Shravan Sreenivasula - 28-Sep - Avendus/ICICI (1/2: allocation & equities)

Shravan Sreenivasula (Avendus/ICICI), 28-Sep: asset-allocation discussion notes. Source document: Asset_Allocation_Yesterday_312_PM.pdf. "The manager" below is Shravan Sreenivasula. Part 1 of 2: portfolio framework, indicative allocation, equity views (India, mid/small caps, US, EM, Europe, Korea/Japan), private equity, tactical process and return expectations. Part 2 covers the income side, gold/silver and liquidity. ## Portfolio framework - Use a **Total Portfolio Approach**, grouping everything into only two buckets: **Growth** and **Income**. - A balanced starting point is approximately **50% Growth and 50% Income/alternatives**. - Avoid creating too many small asset-allocation categories; manage the portfolio based on total risk, liquidity and return. - Diversification is necessary because the best-performing asset class changes from year to year. - Make large tactical changes only when the valuation “pendulum” reaches an extreme. - The manager believes Indian large-cap valuations currently represent such an extreme. - Formal asset-allocation calls are made quarterly, while the investment team monitors conditions weekly. - Tactical decisions should be forward-looking rather than based only on recent returns. - The three potential sources of portfolio alpha are: the equity-income split, the large-cap versus small/mid-cap tilt, and manager selection. - The stated blended portfolio objective is approximately **12–15% annually**, implying a possible doubling period of roughly six to seven years if achieved. ## Indicative allocation - Approximately **50% of the portfolio** may be allocated to equity and other growth assets. - Within listed equity, the normal split is approximately **90% domestic and 10% international**. - This translates to an indicative starting allocation of about **45% domestic equity and 5% international equity** in the overall portfolio. - Private equity may represent approximately **5–10% of the growth bucket**, rather than 5–10% of the total portfolio. - The manager described the 50% income side as approximately **20% REITs/InvIT-type assets, 20% SIFs and 10% deposits or tax-efficient structures**. - Gold has a separate strategic role of approximately **10%**, although the transcript is unclear about whether it sits inside or alongside the 50/50 structure. - Silver is opportunistic rather than a mandatory permanent allocation. - An alternative diversified construction mentioned in the discussion would limit any single major risk exposure to around 35%, but this was an illustrative framework rather than the principal model. ## Indian equity - The strongest current tactical call is to **overweight Indian large caps**. - The manager believes the Nifty 100 is at its cheapest relative valuation versus small- and mid-caps in approximately eight years. - The preferred large-cap range is approximately **40–75% of domestic equity**. - The current overweight position is around **60–70% of domestic equity in large caps**. - Conservative portfolios may take large caps toward 75%, but the manager generally would not exceed that level. - A neutral large-cap position appears to be around 50–60%. - If the view turns negative, large-cap exposure might be reduced toward 50%, rather than removed entirely. - The overweight is based on relative valuation, extended underperformance and unusually negative investor sentiment. - Several large companies have delivered negligible returns for years, creating what the manager sees as “peak pessimism.” - He views this lack of investor interest as a contrarian buying opportunity. - The decline from roughly 26,000 to 23,000 in the Nifty was treated as a deployment opportunity. - The manager stated that capital was added materially during the earlier correction from approximately 25,000 through 24,000 toward 23,000. - He cited approximately 18 times trailing earnings as an important historical support area. - He also compared the long consolidation following the October 2021 peak with the extended recovery period after the Global Financial Crisis. - His preferred implementation is through large-cap and high-quality flexi-cap managers. - He expects good active managers to potentially generate around 2–4% alpha, although that is an objective rather than an assured outcome. ## Mid- and small-caps - Broad small- and mid-cap exposure should currently be **underweight** relative to large caps. - The manager cited valuations of approximately 70–100 times earnings in parts of this universe. - He believes popular narratives and “stories” have moved ahead of underlying fundamentals. - Small- and mid-cap indices had corrected less than the Nifty in the cited period, suggesting that their relative valuation excess had not fully unwound. - Recent outperformance should not be interpreted automatically as a favourable entry point. - The manager does not recommend eliminating all small- and mid-cap exposure. - Exposure should be selective and based on earnings, valuations and company-specific developments. - High-quality flexi-cap managers are preferred over pure small- or mid-cap