This weekly note is from the research team to briefly describe how we think about market cap positioning at Itus. While we are a multi-cap fund, our small cap exposure has not exceeded 25% through the last 6+ years of running the fund. This is aligned with the risk management philosophy to ensure that we never sacrifice liquidity in the fund at any time.
Internally, our risk guidelines created ensure that our position sizing reflect the ability of the fund management team to exit the positions without causing a friction cost at any time.
Similarly, when we go down the market cap curve, our analyst team have two expectations – a higher growth rate in the companies and an incremental RoE which is growing. This is one of the important reasons our small cap exposure was low between FY17 and FY20. (Fig 1 shows the RoE of the small cap index to illustrate the same).
Our small cap exposure increased when we saw cash-flow based earnings grow which resulted in incremental RoE.
Fig 1: RoE of the Small Cap Index (Historical)
The second and most important constituent of our positioning is valuation comfort. We expect a higher earnings yield as analysts when we go down the market cap curve. Today, our weighted average market cap of the portfolio is at 80,450 Cr. We have been reducing the risk in the portfolio across mid and small caps over the last 2 months alongside increasing our cash balance to reflect our valuation comfort.
The below explains our breakdown and transition over time. Today, our incremental allocation of capital continues to be in large caps, where we find relative valuation comfort.
Fig 2: Market cap allocation across time
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We look forward to delving into more engaging subjects that will enrich your interactions with clients. Have a wonderful weekend in the meantime.
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