ETMarkets PMS Talk: April's 9.9% spike - Nikhil Johri on what drove Trivantage Capital's outperformance

Economic Times

17-05-2025

Trivantage Capital's portfolio showed impressive gains. Nikhil Johri credits the returns to policy and sectoral factors. RBI's accommodative stance and stable asset quality helped. The fund focuses on governance and due diligence. It targets opportunities in asset management and affordable housing. Johri sees a rebound in small and mid-cap financials. He believes India's financial sector offers long-term value.
Tired of too many ads?
Remove Ads
Tired of too many ads?
Remove Ads
Q) Thanks for taking the time out. With a 9.9% monthly return in April 2025, what were the key contributors to the recent performance spike?
Q) Your portfolio has outperformed the benchmark over 2 years but slightly lags since inception. What market conditions do you believe will help narrow or reverse this gap?
Tired of too many ads?
Remove Ads
Q) What inspired the creation of a pure-play financial services portfolio focused exclusively on small and mid-cap companies?
Q) How do you ensure that governance and management quality remain high across the small and mid-cap financial names in your portfolio?
Q) With nearly equal allocation to small (48%) and mid-cap (48%) financials, what is the rationale behind this balanced mix?
Q) How do you identify winners across diverse sub sectors like home finance, asset management, small finance banks, and insurance within financial services?
Q) Given the evolving regulatory and interest rate landscape, what are the biggest risks and opportunities you foresee in the financial sector?
Q) What is your take on the markets amid rising trade war and rising geopolitical tensions between India & Pakistan?
Q) Which sectors are you currently overweight and underweight in?
In April 2025, Trivantage Capital 's pure-play small and mid-cap financial services portfolio delivered an impressive 9.9% monthly return, significantly outperforming its benchmarks.What sparked this sharp surge? In this edition of ETMarkets PMS Talk , we sit down with Nikhil Johri , Founder & Chief Investment Officer at Trivantage Capital, to unpack the drivers behind the portfolio's stellar performance, the strategic rationale for staying focused on SMID financials, and why he believes this rebound is just getting started. Johri attributes the outperformance to a combination of supportive macro tailwinds, including the RBI's shift to an accommodative monetary stance and resilient asset quality in the secured lending space.But beyond the headlines, his investment philosophy is deeply rooted in rigorous due diligence, governance-driven stock selection, and sub-sector specialization across areas like asset management, affordable housing, and small finance banks.In this candid conversation, Johri explains how his team navigates the evolving market landscape, the rationale behind the nearly equal allocation to small and midcaps, and why smart investors shouldn't ignore the compelling opportunities unfolding within India's underpenetrated financial services sector. Edited Excerpts –A) The strong performance was driven by a supportive policy environment and sectoral resilience. RBI's shift to an accommodative monetary policy stance in April, along with abundant system liquidity, kept funding costs low—particularly benefiting small and midcap banks and NBFCs.Additionally, asset quality among small lenders in the secured lending segment remained remarkably resilient, allowing them to stay insulated from the travails of the microfinance industry.This combination of favourable funding environment and stable credit quality was central to the portfolio's strong performance. Overall, the portfolio was well-positioned to capture these tailwinds as they unfolded.The primary reason for this performance gap has been the sharp underperformance of small and midcap stocks relative to large caps in the current calendar year.As of April 30, 2025, the BSE 400 MidSmallCap Index was down 8.9% and the BSE 250 SmallCap index had declined 13.0%, while the Nifty 50 TRI was up 3.2%.This correction was driven by a combination of external shocks—primarily the imposition of tariffs and geopolitical tensions in the region. However, with both these concerns now abating, we are already seeing a sharp rebound in the SMID (Small and Midcap) segment.We believe this recovery is still in its early stages and will gather further strength as macro stability returns and domestic demand remains resilient.Our portfolio is well-positioned to benefit from this mean reversion, and we remain confident that this will help bridge—and potentially reverse—the performance gap over the coming quarters.At the same time, this presents a compelling opportunity for smart investors to selectively participate in the resurgence of quality small and midcap names within the financial sector, where earnings visibility and balance sheet strength continue to stand out.The creation of a pure-play financial services portfolio focused on small and mid-cap companies was driven by a combination of attractive valuations and structural opportunities that emerged post the pandemic.As of December 31, 2022, financial services indices had notably underperformed the broader markets over a three-year period—while the Nifty 500 TRI delivered 61.7% returns and the Nifty 50 TRI 54.2%, the Nifty Bank TRI and Nifty Financial Services TRI lagged significantly at 35.2% and 32.5%, respectively.This divergence highlighted a compelling value opportunity, particularly within the small and mid-cap financial space, where many businesses were undervalued despite strong fundamentals.Moreover, there was a