Sep 21, 2023
• The trend in PSUs and business-to-government (B2G) sectors like defence and railways has surprised the investing crowd.
• It’s essential to realise the importance of “newness” in investing.
• Investors have traditionally ignored the newness factor in emerging themes.
• History is replete with examples of how the evolution of humankind has happened because of new, innovative trends, and technologies.
• Newness matters not only at the macro level but also at micro level.
The headline indices saw some weakness in the August, declining 2.5%, while the mid and small-cap indices continued to rally, with gains of 3.5% to 4.6%. The continued strength in mid and small-cap indices was partly led by sustained rerating in PSUs across the board.
The trend in PSUs and business-to-government (B2G) sectors like defence and railways has surprised the investing crowd. These sectors were traditionally considered unfit for investments because of extreme business and political volatility. Their earnings were always lumpy, their return ratios were low, and they were not accorded good valuations even when they made considerable profits. Many investors who invested in these companies in the past paid the price in terms of opportunity cost as the stock prices never moved meaningfully while the other parts of the market kept moving.
However, there has been a significant change in the past few years as the government became quite serious about building and improving the country’s infrastructure and promoting domestic defence manufacturing. Due to the government’s focus and significant order inflows, companies in these sectors saw significant valuation rerating, delivering multi-bagger returns in a very compressed time. Many investors missed the trend because of a lack of commensurate pick up in fundamentals and earnings delivery.
Several investors also shun these sectors as a policy to reduce portfolio volatility. They don’t change their stance even when the conditions change, which might lead to short-term underperformance but this approach is good for long-term portfolio compounding because it’s vital to stick to the circle of competence in long-term investing.
The story above has one important takeaway. It’s essential to realise the importance of “newness” in investing. The biggest wealth gets created in the market when investors are willing to bet on something new. That something could be a new industry trend, a new sector, a new listed company, a new product or a new management. Even when investors stick to their circle of competence in sector selection, they must never overlook the newness factor in companies or sectors they pursue.
History is replete with examples of how the evolution of humankind has been driven by new, innovative trends, and technologies. Those who embrace this newness succeed immensely, and those who ignore this are often left behind.
Here are some examples of how “newness” has defined stock returns in the past three decades.
The above table demonstrates only a few large-scale developments that have led to the growth in business and stock prices. Several other developments have made the economy much more efficient and passed many wealth-creation opportunities.
As mentioned earlier, newness matters not only at the macro level but also at micro level. This means new factors within industries and businesses make a significant difference and sometimes create massive moats for companies to grow sustainably.
Here are a few examples of how newness has helped businesses at the micro level.
These are, again, only a few examples of wealth creation where the companies brought something new to the fore. It obviously comes with a disclaimer that not all new things tried at the micro level succeed. There is a very high failure rate in this space, and therefore, investors need to get on the bandwagon only when the newness starts getting monetised sustainably by the companies.
Newness in Sanctum portfolio
At Sanctum, we understand that betting on something new is always fraught with risk. Therefore, we try to strike a balance between holding established businesses and businesses with a newness element. Our large-cap exposure, which is over 50%, provides stability to the portfolio and consists of companies that have established businesses. Then there is the balance 48% in mid and small-cap exposure, where we have a decent degree of newness.
Here is a table detailing the newness profile of some of our portfolio companies.
Any new initiative requires capable executors at the top who can put the plan into action and can navigate skilfully when the boat starts rocking. This is why we emphasise the track record of people at the helm of these companies. Business outcomes are generally phenomenal when a great idea meets a great executor.
Our focus on newness and various other factors has helped us deliver stable returns in the Titans portfolio over the years.
Here is how our flagship portfolios have done over time.
The detailed performance can be viewed and compared with other PMS performance at this webpage.
Performance is calculated using Time Weighted Returns, net of fees and expenses. Returns over one year are compounded annually; returns for less than one year are absolute. Please note that SEBI does not verify the performance information provided above. Please note that past performance is not a guarantee of future performance.