaborate on your thesis on the quality theme?

Everyone wants high-quality companies with high ROCE (return on capital employed), low debt, consistent earnings, high earnings growth potential, and good management at decent valuations. It’s very difficult to get all of these in one stock. So, quality fund managers usually end up compromising on the valuations front. This overpaying has come to bite them in the past four years. 

When the markets rebounded, it was a broad-based recovery where all stocks, regardless of their quality, were growing their earnings at a rapid pace, and so there was no need to pay an exorbitant price for quality. But when the market starts going through a tough phase, and only a few good quality companies are winning, that’s when quality starts performing. 

While it’s tough to time styles, the recent underperformance and the moderating growth environment with a lot of uncertainty thrown in augurs well for quality. Overall, it seems like a good place for quality to start working again. When the tide turns is anybody’s guess, but at least it’s crucial to remain consistent with our process.

Also Read: Look who’s making a comeback: Quality vs value investing

What quality scheme are you looking at?

I like UTI Flexi cap for sticking to its quality investment style even when it has fallen out of favour. 

Have you exited any position?

I have hardly sold any of my funds since I started seriously investing in 2015. I have redeemed a few small allocations here and there to clean my portfolio. However, I’ve kept all my core holdings. I buy funds mostly by looking at the fund manager. As long as the same fund manager runs the fund, I don’t mind even if it’s underperforming. HDFC Flexi cap is one scheme that I bought due to Prashant Jain, but he left HDFC in 2022. However, I continued holding that scheme because the current manager, Roshi Jain, manages the fund reasonably well.

What would make you sell?

As a thumb rule, I would contemplate selling when the fund manager changes or there is a significant change or dilution from the stated investment approach. Another aspect is on the performance front. If the returns deteriorate and I am not able to understand the reason behind it, then that can be an issue. But let’s say a fund manager who follows a quality style is underperforming, and all others with the same style and index are also struggling; then it’s okay. 

In this case, underperformance is not an issue. In fact, I bought most of my schemes when the fund manager was underperforming. In contrast, if you’re following a certain style and are performing poorly when others following the same style are doing well, then that’s a sign to sell out.

Also Read: Sachet-sized mutual funds can still be difficult for the house help as an investment option

What have you learned in the past five years?

Keeping it simple works: Fewer decisions, fewer funds, and more patience. Backing good fund managers during tough phases: Buying into skilled fund managers who are going through challenging times—but sticking to their proven approach—often pays off. 

The magic of compounding also becomes truly meaningful once the portfolio reaches a reasonable size. It’s also important to track incremental savings. It helps in two ways: identifying where you can get a bigger bang for your buck and deciding how much time and effort to allocate between increasing savings versus chasing higher returns.

It also brings the focus back to what truly matters: growing the overall portfolio through a combination of steady savings and returns.

Lastly, behaviour beats brilliance: Sticking to the plan is hard because of the three S:

Scare you: The equity market tries to scare you into selling through ABCD (all-time highs; bad news; crash predictions; cash calls by experts; declines)

Slow you down with entry anxiety: Waiting for a 10% correction to deploy funds—as it always feels like markets will fall further. 

Seduce you with ABCD: Temptations to go all in; borrow to invest; chase performance and concentrate heavily; derivatives and day trading.

Mint’s Guru Portfolio series features leaders in the financial services industry who share their money management secrets.