Radhakrishnan Chonat: Welcome ladies and gentlemen to another series of our Fund Manager Insights.
And today, I’m thrilled to introduce you to our next guest, Sarvesh Gupta, an accomplished equity
investor with over 15 years of experience. He is the founder of Maximal Capital PMS. And with this,
Sarvesh brings a wealth of knowledge from his extensive background in both listed, as well as unlisted
equities. His experience has been advising HNIs, CXOs, NRIs and family offices with his SEBI registration
as an investment advisor prior to PMS. And he had worked at Gaja Capital and played a pivotal role,
which was one of India’s private equity — leading private equity firms. So let’s try to explore and pick his
brain and figure out what are his views on the markets, and let’s also spend some time to understand his
journey so far. So welcome to the Fund Manager Insights, Sarvesh.
Sarvesh Gupta: Thank you, Radhakrishnan.
Radhakrishnan Chonat: Sarvesh, as usual, can you walk us through your journey in the investment
world from Gaja Capital to founding Maximal Capital, in terms of what motivated you to transition from
PE to managing your own PMS fund? We’ll be interested to know.
Sarvesh Gupta: Yeah, surely. So, for a very long time, even when I was pursuing my MBA at IIM
Ahmedabad and before that doing my engineering, I was very much inclined towards value investing. In
fact, in my second year of engineering, the first book that I read on the field of investing was a very
simple book called Buffetology by Mary Buffett, who was actually daughter in law of Warren Buffett. So,
that’s how the initial — I come from a community also. I belong to Baniya community. So we are
definitely much more mindful about the price that we pay for anything that we want to transact, even
otherwise, against the value that we are getting. So for me, I think, every fund manager, every person
has a general and natural inclination towards a certain style of investing. For me, that was value
investing because it just — it was something that I could relate to right from my childhood. And so, when
I was in private equity, I looked at many, many opportunities across sectors in both private space, as
well as the public space. And what I found out that in private equity as it is being practiced in India, it’s
more of a high-growth sort of an investing journey, wherein you have to identify the right promoters
and hopefully let them execute as per the envisaged plan. And now, that also means that you are
dealing with a promoter who is, in India, generally a very, very smart species. They are not going to issue
you a primary security or a secondary security in India unless they are getting a very good price for their
asset. So this is very different from a US context, wherein these firms are not promoter-driven, not
family run, and where the person who is taking the decisions on such deal is not so much aligned with
the valuation.
Radhakrishnan Chonat: True.
Sarvesh Gupta: In India, the situation is different, and hence, most of the private equity deals also
happen only when the markets are really good. So now, my core thesis was to invest more in a
contrarian way, which means, I want deals which are priced very, very lucratively. So that feature, I feel,
in India specifically, is found more present in the public space because from time to time, there are bear
markets and bull markets, and if you are investing in bear markets, of course everything is cheap. But even in bull market, for example, today, we are in a bull market, there are sectors which will always be
cheap. So you can draw your attention towards those sectors and you can get very good valuations,
which, in my opinion, significantly reduces your risk if you are a long-term investor. So hence, it was
something which alluded more to my personality and my investment philosophy. So after having spent
almost five years at Gaja, where I was the Principal, I decided that I would be doing a far better job in a
public market setup. So one of my seniors from IMA, Mr. Nikhil Johri, who used to head BNP Paribas
Mutual Fund in India earlier, he was in the process of setting up the equity schemes for his PMS. The
name of his PMS was Trivantage Capital, and I got the opportunity to be a fund manager there on some
of the equity schemes. So that’s how I took it up. It was a — I must also say that private equity in India
pays very well. I — because of my interest in this area, I had to take a pay cut of almost 75% to enter this
space. But in the long run, it is all worth it. A public market doesn't pay as much in the beginning years,
but certainly, I think for someone who is really interested into value investing, I feel that’s a much better
space to work on.
Radhakrishnan Chonat: Excellent. One other aspect of yours — probably we’ll touch upon that. You have
been a SEBI registered investment advisor prior to the PMS, right?
Sarvesh Gupta: Yes.
Radhakrishnan Chonat: And you, your clientele had CXOs, HNIs, even family offices that are kind of a trend in India.
