Largecap funds no longer the best bet? Edelweiss CIO Trideep Bhattacharya explains why flexicaps may win now
Are largecap funds losing their edge? Edelweiss CIO Trideep Bhattacharya argues that structural market share losses to nimbler competitors mean traditional giants are no longer
Are largecap funds losing their edge? Edelweiss CIO Trideep Bhattacharya argues that structural market share losses to nimbler competitors mean traditional giants are no longer the ultimate safe havens. Instead, he points to flexicap and midcap funds as the optimal vehicle for modern wealth creation, blending stable leaders with high-growth challengers.Edited excerpts from a chat:What is your broad outlook on IT services as a sector, and how are you positioned within IT? Have you been buying the dip we've seen over the last six months?Not yet. My thinking on Indian IT is that it's in the middle of a technology change. The Indian IT services sector has gone through multiple such changes before, starting with Y2K, followed by package implementation, followed by cloud, and AI is the latest one, probably the biggest one, and the sector is in transition.My sense is that this transition will take about two to four quarters to complete, so we don't buy into the early dip. We want to get gradually closer to the end of that transition before nibbling in. Our starting point is that we're underweight IT services, not that we don't own any, but we're underweight, and as we get more clarity on this shift coming to an end, we'd be inclined to increase our position. So, not yet.And what's your overall positioning in banks, particularly private banks?Financials is a sector where we're meaningfully overweight across our portfolios. We've been talking about this for a while. We also launched a financial services fund earlier this year. Our thinking has been that credit growth in India has bottomed out. It bottomed around September to December last year at 8% to 10%. It's currently hovering around 15% to 16%, and my sense is that if it goes to plan, it will be somewhere around 18% to 20% by the back half of this year. That has a strong positive bearing on financials as a sector.While this is a top-line tailwind for financials, from a margin standpoint we need to watch which part of financials benefits, because there's an inflation angle that also brings in an interest rate angle.
But net-net, we're positive on financials as a sector, and within financials, we particularly like private sector banks. We think they're net winners of demand trends, and valuations are reasonable.Over the last two to three years, investors who have been seeking safety in largecaps have been disappointed. Are largecaps no longer safe?I wouldn't go as far as that. But let me say that we've been a big proponent of mid and small caps over the last couple of years. Part of that argument, particularly for mid caps, is that some of the business models in mid caps are challengers to the incumbent business models that dominate large caps. In the consumption basket, the overall pattern of consumption in India is changing, and as a result some of these could see structural market share loss, with the gainers mostly being smaller companies in mid, small, or unlisted categories.That's why we've favoured a flexicap strategy over a largecap strategy. Some largecap business models are seeing structural market share losses, which can be complemented by mid and small cap stocks that make up a good portfolio from a wealth creation standpoint. So for the last couple of years we've suggested flexicap over largecap, for that exact reason, and now even more so.In that context, what would you recommend to someone who’s owning a largecap fund?Generic advice is difficult, since it depends on overall asset allocation and where you stand on profit or loss. But putting that aside, if I were starting with a clean slate today and choosing between a largecap fund and a flexicap fund, my choice would be flexicap over largecap.Generally, between the two, we've been recommending a combination of flexicap and midcap as a fertile combination to cover the entire market.Why do you say that?Because a flexicap fund, including ours, is generally largecap dominated, more than 60%. Ours is positioned at roughly 55% to 75% largecap at different points in time, with the rest in mid and small cap.
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