A portfolio manager’s take on the recent midcap selloff
Kochi-based portfolio manager Porinju Veliyath — the enfant terrible of Indian stock market on account of his statements and investment thesis — has been trying hard to explain the current situation to clients through a series of mails. He tells ET Magazine what he meant by investing in “chor” companies. Edited excerpts:
You had advised investors to pick chor companies. How would you make money in such companies?
When I said invest in chor companies, I never meant invest in fly-by-night operators. I talked about investing in companies that have sound business fundamentals but have lacked in corporate governance. With corporate reporting standards rising, these companies will have to reform themselves. If you get into such companies early on, you would, in the long term, end up owning good companies at a bargain. My premise was perhaps misinterpreted and misunderstood. I still believe the premise is right.
What made you write emails to your investors?
I like to keep it transparent. The emails are more of status updates. Investors should know how their money is managed. I write to them whatever I analyse of the markets. Some of our new investors had panicked back then. They wanted me to sell and cut losses. Some of them wanted me to buy stocks that did not meet our investment criteria. I wanted to reassure them.
Are you optimistic of a bounce-back?
This is a good time to invest in medium-quality midcap stocks. I am saying medium quality because theres great value emerging in that segment after the recent correction. Top-quality midcaps are still pricey. This paranoia around midcap and smallcap stocks will go away soon.
Did you foresee such a deep correction?
The situation is a bit crazy at the moment. Towards 2017-end, many of us were expecting some levels of price correction as the market was moving into another year (fifth, to be precise) of a bull run. What we did not expect was such a deep correction. We failed to anticipate such strong bouts of panic selling. There was a lot of euphoria around mid and smallcap stocks the whole of last year. A lot of new money had moved into midcaps then. This resulted in several low-quality stocks also riding the tide. Most investments of last year would be out of money now.
Investors have lost money in sector front-liners, too.
This correction is not restricted to mid and smallcaps alone. Even quality largecap companies have fallen over the past few months. If you exclude the top-15 or 20 Nifty stocks, the entire market has corrected sharply since the beginning of this year.