Sarvesh Gupta: Yes.
Radhakrishnan Chonat: So what has been your experience in terms of the customer inside? We still
have single-digits in terms of the number of people who invest in the capital markets per se, right, when
you look at the 140 crore plus population. So, are there any insights and what has been your experience
advising people on investments?
Sarvesh Gupta: Yeah. So first of all, on the penetration point, I would just beg to differ a bit. See, we
have 140 crore, but on an average with a 4.5 family members, we have maybe 25 crore, 30 crore
families. But unfortunately, I think 90% of the India has a very low disposable income. So, if you actually
consider the target market, it is maybe 3 crore families, and out of which, already we have 13 crore, 14
crore DMAT accounts on the last count, if I am not wrong. So now, we are fairly well penetrated. But of
course, as we are seeing the rich are getting richer, the people who are better off are generating a lot of
additional income, so they are entering the market. My experience is more limited to the top end of this
sort of 3 crore or 4 crore families which are investing into markets. At that level, they generally invest via
mutual funds. Many of our customers were the first timers when it comes to PMS or hiring a manager
like a registered investment advisor for their wealth management. But in general, the level of
sophistication, the level of education, even amongst the UHNIs is very low in India. Slowly, it is picking
up, but even now, the level of understanding of the markets, understanding of the philosophy is very
low. And that is where — when we embarked our journey, we decided that we will not go via the
distribution model. So, as of now, we are — 100% of our clients are direct clients. And we felt that it is also very important for us, as a firm, to get the right clientele because especially, we are not momentum
traders or people who are frequently doing in and outs, et cetera. Our objective is to be long-term
invested. So it is very important for any fund manager to choose also the right clients because for
example, I’ll give you a COVID example, right? I mean, I got two phone calls during COVID from two of
my clients, and no one withdrew the money. So, that really helps you as a fund manager to sort of take
your decisions because no one is sort of second-guessing you. They need to have trust in your
capabilities and also they need to have that long-term orientation, plus they should be alignment — in
alignment with the value investing philosophy or whatever philosophy the fund manager has. So it is
very important to choose the right clientele. It is very important to educate them about how you are
going about doing the things and set the right expectations.
Radhakrishnan Chonat: Excellent point. Excellent point. Coming to your PMS, Maximal Capital, right, so
we talked about your journey. Now, can you highlight some of the key strategies and sectors, especially
that you’re focusing on at Maximal Capital?
Sarvesh Gupta: Yeah. So Maximal — so basically, as I told you, I mean, earlier, I — this was set up as an
investment advisory. At one, we used to charge both profit share and fixed fee, and we were disallowed
from charging profit share, and at that — in 2021, as per SEBI regulations. And then, we decided to move
to a PMS setup, and we didn’t change anything. It was more of the same. The only thing was that the
license under which that we were operating changed and the structure got more formalized. Our
reporting, et cetera, now are much more on a frequent basis to SEBI, et cetera. In terms of what we do
since 2017, we have been doing the same thing. We are essentially a contrarian concentrated value
investor, so contrarian as in we tend to look into more into stocks and sectors which are currently facing
some headwinds, but we feel that against the headwinds, we are getting a very good valuation. And
also, it is very important for us to ascertain whether the problems that the sector or the company is
facing is of temporary nature. So if the problems are structural, then we don’t want to participate in. If
the problems are more — for example, there are industries, maybe the theater business, the problem
may be more of structural because they are facing a huge competition with OTTs. So even though the
valuation may be cheap, we may not want to participate. Similarly, there are industries where the
problem might be because there is very low terminal value, maybe because of the — for example, in case
of oil and gas, the valuations are very low. But then, no one knows for sure how EV is going to
completely take away the business from them. So again, stock might look optically cheap, but we may
not want to participate in it. So we are looking into contrarian stuff, which is currently available cheap,
but because of certain factors, which we feel are temporary, and they will revert, and at that time, we
will hopefully end up making a lot of money.
Second, we are value investors, which mean that whatever value we are paying — base is the normalized
earning, and normalized is the keyword here. We are not looking at current earning, but we are looking
at a normalized level of earnings, what could this company produce in a normal scenario maybe, let's
say, two, three, four years out. And if basis that, we feel that if we apply a conservative multiple to it, if
we feel that the valuation is a discount to its fair value, we sort of look for — look into it further, do our
further research to figure out if it makes sense.
