Kenneth Andrade, founder and chief investment officer, Old Bridge Mutual Fund, is known for his high-conviction stock-picking. In this interview, he explains why he remains constructive on Indian equities, the sectors he is backing and avoiding, and the biggest risks he sees for markets.
Edited excerpts:
Markets have remained broadly range-bound over the past two years. How do you see them evolving from here?
We've essentially been in a sideways market since the highs of September 2024. That's not unusual because earnings growth between 2023 and 2026 has largely remained in the single digits. What is encouraging now is that we're seeing a meaningful revival in earnings, at least with the first-quarter results. By the end of this financial year, I expect earnings growth to move into double digits for the first time in about three years.
A significant driver has been the depreciation of the rupee. This has provided a tailwind for exporters as both volumes and rupee realizations have improved. That has boosted corporate earnings in a way the market hadn't fully factored in earlier.
As a result, I don't see significant downside for markets unless there is a major external event. We could see the market indices flattish to modestly higher. I wouldn't expect exceptionally strong returns. A low double-digit market return appears more realistic, broadly in line with earnings growth.
How are your portfolios positioned today? Which sectors are you overweight on and where are you cautious?
We remain relatively cautious on domestic-facing sectors. In particular, we are underweight banks, lending institutions and parts of the insurance sector. We also have no exposure to IT currently. The domestic economy continues to face headwinds. Per capita income growth hasn't been strong enough to drive a significant consumption revival, while household leverage remains elevated. Rural demand will also depend on the monsoon and agricultural output, so we're cautious about expecting a sharp improvement in disposable incomes.
Within financials, we believe the focus should be on stock selection rather than taking broad sector exposure because we don't expect sector-wide profitability to grow faster than the market.
Our investment approach is fundamentally bottom-up. We prefer companies with stable domestic cash flows that are also expanding internationally and gaining market share overseas. This is why we currently have a positive view on sectors such as pharmaceuticals and automobiles.
Both our Focused Fund and Flexi Cap Fund follow the same investment philosophy. The Old Bridge Focused Fund currently holds around 23 stocks, while the Old Bridge Flexi Cap Fund has approximately 35 holdings.
Why are you avoiding the IT sector despite attractive valuations?
Valuations in IT are probably the most attractive they've been in many years. However, our concern is the lack of earnings visibility. The industry is undergoing significant disruption due to automation and rapid technological change. While valuations look reasonable, we don't yet have enough confidence about long-term growth.
Earlier, these businesses enjoyed steady secular growth. Today, that visibility has reduced considerably. Pricing also remains uncertain, particularly on a constant-currency basis.
Another challenge is the sheer size of Indian IT companies. Many employ between 200,000 and 600,000 people. Pivoting organisations of that scale to entirely new technologies takes time. So while IT remains on our radar because valuations are attractive, we prefer to wait until visibility improves.
Pharmaceuticals remain one of your highest-conviction sectors despite tariff concerns. What's the investment thesis?
India occupies a critical position in the global pharmaceutical supply chain. Whether tariffs exist or not, I don't believe India can be easily replaced. Our strengths lie in manufacturing scale and cost competitiveness. While several companies still lack manufacturing facilities in the US, they have enough time to recalibrate and invest where required.
More importantly, the opportunity extends well beyond the US, Europe and several other international markets remain attractive.
The biggest structural opportunity is the upcoming patent cliff. Between now and roughly 2035, innovative drugs worth nearly $750 billion will lose patent protection. This creates an addressable opportunity of roughly $70 billion for Indian generic pharmaceutical companies. Given India's scale, pricing advantage and manufacturing capabilities, this represents one of the strongest long-term growth opportunities available.
Automobiles are another key portfolio allocation. What's driving your optimism?
Indian automotive companies are steadily building global franchises. In fact, one leading two-wheeler manufacturer recently reported international sales exceeding domestic sales during the quarter. While that may not happen every quarter, it reflects the broader direction of the industry.
Indian manufacturers control much of their supply chain, remain globally cost-competitive and generate healthy domestic cash flows that can finance future expansion. With sufficient capital available for capacity expansion, the next phase of growth will come from increasing international market share, and that's where we see the opportunity.
How do the Focused Fund and Flexi Cap Fund differ?
Both funds follow exactly the same investment philosophy and sector positioning.
The key difference is portfolio concentration. The Focused Fund is more concentrated, which means returns can be more seasonal and volatility can be relatively higher. The Flexi Cap Fund holds around 35 companies instead of 23, which helps reduce volatility simply through broader diversification. As portfolios become more diversified and hold a larger number of stocks, volatility naturally reduces. That's the primary distinction between the two products.
Sector allocations remain broadly identical across both funds. If we're overweight pharmaceuticals or automobiles in one fund, we're similarly positioned in the other. Likewise, our underweight stance on financials and IT is reflected in both portfolios.
The objective isn't to run two completely different portfolios. The Flexi Cap Fund is simply designed to offer a smoother return experience while maintaining the same investment philosophy.
As you take high-conviction bets, how do you think about concentration risk?
We believe every holding should make a meaningful contribution to portfolio returns.
Even with a 35-stock portfolio in our Flexi Cap Fund, the average position size is around 3%. Even our smallest positions are generally about 1.5%. We aren't believers in long-tail portfolios where numerous tiny positions contribute very little to overall performance. The Focused Fund naturally carries greater concentration because almost every stock has a meaningful weight, which can lead to periods of stronger outperformance as well as relatively higher volatility.
Old Bridge Mutual Fund currently offers only three schemes. Are there plans to launch more funds?
For at least the next 12 to 24 months, we are comfortable with our existing product lineup.
Our Focused Fund and Flexi Cap Fund allow us to invest across market capitalizations without being constrained by category definitions. We don't believe businesses should be selected because they're large-cap, mid-cap or small-cap. They should be selected because they deserve a place in the portfolio. Our Arbitrage Fund primarily serves an operational purpose by helping investors to do systematic transactions into our active equity funds. Overall, we intend to remain an equity-focused fund house.
What are the biggest risks you are watching?
The biggest risk for India would be crude oil moving to around $120 per barrel, largely because of geopolitical developments. That's probably the single biggest external risk we monitor.
The second is currency stability. It's important that the rupee remains broadly stable rather than witnessing a sharp depreciation. Over the longer term, India also needs to continue strengthening domestic manufacturing, reduce import dependence and attract global manufacturing investments.
That said, given the current environment of improving export volumes and better rupee realizations, I remain reasonably optimistic about corporate earnings and, by extension, equities.