On Day 2, Manthan 2017, The panelists engaged the audience in an insightful discussion on the secret of generating alpha, with Mr. Yash Verma as the moderator.
Mr. Mahesh A Chabria- Vice President (New Projects) with SBI Fund Management Pvt Ltd
Mr. Mahesh Chhabria started the discussion by saying that those who know the secret will not reveal it and those who reveal the secret will not know it. Talking about the secret of generating Alpha, Mr. Chhabria said that it’s important to understand the benchmark and how much more can a portfolio generate over the benchmark. Mr. Chhabria advised the audience to overweight the stocks on which one is bullish and underweight the portfolio on which one is bearish. Mr. Chhabria also talked about the correlation between alpha and beta and advised that to generate alpha one should look beyond the index. Mr. Chhabria continued to say that investors should focus more on mid-cap and small-cap companies instead of large-cap as it is already saturated. When asked about the role of luck in the generation of alpha, Mr. Chhabria said that the luck might be a combination of hard work and research and good active funds beat the expense ratio and give profits.
Mr. Swapnilsagar Vithalani- AVP Investment Banking, JRL Group
Mr. Swapnilsagar started the discussion by comparing the mimic index of today to that of 1993. He said that it is difficult to outperform benchmarks. According to him, to generate an alpha, a company must have a competitive advantage, have intangibles, under-priced, and brand recall. One must focus more on the sustainability of Alpha more than generating it. The period of sustainability depends on the risk profile of the portfolio.
Going on further in the discussion he mentioned that compounding is the 8th wonder of the world. The longer one holds onto a company, the better return one will receive. With the evolution of technology, alpha can be generated using machines and algorithms. But Mr. Swapnilsagar said that a human touch to these machines will add value. Humans are capable of understanding the psyche of promoters by researching on small and mid-cap stocks.
Mr. Manoj Jethva, Senior Adviser PE, VC & Debt Advisory
The introduction started with the discussion of PE funds. PE funds are very specialized & not as mature a market as compared to the US or UK. For a fund to be registered as a PE, there are several criteria to be met. Firstly, its operational cash flow has to be positive. Second, the visibility of the company is important. Third, how the management of the company & the strategies are adopted. Further, on the discussion of humans versus machines, he explained that it is always the prerogative of the managers/humans to generate returns or alpha, not that of the machines. It is the humans who are the decision makers. It is they who are responsible for making superior returns.
Further in the discussion, he shared his views on the topic, whether, in India, the generation of alpha is a result of market inefficiency or the Mutual Fund manager’s skill & whether there was any correlation between the two, he explained that as far as generating return is concerned, the skill of the manager matters more. This is primary. This would be reflected in the decisions made as to when to enter or exit the market. Luck would be secondary. He also gave his opinion on the probable inefficient markets in the world by giving an example.