Third is concentrated, so that this is also very important. I think most of the people in the market are not
able to beat the benchmark because they are very thinly present. In fact, mathematically, it has been
proven that once you have more than 18 to 20 stocks in the portfolio of equal weightage and fair
representation of the sectors, then you will start to mimic the market more or less. And that's what is
happening in both the mutual fund space, and now as the PMS space has also become bigger, so even
the same underperformance — so, I think last one year has been exceptionally good because small/mid-
cap — because of the small/mid cap-rally. But prior one year back, when this rally was absent, on a five-
year rolling base data, even, I think 70, 80% of the PMS schemes were not able to beat their respective
benchmark.
Radhakrishnan Chonat: Correct.
Sarvesh Gupta: So the problem why it is happening is because the conviction is not there and people are
not able to take large bets, or they have raised too much money, and then, they are not able to get the
float. Float is also missing in India in most of the sectors. So hence, it is very important for us to be
concentrated because that's the only way you can beat the market. If you don’t have high conviction
bets as per sector or as per stocks, so then you will face a problem in beating the market. So we try to —
our top 10 stocks typically have like 60%, 70% plus of the portfolio. So we are fairly concentrated in that
case. So this is the core philosophy with which we work.
Radhakrishnan Chonat: Excellent. So, Sarvesh, you mentioned valuation, and we also touched upon —
we are in a bull market, right? Everyone is waiting for a dip, but then it goes back up. So in terms of
valuations, are there any sectors that you are comfortable with at this point? Or do you see the bull
market continuing, especially in the small and mid cap, which has actually gone bonkers? So what are
your views and how do you see this sustaining?
Sarvesh Gupta: Yeah. So I think, the advantage of being an investor in India is that there’s a wide range
of sectors and kind of opportunities which are present. There are a lot of sectors which I think have gone
into a valuation zone at which, they have become uninvestable. So we are ourselves sort of staying away
from them, for example, many of the stocks in defense, power, multinational power, for example, or
railways. Many of them have gone up beyond their fair value, given how their historical past has been,
and all the good news has been priced in. So there are challenges in investing into certain segments. At
the same time, there are sectors which are presently available at maybe 10 or 20-year low price to book
multiple, for example, lending. So there are sectors which are making sense and there are sectors which
are not making sense. And it is very important for us to choose the right sectors from a valuation
perspective also. So that is what we are doing. I think, in lending, in chemicals, in certain places in
pharma, certain places in cement, we — you are still getting opportunities. But broadly, I agree that
currently the valuations are high and one has to be much more circumspect while putting in the fresh
money. So what we are doing at our end is that we are trying to find more of the beaten down large
caps. Secondly, we are on the lookout of special situations. And thirdly, we are also holding a slightly
higher level of cash than usual to be able to take advantage in case the market fall comes. However, having said that, it is very difficult to predict as to whether it will happen and when it will happen. I think
that is a very difficult task. And there’s a lot of money, by the way, in India which is waiting on the
sidelines to get invested in the market, should a correction happen. And that is also one of the reasons
why the correction is not happening because as soon as there’s some dip, it is getting bought because
there’s just too much money waiting on the sidelines because people didn’t had a bad experience. So,
the biggest feature of the last 10, 15 years of market — investing in markets have been that we really
didn’t had any prolonged bear market.
Radhakrishnan Chonat: True.
Sarvesh Gupta: So people don’t have the memory of what a bear market looks like and what is the pain.
And I think 80% of the investors who have come into the market, they have only seen 2020 onwards
when market has only gone up in one way.
Radhakrishnan Chonat: Correct.
