Focus on behavioural aspects to be our key differentiator: Nimesh Chandan

Megatrends investing strategy is suited for a flexicap fund as it selects companies that have strong growth potential based on the long-term changes in the businesses, says Nimesh Chandan

Bajaj Finserv Mutual Fund, which has recently launched its first equity scheme in the flexicap category, has come up with a “megatrends” investing strategy in a bid to offer differentiated products to investors. This strategy is suited for a flexicap fund as it selects companies that have strong growth potential based on long-term changes in businesses, says Nimesh Chandan, chief investment officer of Bajaj Finserv AMC, in an e-mail interaction with Abhishek Kumar. Edited excerpts:

Given that active funds have strict boundaries, how do you plan to differentiate your products?

At Bajaj Finserv AMC, we have added a layer of behavioural finance to the informational and quantitative edges to create an investment philosophy that is truly differentiated. We will only enter those active categories where we see an opportunity to generate sustainable alpha. If not, we will enter them through the passive space. Even in passives, we will be looking at passive allocation but with an active selection strategy (smart-beta funds). Apart from this, we are leveraging technology to offer seamless experience to investors.

How do you plan to take the “behavioural edge”? Some fund houses use the quant model to circumvent human biases. How does it compare to your strategy?

 The crowd often moves like a pendulum between greed and fear. Most investors are focused on the short term and tend to trade a lot. If we can avoid some of these mistakes and in fact take advantage of them, we will have the behavioural edge. There are many tools and processes to do that and quant models are one of them. We will use quant models, as well as other tools like investment checklist, investment journal, and pre-mortem for better investment decision-making.

Existing flexicap funds are always overweight on large-caps with around 60 per cent exposure. Would you also go with a similar allocation?

 Yes, many flexicap funds are large-cap biased. Bajaj Finserv will not keep any bias towards any market cap category. We will use the megatrends investing strategy which utilises top-down, as well as bottom-up research to create a portfolio across various trends, categories, and sectors.

Why did you choose to start with a flexicap fund? Do you feel the timing is right given that the market has run up a lot in recent months?

 We have identified an important strategy that addresses the needs of long-term active investors called megatrends investing. This strategy is suited for a flexicap fund as it selects companies that have strong growth potential based on long-term changes in businesses. As far as timing is concerned, we do not believe valuations are in the expensive zone. The absolute market value might be at an all-time high, but this is coming after a time correction of 20 months, wherein the earnings have grown. There are pockets in the market which are fairly valued or attractively valued.

Will you be taking cash calls in your schemes?

 We have some time to build the first portfolio, so one may see some cash in the portfolio in the initial days. However, on an ongoing basis, we will not take cash calls unless we see some event risks. The markets are rarely expensive across the board. There are almost always some pockets that are attractively placed. Our approach is to scout for those opportunities.

Are concerns that the markets have overheated after a sharp jump from this year’s lows justified?

Typically, investors look at the one-year forward price-to-earnings ratio of the index and compare it with the historical band to gauge whether the market is expensive or cheap. What most people don’t account for is the impact of change in constituents on the target valuation of the index. If the index has moved from more cyclical stocks to more structural growth stocks, typically the index should move to a higher band. So, the current valuations of 19-20x one-year forward earnings don’t seem overheated based on businesses that are part of the index today. Having said that, corrections can come in from time to time. It’s difficult to accurately predict.