Jio BlackRock AMC believes the West Asia conflict has delayed India's corporate earnings recovery cycle by one to two quarters.
In the Mint Money Guru series, chief investment officer Rishi Kohli explains why stock selection, sector allocation and factor investing are three distinct sources of alpha — and why combining them can make portfolios more resilient.
Edited excerpts:
How are your active equity schemes navigating volatility? Does a higher allocation to banks and IT signal expectations of an index rebound?
Our FlexiCap approach is benchmark-aware. For every stock, we operate within a defined band around its weight in the Nifty 500. For example, if a stock has an 8% benchmark weight, our allocation can range between 5% and 11%. So sectors with large benchmark representation, such as banking and IT, will naturally remain part of the portfolio.
The objective is to generate stock-specific alpha rather than make aggressive sector calls. This is not meant to be a sectoral strategy. That distinction matters because our sector rotation fund is specifically designed to take active calls on sectors and subsectors. In that strategy, an overweight versus the benchmark reflects a bullish stance, while an underweight signals a more cautious view.
Globally, our research points to three distinct and complementary sources of alpha: stock selection, sector allocation, and factor or style exposure. In India, investors have traditionally focused more on stock selection, while sector and factor investing are relatively newer concepts.
Just as investors diversify across equities, bonds and commodities, we believe diversification can also happen within equities strategies— through stock alpha, sector alpha and factor alpha. Over time, that is the direction we want to build towards.
Given the relatively short period since the FlexiCap fund launched, the most meaningful metric currently is alpha volatility, because that data is available daily and is something we said from the outset we wanted to keep low. So far, alpha volatility during the live period has remained relatively controlled compared with many peers in the category, which gives us confidence in the long-term potential of the strategy.
Does market capitalization also play a role?
Not directly. In the future, we may launch products that explicitly look at market capitalization before deciding allocations. The current products are not doing that, it is looking at stock specific alpha and then if it's a smallcap coming in, it's coming in because of that approach. So, the market cap allocation is an outcome of the process.
What signals are BlackRock’s technology infrastructure showing currently?
Some forms of alternative data have been working well and we are continuing to test new data sources in our models. More sentiment-driven signals have also performed relatively well, while traditional signals such as value and momentum have struggled in the recent volatility.
Momentum, for example, has performed poorly over the last one-and-a-half years after doing very well for two to three years before that. Every factor goes through cycles. Right now, the environment is tricky because sentiment is moving in different directions.
Against this backdrop, a multi-signal approach works better. That is broadly how we think about it, although our portfolio construction is different from strategies that aggressively rotate between factors such as momentum and value depending on market conditions. Those approaches can involve taking higher active risk. The more active bets you take, the higher your active risk becomes.
Our focus is on keeping alpha volatility contained and improving the information ratio (which measures excess returns over a benchmark relative to the volatility of those returns).
Is the shift in distribution strategy from a direct approach primarily aimed at SIFs?
It is a planned move. Since the beginning, we have said we would be digital-first, not digital-only or direct-only. The first nine to 12 months were always meant to focus on understanding the digital DNA of the business. That period helped us identify what are the gaps and where distribution adds value.
For more sophisticated products, distribution makes more sense, while simpler products may not need it. So while we are starting with SIFs, the approach will eventually extend to other products as well.
Even strategies such as our systematic active equity approach in FlexiCap, or factor rotation models we may introduce later, are not always easy for retail investors to fully understand.
What macro risks are you watching currently that could affect markets?
The war and oil prices are obviously top of mind for everyone.
In our view, the earnings improvement cycle that appeared to be building one or two quarters ago has now been pushed back by one to two quarters. But we still expect earnings momentum to return over the next couple of quarters. Once that happens, markets should move onto a smoother path again.
What would you advise a salaried professional with no financial advisor and a moderate risk appetite?
A simple starting point could be curated combinations of three to five funds packaged according to different risk profiles, something a few fund houses are already offering.
Fintech platforms are also beginning to provide more tailored advice and portfolio granularity, which can be the next step for investors looking for more detail.
Broadly, investors need a better understanding of how stock alpha, sector alpha and factor alpha can complement one another within a portfolio. That understanding is still limited, even among sophisticated investors, let alone retail participants. Globally, however, we have seen that combining these approaches can add meaningful long-term value.