ICICI Pru PMS growth at 21% YoY: Anand Shah on what he’s buying and avoiding

He also prefers value over growth, continues to favour mid- and small-cap stocks for stock-picking opportunities, and has begun adding selectively to IT after staying away earlier in the year. Q. Your strategies do not follow a rigid large-, mid- or small-cap split. How are you positioned today? Our focus is on companies that create wealth, not market capitalisation. Over three, five or seven years, it comes down to business quality, management capability and valuation.

Several large-caps remain attractive. But a greater proportion of mid- and small-caps appear expensive. India’s market breadth is a strength. Opportunities exist across IT, financials, banks, NBFCs, oil and gas, power, electricals and metals. The question is not whether to own large-, mid- or small-caps, but which companies to own within each. Across our PMS strategies, the preference for manufacturing over consumption and value over growth remains intact.

Mid- and small-cap strategies have more breadth and a higher representation of manufacturing. Even in our flexicap funds, we are overweight mid- and small-caps and manufacturing. Our small-cap strategy has therefore been our best-performing strategy. Q. What is your portfolio stance on themes? We are overweight manufacturing and underweight consumption. With interest rates edging higher, we are also overweight value over growth.

Stocks trading at reasonable valuations are likely to outperform businesses priced for growth. Q. What has changed in your portfolios since the start of the year? We have maintained our preference for manufacturing over consumption for some time. The past nine months have only strengthened that conviction. There have been no major changes. We remain underweight consumer staples, with very limited exposure.

We are also underweight pharmaceuticals, though we retain some holdings. Q. You had zero IT exposure at the start of the year. What changed? We began adding IT only over the past couple of quarters. Valuations have corrected significantly and market expectations have moderated. The initial negative impact of AI is also beginning to show in reported numbers. Over the longer term, AI could become a tailwind as corporates adopt the technology and need integration services.

But that opportunity will take time. We are still underweight IT—just less underweight than at the start of the year. Q. How does sentiment compare with the start of the year, amid US tariff worries and the EU and UK trade deals? Sentiment has improved significantly. Several sectors and companies have performed well despite a challenging environment. Many textile stocks have gained 30–50% year to date, even as the broader market stayed largely subdued.

Sentiment among exporting companies, especially in manufacturing, is considerably better. Some sectors will benefit from the UK and EU trade deals over the next 12 months. Manufacturing should also gain from import substitution. The rupee has depreciated around 10% year to date and 15–16% against the yuan over the past 12 months. That gives domestic manufacturers a meaningful competitive advantage.

In contrast, sentiment towards consumption has deteriorated. Recent inflation, driven by food and fuel, is putting additional pressure on household budgets. Q. Does the rupee’s fall make you wary of any sector? Rupee depreciation is part of the solution, not the problem. India consumes more than it produces. Given our relatively low labour costs, we should manufacture more and import less. We face cost disadvantages versus China in logistics and power.

A weaker rupee provides a cushion. It is not a strategy in itself, but it offers temporary support to domestic manufacturing. At the same time, a weaker rupee acts as a tax on domestic consumption. That reinforces our preference for manufacturing stocks. We were comfortable with this positioning at the start of the year. Developments since then have made us even more comfortable. Q. What do you expect from the current earnings season?

We are seeing strong traction across manufacturing, particularly in metals, textiles and chemicals. Within chemicals, there are early signs of improvement in spreads and margins. This is partly driven by China’s anti-involution push. Select chemicals are also seeing price increases. Broadly, manufacturing companies should deliver considerably stronger earnings than consumption companies. We expect the relative performance to improve further through the year.

Q. Which holdings look bruised now but still carry conviction? There are several. Retailing is experiencing softness. Yet organised retailers continue to gain market share from the unorganised segment. Organised retail is growing faster than the broader consumption sector. That is a structural advantage. In my experience, we have made more money in stocks that initially went through a difficult phase.

Such periods give us time to reassess the thesis. If it remains intact, we add at more attractive prices. Metals and, more recently, textiles are good examples. We have been adding to these sectors over the past three to four years, even when they were not performing. This year, that positioning has paid off. From the September 2024 peak to now, the broader market is down around 5%. The metal sector is up approximately 8%.