Sarvesh Gupta: So I think — so challenges can come because of any reason. It can be geopolitical. It can
be whatever. But I think India is placed on a good wicket. So if you are long-term player, I think it should
be less of a challenge. But short-term, medium-term challenges can come anytime. So I think one has to
be very careful about managing the risk properly in a market like today. And so, like, from a cricket
parlance, sometimes, there are pitches where you can only score 200 runs. So you have to save the
wicket. And then, there are pitches where you can score 400 runs. So you can go for trying to hit six on
every ball. So I think currently, it is the market where you have to be much more focused on risk, and
that is what we are doing. And at the same time, of course, if your portfolio picks are good, then you will
at least beat the market also if it is going up. So that’s what we are trying to do. If market is doing well,
we want to at least give the market level return. But if the market does badly, we, A, want to not do as
badly at the market, and B, we want to have a lot of cash or value — large-cap value, where we can
rotate the money into fallen-down stocks.
Radhakrishnan Chonat: Good. You mentioned geopolitical risks, right? Apart from — and do you feel
structurally, the Indian economy is strong one? And what sort of a geopolitical risk do you see affecting
India? So, so far, it has been whatever we have seen, wars breakout, but still, the Indian economy — the
Indian market is holding strong. So what can impact that? And are you confident about the structural
strength of the Indian economy?
Sarvesh Gupta: Yeah. So I think if you look at the past decade, 2010 to 2020, broadly, there was no real
growth in the economy, which was also reflected in, let’s say, the real estate prices or level of
infrastructure growth. So the only type of sectors and stocks which were doing well were those who
were gaining market share from their peers. So, for example, the PSU banking space was dead. So
private banks were doing very well because they were gaining at the expense of them, even though the
market was not very growing at a fast pace, but they were able to grow fast, and their valuations were
also quite good. Same was happening, a shift from unorganized to organized. So segments like paints, or example, were doing well because of that. So the growth was only present in a few pockets, where
some drivers of market share gain was present, even though the market overall was not doing well in
most of the industries. I think this decade is probably going to be different because we have just come
out of a 10-year sort of a cyclical sort of a low, and maybe COVID was a jolt for the entire economy to
shake up and start. Sometimes you have to hunker down if you want to actually fly. So I think we are in a
good shape as far as Indian economy is present in this decade. I feel that 2020 to 2030 should be a very
good decade for the economy as such because we have just come out of 10 years of bad cycle. So that —
I think, the confidence is pretty high on that particular parameter. And also the governance has
improved and the kind of participation of government into various policy reforms, et cetera, has been
good. So, all in all, I think India is placed quite well.
At the same time, in terms of geopolitical risk, so whatever is happening in the world right now is pretty
much priced in. So I don’t fear any of those. But geopolitical risks are — basically, they are unknown risks
and they are essentially cannot be predicted and it can come from anywhere. One must also not forget
that since I just spoke that we had 10 bad years, so we — the probability is very high that we have very
good 10 years. But at the same time, if you look at the world geopolitical sort of a climate, we really
didn’t had any wars in the last multiple decades.
Radhakrishnan Chonat: Correct.
Sarvesh Gupta: The probabilities can happen, something can happen, which is slightly more than a local
war, like a Russia-Ukraine or an Israel-Iran type of a conflict because these wars were there, but they
were primarily sort of between smaller countries and between — and at a localized level. So I think,
anytime anything can happen, and that is why I think markets are not pricing in such risks. And there can
be a decent fall in case any of those risks are materialized. And from a portfolio management
perspective, anyways, so we have to be forever ready, especially if the valuations are high in such a
scenario. And that is our objective that today — for example, for the last six, seven months, we have
been holding 10% cash. Now, we have maybe lost out on some returns, but we know that in case there
is a fall because of any reason, on that 10%, we will end up making 20%.
Radhakrishnan Chonat: Right.
Sarvesh Gupta: So that’s how I think one has to prepare yourself better in — especially when the
valuations are a bit on the higher side.
Radhakrishnan Chonat: So you mentioned that you’re sitting on 10% cash. That basically means you’re
waiting for a good opportunity in the sectors that you have already identified. So without trying to guess
which sectors those are, at what level of NIFTY would you probably be deploying that cash? Let me ask
you that.
Sarvesh Gupta: Yeah. So our approach is more stock-specific and not NIFTY-specific. In fact, NIFTY or the
large caps are not so much overvalued as much as some of the small and mid-caps right now, especially the mid-caps, because small-cap is a very large territory, so you can still find small-caps which are
making sense. But mid-cap zone is overvalued, I think, or probably much more than overvalued across
the board because that’s where the institutions start participating, and people have really taken the
valuations to another level this time. But — so there are — I mean, from a large-cap opportunity size,
there are decent opportunities present. We feel that — we look at from a stock-to-stock specific case.