category funds. - Investors should examine the actual underlying market-cap exposure of each fund rather than relying only on the scheme label. - Existing small/mid exposure should be reduced or redirected gradually rather than necessarily exited indiscriminately. ## US equity - The manager is **overweight US equities** because he believes economic and corporate growth remain strong. - His US call is broader than an AI or Nasdaq call. - He prefers exposure to **non-AI and broader US companies**, rather than relying exclusively on crowded mega-cap AI names. - Negative AI-related news had not broken the Nasdaq trend, illustrating that momentum can remain powerful despite valuation or sentiment concerns. - The message was not necessarily to short AI; it was to avoid making AI concentration the entire international strategy. - Broad US participation offers exposure to American growth while reducing dependence on a narrow technology cohort. ## Emerging markets - The manager is positive on emerging markets. - The main thesis cited is the gradual **de-dollarisation** of global trade and reserves. - Broad, diversified emerging-market exposure is preferred. - Narrow country or index bets are not preferred as the primary implementation. - The opportunity should be expressed through a broad theme rather than by chasing one recently successful market. ## Europe - The outlook on Europe is improving. - The manager expects higher defence spending and other GDP-linked fiscal expenditure to stimulate economic activity. - Europe is a positive but more measured allocation than the high-conviction Indian large-cap call. - Exposure should be broad and selective rather than concentrated in one narrow European theme. ## Korea, Japan and narrow markets - Markets such as Korea and Japan had experienced very strong recent performance. - The manager considered some of this performance potentially overdone. - The tactical instruction was to **wait rather than chase** after a large move. - Narrow Hong Kong- or single-index-type positions were also not preferred. - The international portfolio should not rotate merely toward whichever market has most recently performed best. ## Private equity - Private equity belongs in the Growth bucket. - The indicative allocation is approximately **5–10% of the growth bucket**, equivalent to around 2.5–5% of the overall portfolio under a 50/50 framework. - Capital is normally called over several years rather than fully at the beginning. - The manager does not favour holding the entire undrawn commitment in low-yield cash throughout that period. - He prefers backing future calls with assets that can be liquidated quickly. - A liquidity surplus should always be maintained above expected private-market obligations. - Capital-call reserves may include cash, gold, listed securities or equity-savings funds, depending on the timing and risk involved. - Volatile equity should not be counted one-for-one against a capital call due soon. - The closer the obligation, the safer and more liquid its backing asset should be. - The portfolio should avoid being forced to sell risky assets during a simultaneous market drawdown and capital call. ## Tactical process - The manager does not advocate continuous tactical trading. - Major changes are made only when valuations or sentiment become extreme. - Tactical ranges are preferable to binary all-in or all-out decisions. - Market corrections are viewed as buying opportunities when the long-term thesis remains intact. - Geopolitical developments, tariffs and trade arrangements are monitored as forward-looking catalysts. - A tariff-driven sell-off could potentially be treated as a buying opportunity if the underlying impact is expected to be temporary. - The manager is watching developments involving the US, India, Israel and Iran. - These macro considerations influence timing but do not replace bottom-up valuation analysis. - Portfolio decisions should distinguish price appreciation from actual fundamental improvement. - Assets that have risen mainly through multiple expansion should be treated cautiously. - Recent performance alone should never be the reason for increasing an allocation. ## Return expectations - Domestic-equity beta was estimated at approximately **11–13%**. - Good manager selection may potentially add around 2%, producing an estimated **13–15% equity return**. - Exceptional active managers were discussed as possibly generating 3–4% alpha, but this is not guaranteed. - REIT/InvIT-type income was estimated at approximately **8–9% post-tax** when purchased correctly. - SIFs were estimated at approximately **10% pre-tax and 8.5% post-tax**. - Gold’s long-term expected return was discussed at approximately 10%. - A 10% return from the overall income portfolio was described as an ambitious but strong result. - Combining approximately 15% from the growth side and 10% from the income side supports a rough blended expectation of 12–15%. - These figures are planning assumptions and should not be treated as promised returns. - Taxes, fees, entry valuation, manager performance and liquidity costs can materially reduce realised returns.