We do not go above 20% in any sector. In metals, our allocation is around 15%. Q. How aggressive is your churn? When do you trim a small- or mid-cap holding? We have very little churn and generally follow a buy-and-hold approach. We use an internal framework called BMV—Business, Management and Valuation. These three criteria must be satisfied before we invest. They also guide selling decisions. We exit if the business deteriorates or a management change leads to a strategic shift we disagree with.

More often, the trigger is valuation, when a stock becomes very expensive. Q. Private banks have seen governance issues and leadership changes this year. How do you view the sector? From an earnings perspective, there has generally been no slippage. The pressure has largely been on the multiple rather than earnings. The banking sector is operating with very low NPAs, reasonably healthy margins and stable-to-declining provision costs.

Profit growth has been strong across both private and public sector banks. The key issue is leadership transition. Several banks are going through management changes. Our assessment of these transitions will influence whether we increase or reduce positions. Domestic investors are buying while foreign investors are selling. Significant domestic flows are entering mid- and small-cap funds that cannot invest in large banks by mandate.

Both state-owned and private banks have corrected from a valuation perspective. Q. India has no direct role in the AI build-out. How do you see its position? India currently has a limited role in both software and semiconductor manufacturing. Over time, it could play a role in integrating AI into businesses. But that opportunity is likely to emerge later. The process has begun. However, benefits are coming through alongside considerable deflationary pressure, as clients ask IT companies to pass on cost savings.

Much of the investment flowing into Korea and Taiwan is directed at semiconductor manufacturing. In the US, gains have come from companies such as Nvidia, Intel and AMD, along with power utilities and power-equipment makers. India does not currently have a significant direct investment opportunity in AI infrastructure. At the same time, its IT services industry is exposed to the disruption AI could bring.

Q. Where does your consumption exposure sit? Our flagship long-only AIF, Alpha Opportunities, is predominantly invested in manufacturing. It also has selective exposure to financial services and consumer services. Consumer services include telecom, organised retail, airlines and other services people consume repeatedly. As per capita income rises, products tend to account for a smaller share of overall consumption.

Services become increasingly important. Q. How do you view SEBI’s PMS proposals and the mutual-fund-only PMS route? We view the proposals positively. They give us more options to offer investors and make our products more competitive. We are also positive about the proposed mutual-fund-only PMS framework. We already offer multi-manager solutions through funds of mutual funds. Under the proposed route, we would select underlying mutual funds using quantitative and fundamental analysis.

Investors would benefit from direct expense ratios and professional fund selection. Q. PMS growth has been flat even on a mark-to-market basis. Why? Is PMS growing at the expense of mutual funds? PMS caters primarily to high-net-worth and ultra-high-net-worth investors, who tend to be more informed. Mutual fund inflows are more systematic. SIP investors are generally less perturbed by news flow. Sentiment therefore has a much stronger influence on PMS flows.

Our internal view is that it is not mutual funds versus PMS. Mutual funds meet one set of investor needs. PMS addresses another by combining an investment product with more personalised service. Over the longer term, both industries are expanding. Q. Investor appetite for IPOs has tapered and valuations still look high. How do you assess an IPO from a company that is deeply loss-making? Investors should exercise considerable caution.

There is a widespread perception that an IPO is a sure-shot way to make money on listing. We find considerably more value in the listed market than in the IPO segment. IPOs are often priced excessively because demand is strong. We evaluate IPOs using the same BMV framework we apply to the secondary market. We are willing to invest in loss-making listed companies if there is a clearly defined path to profitability.

We distinguish between businesses moving from zero to one and those moving from one to ten. In the first case, the business model is still evolving and we generally avoid it. In the second, the model is established but still scaling. What matters is an established business model, positive contribution margins and a clear path to profitability with scale. Q. Auto companies are investing in EVs. Is that diversification?

We look at whether a sector is consolidating or fragmenting. Significant wealth creation often occurs when a sector is consolidating. The paints industry is a good example. The number of players has increased from four to eight. There has been little wealth creation over the last four years. Unrelated diversification is a red flag. Expanding into adjacent areas that strengthen an existing competitive advantage is acceptable. Auto companies investing in EVs is not diversification. It is survival. They do not have a choice.