'We don't foresee macro events that may cause markets to fall by 40-50 per cent'

The Indian equity market is undergoing a downturn, with broader indices correcting nearly 15 per cent. While this may trigger panic among investors, Bharat Lahoti, Co-Head of Factor Investing at Edelweiss Asset Management, reassures that such corrections are a natural part of the equity market. He further states that investors should look at the market "more favourably" and "push in more money in the next 3-5 years".

Lahoti currently manages 28 schemes at Edelweiss, including the Edelweiss Large Cap Fund, which has consistently outperformed the BSE 100 in most of the past decade and holds a four-star rating from Value Research.

In this interview, he shares his views on the current market correction and why it is an excellent time to invest. He also delves into the performance of the Edelweiss Recently Listed IPO Fund, what separates factor investing from traditional investing and its role in the large-cap fund's success.

With the recent market correction, do you think the worst is behind us, or should investors brace for more volatility?

If you look at the market right now, we are seeing that it is going through a cyclical slowdown. It's not a scenario like the one we saw in the Global Financial Crisis of 2008 or the problems during the Covid-19 period. However, this correction has been more cyclical, and it happens quite often in the equity market. It's not abnormal to that extent, and in general, during a cyclical turndown, the market falls anywhere between 15 and 20 per cent. Currently, we are standing close to a 15 per cent correction in the Nifty and a similar one in the NSE 500. So, the correction is very healthy from that perspective.

It is difficult for individuals to identify the bottom. Still, given the current fall is driven by sentiment around high valuation, the interest rate scenarios and FII outflows, these cyclical events will make a turn. This is not a moment where we need to be extra cautious to that extent. And this is a very good level to get in, as a 15 per cent correction at an index level is good. When you look at stock levels, stocks have corrected more than 30-35 per cent, and many have an interesting proposition. One should look at the market more favourably. The advice to investors is to stagger their investments and push in more money towards the equity market in the next three to five years; hopefully, one can make more money.

Has the valuation corrected to an extent where investors can start deploying the money?

In the last two quarters (September and December), the earnings have been slack and not aligned with the market expectations. This has led to the market punishing some of these stocks where the expectation was built high, and that is why I am saying it's a cyclical slowdown. The earnings might rebound in the next financial year, and the numbers would look decent in the next three to five years. Though some stocks still have very high valuations, this is due to their relatively better earnings visibility compared to other stocks, which are preferred in volatile markets by investors. However, we don't know where the bottom is, but one should start deploying. If markets correct by, say, another 5-10 per cent, one can deploy more money. Currently, we don't foresee any macro events that might lead to markets going down by 40-50 per cent.

As Co-Head of Factor Investing at Edelweiss Mutual Fund, how would you explain factor investing in simple terms? How is it different from traditional investing?

I would start by asking why stock prices give you returns. It could be due to a particular company's growth, valuations or other parameters, such as quality. Identifying such characteristics and harnessing them is factor investing. From a traditional perspective, it resembles traditional investing, as both approaches utilise the same data points. Traditional fund managers look at the sales growth, the operating profit growth, the bottom line growth and other financial and valuation ratios. Factor investors like us are also looking at the same thing, but we are in a more systematic format. For us, all these numbers do matter. To give another example, a company that is delivering 30 per cent growth versus a company delivering 15 per cent growth, we always say that 30 per cent growth is a superior company. A traditional fund manager may say this looks interesting, but they are more subjective in analysing this growth. So that is the only difference. Otherwise, if you look at them, most things are very similar to the traditional form of investing.

Factor investing is gaining a lot of traction. Where do you see it fitting within a broader investment strategy?

The way we think about it is that when we build our strategy, we think about it from a long-term perspective. We don't think from a period-to-period perspective. We don't know which factor is going to do well next year. We tend to see that running a multi-factor model, which combines quality, value, growth and momentum, does well over a long period. The idea is to create consistency in returns as compared to outperformance in a certain set of periods. Many funds in the market are focused on one set of factors. Some funds prioritise value, quality or growth, and when these factors fail to deliver the desired results, these funds tend to underperform. However, for us, the idea is to show more consistency in performance, which would help us build wealth over a longer time period. But what we generally see in our multi-factor models, given that the Indian equity market is more tilted towards growth and momentum, is that our factor exposure is higher towards growth and momentum.

The Edelweiss Recently Listed IPO Fund has a unique strategy. Given that many IPOs list at a premium, what's behind the fund's single-digit returns over the past one and three years?

This fund is highly interesting, and its launch was prompted by the challenges faced by retail investors in selecting and gaining access to initial public offerings (IPOs). We have seen that one-third of the IPOs don't make money, and retail investors also book profits on the first day of the listing. However, in our opinion, IPO investing is not about first-day listings or first-day gains. We have observed that maintaining a solid portfolio of companies over an extended period tends to outperform the market as a whole.

In the last year, this fund has delivered returns of 11 per cent, while the NSE IPO index is up by just 3 per cent. So, this fund outperformed by 8 per cent. This fund has a six-year track record and has delivered around a 14 per cent return since its inception, compared to the 7 per cent generated by the benchmark. The key point of the IPO fund is that it solves the retail investor's dilemma of how to invest in an IPO. Building a position in these high-conviction names over time creates wealth. That is all we do, so this fund helps solve retail investors' problems. Hence, this fund is intriguing from that point of view.

Edelweiss Large Cap Fund has outperformed the BSE 100 in most of the last 10 calendar years - something many active funds struggle to achieve. How has factor investing contributed to this consistency? Given the relatively narrow large-cap universe, how does your model identify opportunities? Could you also share an example to illustrate this?

One of the key aspects of large caps is that the universe is very narrow, as it only has 100 stocks. So, you need to be highly data-driven in this segment. This is because if you try to take an outsized position in terms of higher concentration risk or higher sectoral exposure, and if that doesn't play out well, you tend to underperform.

So, in the Edelweiss Large Cap Fund, we run a multi-factor model and are not biased toward value, quality or growth. We have a mix of all factors, which helps us have a consistent return. Secondly, we maintain full investment in this portfolio and do not engage in cash calls. Thirdly, we want to run a diversified set of portfolios. Since we think that the large-cap category is the first investment choice of the investors in the equity markets, we need to give them a better experience to that extent. So, we want to keep this portfolio less risky compared to mid and small caps.

All these things have helped this fund deliver consistent performance, and we have gained a lot by doing a sectoral rotation in this fund because of the multi-factor approach. The model lets us know where to invest, whether in value, growth or quality. Suppose the models suggest looking at these five companies, and all are in banking; then we are overweight on banking. So, this sector rotation has helped deliver a better alpha over a longer time period.

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