SBI Flexi Cap Fund_ Why the New Approach Works

[on-hold music] Hi, everyone. Thanks very much for joining in. I have with me Anup Upadhyay. He's the fund manager of the SBI Flexi Cap Fund. And, you know, a lot of you would think that he's only been managing the fund for a year, but actually he's had a much longer association with SBI Funds Management. And, um, Anup to start off with, you know, in this one year that you've been back and you've taken over the Flexi Cap Fund, how have you revitalized, so to say, uh, the portfolio and the strategy?

Sure. So in twenty twenty-four, the management decided to do a thorough review of the portfolio construction process, the performance of the scheme, and, uh, the way we, um, manage the portfolio. And the objective of the review was to transform Flexi Cap into a consistently winning portfolio. So, uh, as an outcome of that review, we identified, uh, three specific ways of improving the performance of the portfolio and the process of constructing the portfolio. So the first change, uh, that we made was that we decided to take more active sector bets. So earlier we were running a largely sector neutral, uh, stance, where we would keep active weights on specific sectors within a tight band of plus or minus two percent. Now, this was restricting the fund from generating enough attribution, enough excess returns from, uh, sector calls. The second change that, uh, we made was to prune the fence sitters in the portfolio. So we, uh... the portfolio was over-diversified, and we cut the number of positions, the stocks in the portfolio, from around one hundred and six to roughly sixty stocks. So this allows us to express our best ideas more confidently, and it allows us to give them enough space in the portfolio so that when they do well, it is... it becomes visible in portfolio's, uh, return. And the third change, uh, that was made was that, uh, from a consultative portfolio construction process, where the entire, uh, fifteen-member strong analyst team, uh, would, uh, participate every single time into portfolio construction process, we, uh, shifted to a two-member fund management team. So now Dinesh Balachandran and I, uh, construct and, uh, run the portfolio. Apart from this, uh, we have also very sharply defined, uh, our stock selection, uh, strategy for the fund. So we now, uh, look to buy only those stocks that fit one of three, uh, buckets. The first bucket is that of stocks that are champions. Now, uh, champions are not those stocks that have delivered the best returns over the last three years or five years. These are those companies that operate in a very large, uh, industry, industry with a very large market size. These are companies that have delivered very high earnings growth, at least five percent faster than the broader market, and companies that are also able to generate a high return on capital, so at least five percent above the cost of, uh, capital that they have. So this form the first bucket, and we want this bucket to be at least, say, forty percent or one-third of the portfolio. The second bucket is that of, uh, stocks that are seeing a positive change at the margin. So that positive change at the margin might reflect in the form of a change in management team or an improvement in key operating metrics for that business or a rerating in, uh, uh, uh, valuation multiple because the quality of business is, uh, changing.

The third bucket is that of cheap or bargain stocks. Now, everyone wants to buy cheap stocks and bargain stocks in their own way, but we define cheapness in a very specific way here. We look for those stocks that are trading close to their re-- uh, the cost of replacing their assets or close to their liquidation value. We also, uh, call something that has got a very high free cash flow yield as a cheap stock here.

Okay.

Some... A stock that is trading way below its, uh, average, uh, uh, valuation multiple, uh, compared to, say, its five-year or ten-year band would also, uh, fit here. So these are the three, uh, kinds of stocks that we buy in the portfolio. So this stock selection strategy is now, uh, very sharply defined, and we, uh, track what percentage of the portfolio is allocated to which, uh, of these strategies. 

So it allows your conviction to also flow through, uh, you know, in its truest sense, uh, into the portfolio, right? Okay. Um, you know, Anup, I don't know why, but, uh, there is this, um, uh, you know, expectation, or rather I should say there is this, uh, talk that this is a more defensive-oriented fund. You know, the orientation is defensive. Uh, but what I understand from what you're talking is that it is a growth, uh, kind of a fund, right? So how would you really define it? And, you know, given that, uh, if I'm correct that, you know, it is indeed growth-oriented, how well is it positioned for twenty twenty-six, the opportunities that are to come?

Right. So this is a feedback that we often hear, that this is a portfolio that does well only when the market, uh, corrects and not when the market rises. And we feel that, uh, uh, that's not the case, uh, definitely not with the revamped, uh, portfolio. So the mandate for a Flexi Cap fund is to... uh, is not to stick to any particular, uh, sort of style factor like value or growth. And here, uh, the current portfolio is structured in a way that

The businesses would do well 

When, uh, the economy recovers and when it... as it accelerates. So we have an overweight of close to seven percent on financial services- 

A good percentage of this overweight comes from, uh, lenders, so they do well when the economy, uh, is growing fast. We are overweight on the auto sector, again, a sector that is pro-cyclical and that does well when the, uh, economy is doing well. We are also overweight on, uh, cement and metals. These two sectors are also, uh, sort of pro-cyclical.

Mm. 

