Inside smallcase

Meet the manager: Sagar Lele’s journey to bring institutional-grade experience to modern retail investors

Meet the manager: Sagar Lele’s journey to bring institutional-grade experience to modern retail investors
Reading Time: 9 minutes

As a kid, Sagar spent a ridiculous amount of time flipping through magazine pages. His father was in the media business and every month he would bring home about 50 magazines across subjects that they either published, printed or tracked.

Two magazines he particularly looked forward to, and read word for word – Overdrive and Dalal Street Investment Journal. When it was time to choose an education path – he knew it was either in cars or stocks. He chose stocks so he could make money and buy cars! He education (bachelors in business administration and masters in finance) was aligned to this choice, and he was quite clear about a life around stocks.

After his masters degree abroad, he had a tough time finding a job due to the then economic conditions and decided to return to India. He got a job at Dalal Street Investment Journal – the very place that got him into finance. For the next 7 years, he was unstoppable! He moved to institutional equities and got a CFA charter.

At the peak of his broking career, he moved to asset management, taking a steep cut and moving at 1/5th of his salary. But the amount of learning managing funds at a global AMC with US$ 200 billion in AUM in a span of 2 years was 5x of what he had learnt in the 7 years put together.

His portfolios were amongst the top 3 performing globally & consistently over the two years, and at peak performance again, he knew he needed to get out! This time, it was due to two factors:

i. After being on the buy and sell side, he knew how to invest in good businesses, but had no idea how to build one

ii. On the job, he was making a tonne of money for others. But he wanted to build a business where he could take a bigger share out for himself as well.

Cut to Rupeeting – bringing institutional-grade experience to modern retail investors through research, portfolios, and products. The objective – make people money, and make himself money!

Stock successes

His first stock was Atul Auto, back in 2013. Over a two year period, it was posting record numbers while the rest of the automobile industry was passing through the decade’s worst slowdown. The stock gave him 4x returns within a year, but lacked both the patience and conviction to hold on to it longer. Two more months and it would have been a 6x return. But then, in the hindsight, the exit was good. The stock has been on a steady decline since, for six years straight after that, halving in value.

A handful of stocks make for large success stories. He’s had one stock in each of his career phases, which brought in immense fame, credibility, success and money. Here are a couple of stories:

1. I initiated coverage on TeamLease after its IPO in a detailed report on the staffing industry writing more than 100 pages over a period of one month, covering every detail thereafter, pitching the idea to every relevant domestic and global investor there is over a period of one year, and fixing up multiple roadshows, deals and conferences. My coverage was the most sought-after and the stock went 3x over a two year period.

2. I made an investment in a mid cap chemical manufacturer. It was a high conviction idea for me given their massive capital expenditure, large scale import substitution, tailwinds in other business, and overall movement towards value-added products. I was convinced of a triple digit growth in earnings, which would eventually lead to the stock’s discovery and popularity. I bought the stock in every fund I managed and advised. Through the two years of holding, the stock went 8x.

There is a four-step framework to picking multibaggers according to Sagar:

1. Look for stories: Every company has a story – it has gone through something, it is transitioning in some manner, and it intends to reach some point. Back stories that transform industries, companies themselves, or consumers; and that create a high intensity impact over time.

2. Make sure numbers validate the story: The story, as it unfolds, should see a translation into high-growth on three counts – revenue, operating profit and operating cash flows. Forecasts need to bake in realistic and achievable estimates of your opinion on how metrics will look over time. If the numbers don’t excite, the story can be scrapped.

3. Get yourself a bargain: The ideal situation is to benefit from a combination of earnings growth and valuation re-rating. You need to hence step in when valuations are low. Low being a function of (i) you think earnings can be higher than what the street thinks, and/or (ii) you think the market will value the stock higher when the story and numbers unfold.

4. Exit: Exits are as important as entries. Some stories play out over months, and some over decades. Some companies have multiple stories playing out over time, perhaps with gaps in the middle. Exit when the story and numbers don’t make sense any longer.

Investment philosophy

Our investment philosophy is to build long-term wealth by actively hunting for a combination of earnings growth and valuation re-rating, which plays out over long periods, and generates returns in multiples, and not percentages.

My favorite investing quote is not from an investing book or by some celebrity manager. It’s from the iconic movie Wall Street.

“I don’t throw darts at a board. I bet on sure things. Read Sun Tzu, The Art of War. Every battle is won before it is ever fought.”

Gordon Gekko

His personal tenets include:

  • Invest in knowledge – that’s what makes money
  • Never lose clarity of thought – there’s no outcome without this
  • Follow what’s right – objectively, sans emotions

On financial freedom

Financial freedom to Sagar is the point when there’s enough money made that it stops being the objective of working, and instead becomes an outcome. Here’s a little formula he has to sail through this!

a. What is the total value of all the assets you want to own after which you will stop chasing money?