significant influx of global private equity capital into SMID financial services companies, leading to improved management quality and governance frameworks through professionalized leadership and revamped boards.It is also important to note that several high-potential sub-sectors within financial services—such as Asset & Wealth Management , Brokerages, Rating Agencies, Stock & Commodity Exchanges, and Affordable Housing—are predominantly represented only in the small and mid-cap universe.This made a focused investment approach not just timely but necessary to fully capture the breadth of these opportunities.Recognizing these factors, we launched this dedicated investment approach on March 1, 2023, with the conviction that this segment offers meaningful long-term value creation potential for discerning investors.Beyond the financial metrics and business fundamentals, we place significant emphasis on governance standards and management quality when evaluating investments in the small and mid-cap financial space.Our due diligence process is rigorous and multi-layered. We carefully assess the composition of the Board of Directors and the credibility of the auditors, review the management's track record, analyse credit ratings, and consider the presence of reputed private equity investors, which often serves as a strong external validation.In addition, we actively engage with the broader ecosystem—including industry peers, market participants, and occasionally even competitors—to gather independent views on the management's integrity and execution capabilities.This holistic approach ensures we remain aligned with high governance standards and back businesses with sustainable leadership quality.The portfolio construction process plays a critical role in delivering strong, risk-adjusted performance. As part of this process, we consciously ensure diversification across various subsectors within the financial services space to mitigate concentration risks.Our investment framework also factors in specific risks associated with small and mid-cap names—such as illiquidity, higher volatility, and sub-optimal scale of business.Given these dynamics, portfolio construction becomes an ongoing act of optimization rather than strict adherence to any pre-defined allocation.We do not set out to deliberately maintain an equal weight between small and mid-caps; instead, allocations generally range between 40% and 60% each, depending on prevailing market conditions and our outlook.The current balanced mix reflects where we see the best risk-reward opportunities at this stage of the market cycle.Identifying potential winners across the diverse sub-sectors of financial services requires deep domain expertise and a highly customized evaluation framework.Each sub-sector—be it home finance, asset management, small finance banks, or insurance—operates with distinct business models, regulatory environments, and growth drivers.Our investment process is designed to recognize and account for these nuances. We apply a rigorous analytical approach that assigns appropriate weightages to key operating metrics specific to each sub-sector—whether it's AUM growth and fee income for asset managers, underwriting quality and claims ratios for insurers, or NIMs and asset quality for lenders.This disciplined, metric-driven evaluation ensures we consistently identify businesses with sustainable competitive advantages, prudent risk management, and strong governance—hallmarks of long-term value creators across the financial services landscape.The financial sector's evolving regulatory and interest rate landscape presents both challenges and opportunities. While it is a highly regulated space—which, in our view, offers significant comfort to minority investors by ensuring better governance and systemic stability—it can also create periodic headwinds.These include liquidity and interest rate risks, regulatory pricing caps leading to margin pressures that businesses must carefully navigate.That said, the opportunity set for small and mid-sized financial services companies in India remains exceptionally strong.Structural factors like low financial penetration, a growing middle class, and robust consumer demand create a fertile environment for well-managed SMID businesses to thrive despite cyclical challenges. For investors with a disciplined, long-term approach, this represents a compelling growth opportunity.While geopolitical tensions and trade-related uncertainties do create short-term volatility, we believe markets are increasingly resilient to such external shocks.In fact, as things stand today, the macro headwinds have meaningfully eased, triggering a sharp rebound in global markets.Our focus remains firmly on bottom-up stock selection, particularly in domestic economy-facing businesses that are well-positioned to benefit from India's long-term structural growth story.Regardless of external noise, we see strong and sustained opportunities for value creation in this space for years to come.The financial services sector offers a well-diversified investment universe, and our portfolio reflects this breadth through a balanced exposure across several high-conviction subsectors.Currently, the top sub-sectors in the portfolio comprise Wealth Management, Asset Management, Affordable Housing, Stock and Commodity Exchanges and other Capital Market Intermediaries.These segments offer a compelling combination of strong growth visibility, structural under-penetration, and attractive profitability metrics.Our active portfolio management ensures that we stay aligned with emerging opportunities while prudently managing risk.: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)