SBI Mutual Fund's Anup Upadhyay Highlights Superior Margin of Safety in Large Caps Over Mid and Small Caps
In the dynamic landscape of equity investing, investors often grapple with the choice between the relative stability of large-cap stocks and the potential high returns of mid and small caps. However, according to Anup Upadhyay, fund manager at SBI Mutual Fund, large caps currently present a more compelling opportunity due to their enhanced margin of safety. This insight comes as the SBI Flexi Cap Fund has significantly increased its allocation to large caps, reflecting a strategic shift in response to market conditions.
Strategic Allocation Shift in SBI Flexi Cap Fund
Upadhyay disclosed that approximately 70% of the SBI Flexi Cap Fund's portfolio is now invested in large-cap stocks, a notable increase from 55% just a year ago. This tactical adjustment is driven by the perception that large caps offer a better margin of safety compared to their mid and small-cap counterparts. "We increased this because the margin of safety is currently better in large caps compared to small and mid caps," Upadhyay explained, emphasizing that this decision is based on a stock-by-stock analysis rather than a broad market call.
Who Should Consider Flexi Cap Funds?
Flexi cap funds, such as the SBI Flexi Cap Fund, are designed to cater to a wide range of investors. Upadhyay believes that most investors fall into a moderate risk category, seeking wealth creation through equities without the need to actively manage exposure to specific market segments. "Most investors are neither very aggressive nor very conservative; they want to benefit from wealth creation in equities," he noted. He recommends that every investor's core portfolio include some allocation to flexi cap funds, with additional investments tailored to individual risk appetites.
Sectoral Opportunities and Market Outlook
Upadhyay shared his optimistic outlook on several key sectors, where the fund is currently overweight:
- Financials: The fund is bullish on non-banking financial companies (NBFCs) and banks with strong management teams, capitalizing on the trend of rising household leverage and increased comfort with debt among younger generations.
- Insurance: Highlighting India's under-insured population, Upadhyay sees significant growth potential in the insurance sector. He noted that lending and insurance are performing well as a combined theme within the flexi cap space.
- Auto Sector: The fund maintains an overweight position in autos, anticipating a positive impact from historical tax cuts that have typically spurred growth for two years. However, he cautioned about risks from sharp metal inflation.
- Metals and Cement: Upadhyay pointed to opportunities in metals, driven by company-specific narratives and capacity expansions, while the cement sector is seen as consolidating, with selective investments based on favorable stock prices.
Risks and Trends for 2026
Looking ahead to 2026, Upadhyay identified de-dollarisation as a key trend that could benefit real assets and commodities like copper. "There is a larger wave of de-dollarisation, so this might mean that we will continue to see real assets doing well," he stated. This could lead to a broad-based rally in hard metals, aligning with the fund's overweight stance in certain metal stocks.
Fund Strategy and Rebalancing Efforts
The SBI Flexi Cap Fund's relatively smaller assets under management (AUM) compared to top funds in the category provides a strategic advantage. "A smaller fund size gives us the opportunity to be more nimble in asset allocation and provides a lower threshold for buying into stocks," Upadhyay explained, allowing for quicker entry and exit positions and investments in smaller companies.
Over the past couple of years, the fund has undergone significant rebalancing to address underperformance. Key changes include:
- Transitioning from an exclusively analyst-managed model to a more traditional fund management team, enabling faster decision-making.
- Moving away from a sector-neutral stance to taking active sector weights, based on instinct and research insights.
- Consolidating the portfolio from 106 stocks down to about 60, ensuring better allocation to top-performing stocks.
Core Stock-Picking Framework
Upadhyay outlined the fund's three-pronged stock-picking strategy:
- Champion Stocks: Companies growing faster than the broader economy, with superior returns on capital and large market opportunities.
- Change of Margin Companies: Firms where positive developments, such as management or product changes, could boost market share or margins.
- Cheap Stocks: Companies trading close to the liquidation value of their assets, identified through balance sheet analysis.
This comprehensive approach allows the SBI Flexi Cap Fund to navigate market volatility while seeking growth across different market segments. Upadhyay's insights underscore the importance of flexibility and strategic allocation in today's equity markets, particularly as large caps offer a safer haven amid uncertain conditions.
