ETMarkets PMS Talk: Growth, margin expansion, and valuation - the 3 pillars behind Purnartha's stock selection

Time of India

01-05-2025

In this edition of ETMarkets PMS Talk, we catch up with Saurabh Pathak, Head - Investment Counsellor at Purnartha PMS, to understand the driving forces behind the firm's consistent outperformance across market cycles.
At the heart of Purnartha's investment approach lies a disciplined framework built on three core pillars —
Growth
,
Margin Expansion
, and
Valuation
. Pathak walks us through how this philosophy shapes
stock selection
, fund strategy, and risk management, particularly in volatile times.
He also sheds light on the positioning of their flagship
Dynamic Midcap Strategy
, sectoral preferences, and how investors are reacting to today's global uncertainties. Edited Excerpts –
Q) Thanks for taking the time out. Please take us through the performance of Purnartha funds for FY25 and which fund stood out and why?
A) Fund Performance Overview:
All our equity funds have delivered strong performance over the one-year time frame, while our concentrated schemes have also outperformed over the two-year period. This consistent performance is primarily attributed to our strict adherence to core investment philosophies and timely decision-making.
• The outperformance of Pratham & Vision strategies was driven by strong stock selection, while the success of the Dynamic Midcap strategy was the result of a proactive sector allocation approach combined with investments in companies boasting healthy order books and timely execution.
• We remain highly confident in our ability to continue delivering outperformance relative to benchmarks across all schemes going forward.
Agencies
Q) What is the primary investment objective of the Purnartha Dynamic Midcap Strategy?
A) Our Dynamic Midcap Funds are designed to capitalize on India's long-term, multi-decade growth story, aiming to generate an alpha of 3%–4% over the Nifty Midcap 150 Index.
The strategy is thoughtfully crafted to navigate market uncertainties by blending both Growth and Value investing styles, resulting in a balanced and resilient portfolio.
Q) What are the key sectors in which the Purnartha Dynamic Midcap Strategy is invested, and what is the sector-wise exposure as a percentage of net assets?
A) Currently, our portfolio is diversified across approximately 10 sectors, with strategic allocations in key areas such as Financials (~18%), Healthcare (~10%), Capital Goods (~9%), FMCG and IT (each ~8%).
We've aligned our sector weights with the benchmark. For example- we have increased our exposure to defensive themes in Nov/ Dec 2024 while trimming our allocation to Capital Goods in response to evolving market dynamics.
Q) Small & midcaps was one space which was beaten down badly in the last few months. How should one look at this theme for FY26?
A) Mid and Small Caps have faced headwinds over the past six months, primarily driven by stretched valuations, concerns around the US elections, and tariff-related fears.
In response, we have adjusted our portfolio stance—reducing small cap exposure from 30% to approximately 16%, while maintaining our mid cap allocation in the range of 45%–49%.
While we remain structurally positive on the small and midcap segments, our current focus is on selective opportunities within sectors.
We continue to invest in fundamentally strong companies with 2/3 years of revenue visibility, robust balance sheets, healthy cash flows, and the ability to self-fund future capex without relying on debt.
Q) What are the key sectors in which the Purnartha Dynamic Midcap Strategy is invested?
A) We continue to maintain a well-diversified portfolio across 9–10 sectors, with significant allocations in key areas such as Banking & Financials, Healthcare, and Capital Goods.
Q) How do you evaluate companies for investment across different funds?
A) Purnartha Pratham & Vision Strategy:
Our investment philosophy is based on three key drivers — Growth,
Margin
Expansion, and Valuation. Companies that meet any two or more of these criteria are subjected to a detailed research and screening process before being included in the portfolio. The primary objective is to identify businesses capable of sustaining multi-year growth.
• Dynamic Midcap Strategy:
This strategy follows the GSM framework — Growth, Strategic Investment, and Margin Expansion. Companies that meet any one of these parameters are considered for further screening.
The Fund Manager aims to maintain exposure to all three pillars (GSM), adjusting allocations dynamically based on the prevailing market environment and sentiment.
Q) What is your take on markets for FY26 and did you also tweak your strategy to counter tariff related volatility in the system?
A) Dynamic Midcap Strategy Outlook:
Our Dynamic Midcap Fund operates under the GSM Philosophy (Growth, Strategic Investment, and Margin Expansion). This approach enables the fund to maintain a balance between growth and value style investments within the same portfolio, providing stability even during periods of market volatility.
In response to current market conditions, we have increased allocation toward defensive sectors and India-focused themes, while using cash as a tactical tool to seize opportunities arising from market fluctuations.
• Market Outlook (FY26):
For FY26, we anticipate that the equity asset class will deliver moderate returns compared to the strong gains of the past couple of years. However, we continue to expect corporate profit growth of 10–12%, which aligns with nominal GDP growth projections.
Q) How do you manage risk across different funds?
A) Purnartha Pratham & Vision Strategy:
o A significant portion of the portfolio is allocated to large-cap companies, ensuring liquidity at all times and providing opportunities to capitalize on market volatility.
The three-driver approach — Growth, Margin Expansion, and Valuation — guides the portfolio construction and allocation. We manage idiosyncratic risk by adhering to strict investment rules and executing a disciplined exit strategy whenever initial investment assumptions are no longer valid.
• Dynamic Midcap Strategy:
o Mandatory trimming of position where a stock breaches 12% of the current portfolio value
o Stock allocation is an indication of risk-return tradeoff
o Exposure to a wider spectrum of sectors/sub-industries
o Managing exposure to raw material (commodities), geographies, size, style
o While debt is allowed till 0.5x to equity – in the current 'tariff uncertainty' ~60% of the portfolio is allocated to net cash companies.
• Purnartha One strategy:
o Risk management is an inherent feature of the Purnartha One strategy, achieved through diversified exposure across different asset classes and timely portfolio rebalancing.
o Our approach is further strengthened by the VMS framework — focusing on Valuation, Macro Outlook, and Sentiment. This three-factor framework helps to actively hedge risks and maintain portfolio stability across varying market conditions.
Q) There is too much chatter on Gold – how do you see this asset class for investment?
A) Gold Investment Strategy — Purnartha One:
As part of our Multi-Asset Strategy under Purnartha One, we maintain an allocation to Gold in the range of 4–6%. We view Gold primarily as a crisis hedge, rather than a high-return asset.
• Given the ongoing global economic uncertainties, demand for Gold is expected to remain strong. We consistently recommend that investors allocate a portion of their portfolio to Gold at all times. The objective is not to maximize returns from
Gold, but to provide a cushion and enhance portfolio resilience during periods of heightened volatility and uncertainty.
Q) What are the queries that you have been getting from your clients?
A) Investor Sentiment in Current Times:
Today's investors find themselves at a crossroads — concerned about global uncertainties such as tariff wars, yet confident in India's long-term economic growth story. While this duality has not deterred participation in equities, it has led to a more cautious investment approach, limiting aggressive positioning.
Another segment of investors remains confused, struggling to choose between different investment styles, philosophies, and asset classes available in the market. Despite the broader index recovery, many remain apprehensive, preventing them from making decisive moves.
Individual investors often find it challenging to identify investment solutions that align with their goals and provide timely results. Although there is a growing urgency to create passive income through investing, prevailing macro and microeconomic fears cloud judgment, often leading to panic-driven decisions.