Nilesh Shetty's Investment Strategy: Liquidity Filter and Predetermined Limits

In an interview with Capital Market Publishers, Nilesh Shetty, Associate Fund Manager, Equity said, "Concentrated bets on a theme increases the investors risk. Actual returns may or may not justify the increased risk. Diversified equity funds are much better suited for retail investors."

Below are the responses he shared in his interview:

1. Equity markets are already up. Is there more room to grow? How are you approaching market right now? What is your future outlook for the market?
Significant increase in share prices over the last few years devoid of any earnings growth has made valuations across most companies expensive. Rising global liquidity lowered risk aversion. We may just be entering a phase where global liquidity recedes making valuations a lot more reasonable. Our sense is downside risks are high at the current moment and investors need to be cautious. We have seen some of our portfolio stocks breaching our sell limits forcing us to sell them raising cash levels in the fund. Over the long term, we remain optimistic on Indian equities. India is likely to grow faster than many nations.

2. What is your investment space? Any stock specific traits which makes it a part of your portfolio?
We have a liquidity filter of at least $1 mn daily trading volume in the stocks that we own; apart from that we do not have any market capitalization or sector bias. We have a predetermined Buy and Sell limit for each stock actively covered by our research team. The limits are decided based on sustainable cash flow generating ability of a company and its long term valuation bands. Once a stock hits our buy limit it finds its way into our portfolio and once it hits our sell limit it exits our portfolio.

3. What kind of stocks you avoid, why?
Companies with weak corporate governance and a history of treating minority shareholders poorly do not come into our portfolio.

4. How frequently you churn your portfolio and Why? Latest made changes in portfolio?
We do not churn the portfolio that often. Our typical churn ratio has been ~20%. We have reduced positions/ sold out of Oil marketing companies as well as some other selective names as valuations turned very expensive. We have increased weight in some Pharma stocks and Information technology stocks in FY18. These are good companies with great managements facing some near term headwinds, but may prove to be winners in the next five years.

5. Given the dynamic economic and political situation, how can investors minimize their risk and maximize their returns?
It's extremely difficult to time markets. SIPs remain the best avenue for retail investors to invest in equity markets. The long term India story remains extremely strong despite near term macro concerns. Rupee cost averaging via SIPs remains the best investment option in the current environment.

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