Irrespective of the market, if we feel that we are getting maybe 40%, 50% discount to the fair value, we
do participate, even if the market valuations are high at that point of time. So our search is on. In fact, as
we speak, we are looking into one or two stocks which might enter our portfolio in the next one month.
But yeah, I mean, generally, I think, like even the small falls which are happening, we are trying to put
some cash to you. So May 15, May 17 time, we did add — or reduce our cash level because there were
some stocks which — so that’s the beauty of the market. Market, even if the NIFTY falls by 5%, 10%,
sometimes, there are stocks which have fallen by 40%, 50%, and this happened in March this year. And
at that time, you have to take sort of opportune call and timely calls to get invested into those. So that’s
how — I mean, we are quite agile from our side to be able to exploit those opportunities.
Radhakrishnan Chonat: Great. Sarvesh, let me ask you this. What according to you — you did say some
sunrise sectors, like you said, lending especially is something that you’re looking at. So within lending,
you have different sub-segments. You have — starting from micro finance, then structured. You have
private banks. So I’m just trying to pick your approach. So you have identified lending as a structurally-
strong sector. How do you go about identifying which stock — without naming them, but how do you go
about identifying — what is your process, if you can explain?
Sarvesh Gupta: Yeah. So in the beginning, of course, when we were doing — maybe six, seven years
back, we used to apply a lot of filters basis, the historical performance track record, reading all the con
calls which are available to understand. But now, we have reached a stage where we have already been
tracking so many companies across the board, across the sectors, that we have a decent sense of what is
happening in which segments of the market, where the valuations gap exist, where the performance is
going to come on a higher basis in the coming years compared to what it is now. So I think now, it has
been — because of the collective experience that we have gathered over the last several years, it comes
to us intuitively. This is — actually, I think there was this book on 10,000 hours of focused practice, right?
Radhakrishnan Chonat: Right.
Sarvesh Gupta: So since we have done that, I think now, as a fund manager, our intuition actually goes
on a very — I mean, it is slightly less objective. But then, this is one of the things that I have realized that
over time as you work hard, maybe if you’re investing — thinking about investing 12 hours a day for the
last 10 years, things do come to you on a — some things will make sense to you in five minutes. And of
course, you will do all your analysis. You will get your analyst to work out the models and look into all
the reports and all. But many of the things will instantly make sense to you, and many of the things,
more importantly, will instantly come out of your shortlist because you would know that this is not
something that we would be interested in. So, as of now, within lending, what has happened is that
once you have seen a fall in HDFC Bank’s valuation, that has put a cap on the entire sector’s valuation
because today the question is that if you like anything in lending, why not just buy HDFC Bank, which is
available at 20-year low price to book and maybe a 10-year low or 15-year low price to earning. So the
opportunity is quite good across the metric, across the — whether be it private banks, be it microfinance,
be it NBFCs, the opportunity is quite good. These companies are growing sustainably on a high rate.
India cannot grow without the lenders not growing and doing properly. RBI has also recently put in a lot
of checks and balances, which have hit the valuations negatively. But in my view, these will actually help
the sector positively because at least the most important reason why the valuation in lending sector can
go down is because of the credit cost, more important than anything else. And I think every step that RBI
has pursued is basically towards bringing down the sustainable credit cost in the sector by putting in
more and more checks and balances. So, as and when these things get digested, I think you can see
good valuation re-rating, and the growth is anyways going to happen for large companies maybe at 15%
or thereabouts, and for small companies at 20%, 25%. So there are many candidates who will grow
consistently in this space. And against that, you see the valuations, they are at pretty low compared to
their historical past. So there is a possibility of re-rating as well. So we feel this is a sector where one
should definitely be putting in some money to work as of now, especially when many other sectors are
much more expensive.
