This Best-Performing Portfolio Manager Says Risk-Reward Tradeoff Not Favourable Yet 

2Point2 Capital Advisors LLP is sitting on 40 percent cash in newer portfolios as the risk-reward ratio isn’t favourable yet, Amit Mantri, founder of the portfolio management firm, told BloombergQuint over the phone. That’s more than three times the 12-13 percent cash in its aggregate portfolio.

Quality mid-cap companies haven’t become cheap, said Mantri who is known for pointing to red flags in balance sheets. If the mid-cap valuations were extreme ahead of the liquidity crisis, they have turned expensive, he said. “Good mid-cap companies with sound business models, high return on equity, cash flows and market leader in their segments are still richly valued.”

But, according to Mantri, the valuation of 2Point2 Capital’s portfolio isn’t rich. It trades at a median of 17 times its 12-month trailing earnings, he said. Operating earnings is expected to be 15-18 percent, leading to similar stock returns, he said.

2Point2 Capital Advisors returned 15.4 percent gains in the last three months, the highest among portfolio managers and more than twice the 7 percent returned by Nifty Midcap 100. That comes as broader markets started to recover after a global trade war, a slowing economy and a liquidity crunch drove investors to heavyweight stocks in much of 2019, pushing benchmarks to record highs.

The firm’s Rs 440 crore is invested in 12 companies, with mid and small caps contributing more than 80 percent. The stocks, according to him, performed well on the back of better earnings and sustainable business models.

The portfolio companies reported 20 percent year-on-year growth in the profit before tax in the quarter ended December, he said. While troubles of companies facing governance and operational issues are reflected in their balance sheet as they don’t have a sustainable business model and depend on access to debt, Mantri said some of the midcap businesses with sustainable model are emerging from the impact of liquidity crisis.

2Point2 Capital’s has over 40 percent exposure to small- and mid-cap bank and non-bank lenders, including companies like Muthoot Finance Ltd. and Manappuram Finance Ltd. Gold prices rose during the last few months, leading to a run-up in these stocks, he said.