Ex. – House in Mumbai worth Rs. 10 crore, and a car worth Rs. 1 crore.

b. What’s the annual sum you need to feed your living expenses and ideal lifestyle?

Ex. – Living expenses of Rs. 15 lakh per year, and lifestyle expenses of Rs. 15 lakh per year.

Total money needed to attain financial freedom = a + (b / 4%) = Rs. 11 crore + (Rs. 30 lakh / 4%) = Rs. 11 crore + Rs. 7.5 crore = Rs. 18.5 crore.

For Sagar, speed in achieving financial freedom is critical. Hence, the simple method he follows is to chase non-linearity. Anything with a ^ sign on it is an outcome he chases. Just that one sign in the formula makes choices pretty simple – equity over debt, business over a job, leverage over cash, build over run, adrenaline over melatonin! Whatever gets me to the Rs. 18.5 crore fastest is my jam.

The whole focus on speed comes from the logic that the earlier you attain financial freedom, the free-er you are to reduce stress, work because you like to, do things that you want to, and live more while your limbs still allow you to.

The only way to win is by making money! You can have the best branding, the most differentiation, the lowest cost, or even the highest Twitter following. But if you aren’t making money for your investors, sooner or later you’re going to lose.

smallcase journey

Performance for mutual funds is constrained by regulation (types, composition, and concentration), whereas PMS is for the wealthy. smallcase perfectly fills the gap by introducing professional advisory in the form of baskets, and the potential to generate superior returns. It was the perfect fit for Rupeeting’s mission to bring institutional expertise to retail investors.

Their most recent launch was a smallcase called Socially Responsible Investing. There were two reasons for this:

1. Demand-led: People have been increasingly conscious about their choices, often aligning them with a larger-good which benefits the environment, or society at large. This is reflected in the food they eat, the products they use, and in the way services are consumed. Why should investing be any different? People want the ability to invest in businesses that work on the same principles that investors follow in their lives.

2. Supply-led: Most ESG products end up replying on third-party ESG ratings to build portfolios. However, ratings are either unreliable or miss the larger context because of their drive to standardise methodologies and processes. ESG funds then end up investing in businesses that very obviously don’t fit the bill and/or miss the point of generating returns altogether.

To cater to demand, they launched the Socially Responsible Investing smallcase. They focus on ratings, investing in sustainable businesses and enabling returns. After all, what’s an investment if it doesn’t focus on generating returns?

‘Look at us as an ESG + Alpha smallcase’, Sagar says.

Socially Responsible Investing

Future plans

Rupeeting offers 3 ETF-based, multi-asset, diversified, all-weather smallcases to suit all risk profiles, and 6 equity smallcases that are meant to compound wealth over the long term. Next in the plan is to use the smallcase gateway and bring high-quality investing products to investors.

Sagar and team plan to launch a smallcase that rides the Indian manufacturing wave. They reckon India is in the early days of a large growth story in manufacturing driven by:

1. Domestic companies manufacturing in India rather than relying on imports

2. Foreign companies setting up manufacturing in India to cater to local and international demand

There are several drivers for both these dimensions – demographics, cost, consumption, technology ecosystem, government support and fiscal policy, amongst others. With the new smallcase, they intend to add companies that will benefit from manufacturing in India over the next few years.

Their all-weather smallcases have been performing extremely well. Returns since their launch in August 2021 are between 8-10%. They have offered robust performance despite the extremely challenging and volatile environment seen since their launch. Stable returns was their objective and they have delivered just that!

Some factors that have helped this stellar performance so far include:

  • Timely reduction in exposure to equities with the deterioration of markets
  • Actively moving the duration of debt to make the most of the rapid interest rate shifts
  • Stepping in and out of international equities, thereby avoiding large falls and opportunistically buying in at lows

They launched equity smallcases from October 2021 to December 2021. Unfortunately, this coincided with the downward shift in equity markets. Nonetheless, performance has been exceptionally good: In 2022, Monopolies, with an 18% return was one of the best performing smallcases!

As of now, one year returns for two smallcases are upwards of 20% – Monopolies and Value Migration.

Value Migration

3 of their smallcases are materially outperforming their respective benchmarks. Over this year, Rupeeting plans on ramping up on two fronts:

1. Content – They have been working on providing quality research to our investors, and insightful content to consumers. They recently launched a podcast on Spotify and YouTube.

2. Products – Using cutting-edge technology and user-centric experiences, they intend to launch a host of new products in the market, which would make stock investing easier for investors.

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Meet the manager: Sagar Lele’s journey to bring institutional-grade experience to modern retail investors