And the other one more thing, by the way, which I forgot, is, FIIs have been selling a lot. And in India,
this is one of the — again, a very India-specific thing that the float is very high in BFSI stocks. The liquidity
is very high. A INR5,000 crore market cap BFSI company has liquidity as much as maybe a INR25,000
crore non-BFSI company. There is no liquidity outside of — especially in good companies, outside of
lending. If you see, 75% will be held by promoter, 10% by some good investors and 5% by some funds.
There is hardly 10% float available. So those sectors, the valuations also can show us a distorted picture.
And here, I think, the float is there, liquidity is there. FIIs have been selling, and most of their selling
comes in foreign — in lending sector. For example, in HDFC Bank, earlier there used to be an auction
because the foreign limit was completely taken by the foreigners, right? Today, against 75% limit, only
58% is bought by foreigners. So, the [burnt] of FII exit has also been — from a technical point of view, has
come to lending sector in a large way. So, in case they come back, because the India story is strong and
once the election-related uncertainties also go away, and most importantly, when the rate cycle sort of
comes down, this is not probably going to happen in one year, but I think for long-term investors, it’s a
good time to accumulate and take advantage of all these three. Macro is also working in their favor like
FII is coming back and lending rates going down, and the RBI policy is getting digested by the market.
Radhakrishnan Chonat: Cost of capital. Yeah. Recently, the gold NBFC stocks went down because of the
20,000 limit. But as you rightly said, it's structurally strong for the organized players versus the
unorganized ones.
Sarvesh Gupta: Yes. It will benefit the organized players more, and it will make the companies also
strong because they will be forced to make these changes. So they — of course, in the short term it will
create some business model challenges, but in the long term, it will make them much more — I mean, as
I told you, the credit cost line of their P&L will get strengthened by all these actions because, for
example, if you're lending everything in — not in cash, the possibility of fraud goes down, the possibility of you — the responsibility on the credit officer goes up because everything sort of starts to make much more sense.
Radhakrishnan Chonat: True. You mentioned earnings calls briefly. So, at AlphaStreet, we pride
ourselves in covering maximum number of Indian calls. And my team just alerted me before the
interview that you regularly appear in many earnings calls asking questions. So what has been the role of
technology, per se, with new tools for you to better filter companies? How has the investing landscape
and market analysis changed from when you started to now? Are there any new tools? Are there any
new indicators that you look at?
Sarvesh Gupta: Yeah. No, so there are many tools available in the market, and we do, I think — so, one
of the challenges as a fund manager is that we track too many things, and then we miss out on many of
these calls. And AlphaStreet, for example, is a great way for us to catch up on those calls immediately
because you are — you guys are able to upload it. And on YouTube, it is much far better to sort of listen
in as per your own pace because the other challenge is the time. So we are able to sort of fast forward it.
We are able to sort of go up and down to sort of listen some parts of the call again, also to get better
understanding. So, obviously, what all this technology has done, it has democratized the landscape for
many people who are investing into the markets. I think earlier, there was an information arbitrage,
there was an analysis arbitrage, and there’s a timing arbitrage. Basically, if you want to create alpha,
there are three gaps. There are three things. One is your edge which you can get from information. One
is the edge which you can gain from your analysis, and third is the edge which you can gain from just
being philosophically long term or something like that. I think what technology has done — earlier, all the
institutional guys only used to have — large guys only used to have the information at the right time.
Now, with the help of technology, people are — everybody is getting the same sort of information at the
same time. So that — so technology has played a great role in democratizing. And this is what SEBI also
wants, right? So irrespective of even if one person is holding one share or if a person is holding 1 crore
shares, the access to the information on the company should be the same. And technology, I think, has
played the great role in making sure that is done to everyone and also at a very low cost in a very big
way. So that’s very good. And on our side, we do try to take advantage of many of these new-age tools
to sort of do our analysis more efficiently and in a faster turnaround time, and it has definitely sort of
helped us a lot. And we — I mean, we are very much looking into all the possibilities that are present in
the market so that we can make our research process more efficient.
Radhakrishnan Chonat: Sarvesh, mutual fund is sort of an established industry from within the confines
of investing, whereas PMS is a new entrant, the new kid on the block, right? So let’s say, mutual fund is
test match versus PMS is a one-day cricket. Who is the ideal person for you from a customer perspective
who are listening to this, right? Or when should I think of switching from mutual fund to PMS? What is
the ideal customer profile for you?