So the sector allocation would tell anyone that this is a portfolio that has been constructed to benefit from a rising economy, that has been constructed to own a disproportionate return when the, as the Indian economy accelerates.

Mm. 

So I would exce- expect earnings of the portfolio to grow faster than the broader market, and therefore, that should also reflect in stock returns.

Mm. And, um, you know, Anup, uh, there have been some concerns, uh, that were raised about the performance. Uh, but if one goes through, uh, the performance of the fund since you've been managing it, so, say, in seven of the last eleven months you would find that, uh, you know, the fund, uh, ranks in either the first or the second quartile, which is pretty good, right? I would say. Um, how confident are you on i- improving this even further?

So we feel that n- the outcomes that we have in life or in portfolio management are a result of, uh, the process or the choices that we make, and we have a consistent and clearly defined process now. We are sticking to this process every month. We are, uh, sticking to that process every time we decide on purchasing a stock or selling a stock. So, uh, and the process is something that I talked about earlier-

Yeah 

... about, uh, having sharply defined, uh, stock selection, uh, uh, buckets, about, uh, expressing, uh, sort of, uh, uh, active sector m- bets and, uh, through having a diversified, but yet, uh, a sort of, uh, concentrated fund. So we feel that, uh, because the process is, uh, well set and it's rooted in fundamental, uh, performance, the outcome is also going to be consistent, and we would expect the portfolio to deliver, consistently deliver, uh, good returns.

And finally, Anup, uh, the question that is, uh, you know, on a lot of people's minds, which is that, uh, we can't operate in isolation, right? So, uh, we live and function in an industry, and actually, we're not the only flexi cap fund. There are others. Uh, but how would you say that the SBI Flexi Cap Fund, uh, is, um, uh, you know, placed against the peer set, or what would you say, uh, are the advantages?

So, uh,

I feel that, uh, the first, uh, uh, say, when any investor, 

uh, works on, uh, selecting the schemes that you are working, uh, th- th- that they want to select, 

The usual process that investors, uh, follow is to look at trailing returns of, uh, different schemes in the category. And usually the best performing schemes, the top decile schemes, are preferred by most investors, uh, and, uh, partners. I feel that this is

A losing strategy. There are multiple strategy, uh, studies that have been done over the last, uh, three decades, starting from mid-'90s and, uh, sort of, uh, another study that was done in 2015 by IIM Bangalore, which show that looking or chasing trailing returns 

Leads to underperformance when one is selecting, uh, mutual fund schemes. So I feel that this is the first factor that investors need to keep in mind, that, uh, we shouldn't only be trying to optimize trailing returns on the schemes. Secondly, uh, investors n- need to select schemes based on the investing philosophy that the, uh, fund manager has because, uh, times change, economic conditions change, and the fortunes of companies change. What stays constant and what needs to stay constant is the way stocks get selected and the way the portfolio gets constructed. So because SBI Flexi Cap has a clearly defined, uh, strategy and process, I feel that this should give a lot of comfort to investors that this is not a fund that is being, only being run based on the whims or fancies of a fund manager. There is a clearly defined process. There is a clearly defined investing philosophy. There is an entire team of risk management professionals who are analyzing the, uh, portfolio on a live basis every, uh, second of the market. So that is something that I feel, uh, is extremely important for long-term, uh, performance and success of any portfolio.

And, uh, Anup, uh, you know, it's also a smaller fund, right? It's half the size of the largest fund in the category, which would, I mean, I would assume make it more nimble and agile.

Right. I feel that, uh, one of the outcomes of, uh, chasing trailing returns is that a lot of fund flows into a select set of schemes, and they eventually become extremely large. And beyond a certain size, that large size leads to slow decision-making and slow implementation of changes in the portfolio. So the relative small size of SBI Flexi Cap is also an, an advantage that should be strongly considered by investors.

And you would say this is a scheme for everybody, right? There's nobody who cannot have the flexi cap in their portfolio.

Yeah, I strongly feel that every investor needs to have some equity, uh, in their portfolio, and in every equity portfolio there should be, uh, a flexi cap fund. And I strongly feel that SBI Flexi Cap is one of those schemes that should be an integral part of every, uh, port- investor's portfolio because it meets the risk/reward, uh, uh, needs of majority of investors. This is a fund that invests across market cap buckets. It invests across industries. It doesn't have a style, uh, bias or a, a style, uh, philosophy. So this, uh, flexibility that the style has makes it suitable for every investor.

Yeah, and a flexi cap, uh, in any case is the only category of, uh, equity mutual funds where the fund manager can actually play out their entire, uh, investment strategy, right? Because there are no caps, like you said, there are no sector cap, no, uh, uh, you know, uh, large cap, mid cap sort of allocations. So your full strategy can play out only in this flexi cap fund. Anup, thank you so much for joining in and answering all these questions, which have been coming in from all of our investors, and we wish you all the very best for 2026.

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