IPL Portfolio: Picking stocks like selecting a cricket team, says Arvind Kothari

Creating an ideal investment portfolio is akin to selecting a cricket team, says Arvind Kothari, Smallcase Manager & Founder of Niveshaay. “Just as cricketers are chosen based on their skills, we also curate our portfolio mix from a pool of investment options that have features of not just specialist or all-rounder in themselves but also have some x-factor in them to outperform the market,” he says. Edited excerpts from a chat:

An ideal mix for IPL team selection is an all-rounder, bowler, batsman as well as a great fielder all together. Considering the current scenario, Volatility in market, expectation of correction, what would be the Idea Portfolio Mix you would recommend to the investors?
Arvind Kothari:“No single strategy fits all”. The market is so dynamic that you need both Virat Kohli, someone who can perform consistently in every condition, and Ravindra Jadeja, someone who provides that balance and stability.

Creating an ideal investment portfolio is akin to selecting a cricket team. Just as cricketers are chosen based on their skills, we also curate our portfolio mix from a pool of investment options that have features of not just specialist or all-rounder in themselves but also have some x-factor in them to outperform the market. Our investment portfolio primarily focuses on high-growth sectors that have significant potential for future growth and are expected to perform well, such as Make in India, Recycling Trends, Energy Transition, Consumption, and Defense, among others.

As per the observations over the past years Chennai Super Kings & Mumbai Indians had been consistent performers whereas, Sunrisers Hyderabad and Kolkata Knight Riders have shown high erratic performance. Similarly, what would you recommend to your investors? Should they invest in sectors/companies showing consistent performance or should they opt for the in high risk/ high return (highly volatile) company?
Arvind Kothari: The first and foremost rule of investing is that one should know where one is investing. Ideas can be borrowed but not conviction. The investment strategy is based on multiple factors like investment objective, time horizon, and risk appetite of the investor.

Whether generating alpha sporadically over the years is valued more than constant returns depends on unique financial situations and preferences. Our second-order thinking helps us to play a story that is often under-researched due to uncertainties involved and has the potential to give outsize returns. This makes them less disruptive to rapid changes and savor competitive advantage for extended periods.

This IPL, Mayank Yadav has been highlighted as a discovery/ hero of the season. Likewise, would you suggest any emerging stock or sector for this year?
Arvind Kothari: It's quite likely that many franchises will bid for Mayank Yadav in the next season’s auction, and deservingly command a huge premium. Similarly, we actively seek sectors and companies that have distinguished themselves in their respective fields. We focus on companies that can effectively implement their business strategies, achieve robust financial performance, and gain market share when macroeconomic conditions favor them.

The transition from emerging to leading begins where consistent performance, expanded market presence, and solid financial fundamentals can propel a stock forward. This can generate momentum, draw more investors, and potentially initiate a positive growth cycle. Fortunately, we have been able to identify promising emerging players in sectors such as Defense, ESDM, Power, and Renewables and continue to believe the same sectors have a lot to offer in times to come.

Royal Challengers Bangalore, although have not won any IPL, their team always consists of Key Star performers. Considering portfolio creation, should investors only focus on the key asset classes or full mix of asset classes?
Arvind Kothari: Cricket always demands players to be adaptable to different oppositions, in different conditions, and across formats. Similarly, volatility, uncertainty, disruptions, crises, and shocks are inherent part of capital market; asset allocation between different asset classes like equity, bonds, gold, real estate, etc. shall be made in a manner to adapt to such changing dynamics.

There may not be just one right mix while designing a portfolio as it involves a series of complex decisions that are subjective in nature. The proportion of mix between various asset classes may depend upon the risk-taking capabilities, return expectation, time horizon, etc. of the investor. It's crucial to align these factors while constructing a portfolio and consider the risk and reward associated with pursuing alpha.

Punjab Kings 11 has a very high potential to perform well in IPL, with a great mix of players in the team. When it comes to markets, do you feel there is any particular sector/s that has still not performed but has high potential or high growth opportunity in the coming times.
Arvind Kothari: Just like a strong mix of skilled players is key to Punjab Kings' success in the current IPL, having exposure to promising stocks and sectors is crucial for potential high growth in the future. Two major trends in India right now are Manufacturing and Consumption, offering interesting investment opportunities. The Indian manufacturing sector is showing sustainable growth with robust government policies, development of requisite infrastructure, and decent traction from shifting dynamics of global manufacturing i.e., China +1. The resultant strengthening of the manufacturing sector, the presence of a large youth population, and the burgeoning middle-class are significant drivers of long-term growth which ultimately trickles down to higher consumption. Particularly, the premiumization theme in the consumer discretionary space is expected to perform well as the current size of the overall luxury market in India is expected to grow 3.5 times to reach $200 billion by 2030. Our scuttlebutt research indicates rising demand for premium items across various sectors such as real estate, electronics, automobiles, and branded apparel compared to more affordable alternatives.

Generally, Mumbai Indians have been slow starter losing initial few matches, but often does greater comeback in the tournament at later stages. Do you see any similarities with a sector/ stock in stock market? Do you suggest retail investors to evaluate based on past performance and invest for long term horizon?
Arvind Kothari: Consistently, the adage "slow and steady wins the race" rings true. Take, for example, the Mumbai Indians' IPL journey; despite a shaky start, they've secured the joint-most titles, showcasing the importance of resilience and long-term strategy. Similarly, we prioritize sectors and stocks that have demonstrated steady growth and established a dominant market position over time.

When constructing a portfolio, it's essential to consider both historical performance and the quality caliber of management. Evaluating a company's past performance helps us understand its resilience and strategic decision-making skills through different market conditions. Simultaneously, assessing management's track record lets us gauge their ability to seize emerging opportunities and propel future growth, instilling confidence in their ability to deliver consistent results. We strongly believe in holding onto successful investments for the long haul while constantly tracking their developments.

Dhoni is likely playing his last IPL season with a new captain Rituraj Gaikwad leading the team with his guidance. Dhoni and Gaikwad are acting as support systems and helping the CSK team perform well. Similarly, is there any sector and adjacent sector that are both propelling each other forward that investors should keep a watch on?
Arvind Kothari: Having a mix of experienced players and new players is crucial for the success of a team. Experienced players provide leadership and valuable experience, acting as mentors and role models for younger players. New players bring fresh perspectives and innovative ideas, injecting creativity into the team's strategies with their enthusiasm, further enhancing the overall support system of the team.

Interdependence among sectors is the heartbeat of a thriving economy, where each sector's strength fuels and sustains the growth of the others. One interesting sector and its adjacent sector that propel each other is the power sector and capital goods sector. While the power sector encompasses the generation, transmission, and distribution of electricity, the capital goods sector comprises industries involved in manufacturing machinery, equipment, and components. The power sector relies on capital goods for infrastructure development. Equipment such as turbines, generators, transformers, and transmission lines are critical for establishing power plants and expanding electricity grids. Strong investments in the power sector drive demand for capital goods. Increased spending on power generation projects, grid expansion, and renewable energy installations stimulate growth in the capital goods industry. Conversely, a robust capital goods sector indicates healthy economic activity and infrastructure development, attracting investments in the power sector. One should keep a close eye on companies operating in these sectors.