Sarvesh Gupta: Sure. So, on this, having seen so much of data, I think there are two or three very
important points related to the question that you asked. A, now, the mutual fund managers are very
good, right? All these mutual fund managers are probably more skilled than any of the PMS manager. But however, the law of gravity in the field of investment management is that everything else remaining
the same, the expected return is inversely proportional to the assets under management. The problem
with mutual funds in India today is that they are managing too much money, which is also going to
increase so much more. So you cannot beat something which — of which you are a big part of. So mutual
fund themselves are becoming a very large part of the market. They will continue to grow because there
is a large population and they will only trust an HDFC or an ICICI. If I have INR5 lakh, INR10 lakh to invest
in the markets, they would definitely trust them, and that is the way they should also because with a
limited amount of money, that will be the most cost-efficient way. So people who are starting out
should definitely go towards mutual funds, but they should also understand that there is a very high
probability that the returns that they will generate will not be in excess of market. In fact, two days back
only, even there was this article on the large-cap funds which have beaten the market, beaten the
NIFTY. It was on Moneycontrol or somewhere. And I saw even the top funds have actually beaten by like
0.5% or 1%. So it is very difficult because they are also handling retail money. So SEBI also puts in a lot of
restrictions, typically, except for the benchmark stocks where people are happy to take it up to the
benchmark weightage. Other than that, they would hardly take 1% or 2% weightage. Now, problem with
— as I told you earlier also, mathematically, once you have so many stocks, you will start mirroring the
market because you have taken one cement stock, one defense stock, one chemical stock, one pharma
stock, one HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Reliance. It is very difficult for the mutual fund
manager — I mean, it is just the structural problem for them to beat the market.
Radhakrishnan Chonat: True.
Sarvesh Gupta: And that will persist. Now, hence there are people in the PMS who can probably do a
better job — but again, in the PMS also, some of the PMS fund managers who will try to do things in the
same way as a mutual fund, they will find it very hard. So, one thing is, for example, if you’re running a
small-cap strategy and you are running INR1,000 crore, INR2,000 crore, it is very difficult because the
float is not available, as I said. Beyond BFSI, there is no float available. So you are essentially like a
private equity investor. If the markets fall, you can't exit with a INR100 crore position in a small-cap. So
you have to — so the brilliance of Warren Buffett, for example, was that he was a great small-cap fund
manager. Then he became a great mid-cap fund manager. Then he became a great large-cap fund
manager, and now, he is only a buyout manager. He is only looking for buyouts. He is not even looking
for buying from the market because he needs $40 billion, $50 billion. So very few fund managers are
able to transition from one place to another. That is the problem even in the PMS. But they get too
much money. And once — if they are not able to transition — a small-cap fund manager has to transition
into a mid-cap fund manager after 5, 10 years when he has thousands of crores of money. And from
small — mid-cap, he has to again transition to a large-cap fund manager once he gets INR8,000 cores,
INR9,000 crores, INR10,000 crores. So, that journey is very tough and very few are able to do. So from
an investor’s perspective, they should also understand that whether — the past track record is not the
only thing. The other important point is that the range of AUM that they are managing, will they be able
to succeed in that AUM range? There was one PMS — I won’t name it, but there was one PMS, very
famous PMS, which was managing INR1,000 crores two years back. And one year back, from INR1,000
crores, it went to INR10,000 crores. And I feel that it is very, very, very difficult for someone to successfully replicate the returns, but people don't understand. Even the HNIs and new HNIs, their level of sophistication, when it comes to understanding these issues, is very low. So people feel that, okay, at INR1,000 crore, he has produced this return. At INR10,000 crore also, someone money will come. That is not going to happen. So, one has to be very careful about picking the right fund managers and also understanding the principle of gravity, which I just told that size of AUM is inversely proportional to the expected returns.
And then the third factor, which is the macro factor, which is also something which people need to
understand that if you’re coming at a point when the valuations are higher, your return expectations
have to be that much more muted compared to, let’s say, what you have received in the last two, three
years. This is another folly that people do, where the risk management comes in, where everything
comes in, which I spoke about. So there’s a lot of — and that’s why I think there’s a space for RIAs.
