Watching the outside edge of the bat
You have probably read more market commentary in the last month than is good for you. This is not that. This is a letter about how the person now responsible for your money thinks, so you can decide whether you want him responsible for it.
I joined DSP as Chief Investment Officer a few weeks ago. Here is what you should know about me.
I am still an analyst at heart. What I enjoy most is figuring out how an industry works, and where the excitement around it is justified or unjustified. Economics is my favourite subject, and investing lets me apply economic thinking to real situations. That is why I have stayed in this profession for so long.
I am not a momentum investor. If you liked something at 100, you should like it less at 200. You can be a growth investor, a value investor, a quality investor. These are all legitimate. Chasing price is not. This single discipline will sit underneath every fund I influence at DSP.
I accept two things about markets. They are rational over the long term but irrational at many points in between. When markets are in an irrational zone, it is logically impossible to outperform while staying rational. At those moments I will choose to stay rational, even if it costs us in the short run.
A few views, some of which run against the current mood.
Before I get to them, one honest note. Nothing in this letter is a forecast. I have been wrong before and may be wrong again. What I can promise is that I will explain myself, in real time, when I am.
I have been cautious for over two years and have called the recent run close to a bubble. From January 2008 to January 2020, a twelve-year stretch, small caps delivered hardly any return. The 2020 to 2024 performance made many forget that. Inflows have created their own supply as promoters and PEs sold into them. I would rather be early in caution than late.
Many believe the index cannot be beaten. I disagree. A passive fund mechanically buys more of what has gone up. A disciplined active manager who trims into strength can, in principle, do better. My approach is not to find multibaggers. It is to avoid the bottom one-third.
Be consistently second quartile every year, and over five years you end up at the top. This is not mediocrity, it is discipline.
I do not need a ten-year view on India's growth rate. I need to know whether policy is working to normalise the cycle, and which sectors benefit when it does. Right now, I prefer financials, cement and capital goods. I am cautious on steel and iron ore, where Chinese demand has structurally peaked. This is contrarian to many, but I have held this view through three years, and the demand-supply numbers keep confirming it. I am also watchful on Indian IT margins, where the competitive landscape has genuinely changed.
I do not predict them. FII flows, SIP flows, none of these influence earnings. They move multiples. If earnings compound at a healthy rate for three years, even some PE compression leaves you in good shape.
I am not saying overseas markets are more attractive than India today. But if you have no overseas exposure at all, some diversification makes sense.
The best proof of corporate governance is a payout - dividends or buybacks.. It reassures me that the profits were genuine, that is, cash, and have been given to me to deploy as I deem fit. I am also wary of companies that suddenly become accessible to investors when raising capital and disappear afterwards.
In the funds I run, cash is an outcome of the risk budget, not a market timing call. If my active positions are full and I still have stocks I do not love, I will hold cash rather than invest for the sake of it.
This is not a reset of DSP's investment philosophy. DSP has long stood for disciplined investing. What I hope to bring is sharper conviction in moments when conviction is hardest, and patience when patience is unfashionable.
Thank you for your trust. If you work with an advisor, I suggest you ask them whether what I have written here matches what you own. If you don't work with one, that conversation is still worth having. I will work to deserve the trust you have placed in us.
Warmly,
Anish Tawakley
Chief Investment Officer,
DSP Mutual Fund