Traditionally, mutual — PMS has been more of a distributed product, but the distributors are, in many
cases, conflicted because they are only going to give it to the guy who is giving them the maximum share
of revenues. And hence, now SEBI wants to push more of this RIA model, where these RIAs get paid by
the client, but they are focused on to selecting the right funds for their clients, depending on the client's
particular risk profile, return profile, AUM, et cetera. So I think that is something which is very much
needed in this market for the investors to be able to pick the right PMS also.
Radhakrishnan Chonat: [Marcellusly] articulated. So let me shift gears, and outside of investing, right,
what are some of your personal interests and how do you disconnect from the market?
Sarvesh Gupta: Yeah. So, I love watching videos which are related to travel plus food sort of a genre. So I
follow some of the YouTubers there. And this is personally something which is sort of an activity that I
do on a daily basis after I come home. Plus, I have a six-year old son, so a lot of time goes in playing with
him and making sure that I’m reading out something to him. And basically, I am a voracious reader, so I
do want to inculcate the same habit in my child as well. So, some of the time goes into trying to do that.
And apart from that, again, reading for myself as well. I think these are the two, three things that I enjoy
a lot. Yeah.
Radhakrishnan Chonat: I’m glad you said you are a voracious leader because my final question to all my
guests is always to recommend us three books that my listeners can benefit from. It can be investing-
related or non-investing-related, but three books that significantly helped shape who you are today.
Sarvesh Gupta: The name, I think — so this is where I also have a very strong opinion that there are
bibles when it comes to investing, for example, and people should not look for newer bibles because
those bibles will always remain as the bestsellers and the best sort of books for anyone to approach. So
at the risk of maybe repeating it on this forum and many of your other people would have said the same
thing, but for the uninitiated, for people who are interested into investing, exploring, The Intelligent
Investor by Ben Graham is the best possible book to start with. And my thinking is that, as you sort of
read the book, you should also apply those learnings into the market with some small amount of money.
It is very important. So, Yogi Berra has said a very important thing: in theory, theory and practice is the same. But in practice, it is not. So it is very important to also apply the things that you are learning by
reading each of these books. And then, as you are able to graduate into — let’s say, some people like
special situations a lot. So, there’s a book called You Can Be a Stock Market Genius by Joel Greenblatt.
So you can read that and then sort of do more special situations in real world also, start with small
money. But it is important. And similarly, if someone wants to pursue the detailed financial analysis or
growth investing, for example, Philip Fisher has a book, Common Stocks and Uncommon Profits, that is a
book which is very relevant from an Indian context because many of these American books don’t lay
emphasis on the business or the promoters, et cetera. And that book is also very interesting to read for
a newbie. And of course, as you graduate, there are tons of books like there’s a book called Outliers,
which is focused into capital allocation, but those are advanced books. I think one should read that once
you have finished the initial books. So I think, as I said, there are the old classics, and one should focus
on that. It is not that — and by the way, unfortunately, most of the Indian authors have not done a good
job. So I have read almost every book which is there. I think there was one journalist who published this
book, Bulls, Bears and Cartels, something like that. I forgot the name of the journalist. But that is very
interesting book to read. But other than that, in general, I have not found great books written by Indian
authors. But I think, one should — I mean, reading is very, very important because this is a knowledge
industry. There is — but also very important is to apply those learnings and develop your own unique
approach. Today, I might — I would not say that I am investing like Warren Buffett. I’m also not investing
like Benjamin Graham. I have my own way, which is a mix of all these ways and whatever I have learned
from the Indian markets and a specific situation that I have dealt with. So you are — some of your
experiences, and it is very important to apply. That’s how you magnify your learning by what you
accumulate through reading.
Radhakrishnan Chonat: Very well articulated. You have Sarvesh Gupta way yourself. And it's been an
absolute pleasure catching up with you, picking your brain and getting to know your philosophy and
more about your fund. I look forward to more such interactions. Maybe we can do sector-specifics later.
But it’s been an absolute pleasure to introduce Sarvesh to our Fund Manager Series. And thank you,
Sarvesh, for taking time to speak with us.
Sarvesh Gupta: Thank you, Radhakrishnan. Thanks a lot to you and your team. Thank you.