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In a market often driven by momentum and popular themes, seasoned investors are increasingly turning their attention to overlooked pockets where valuations remain attractive. In this edition of ETMarkets PMS Talk, N. ArunaGiri, Founder & CEO of TrustLine Holdings, highlights that some of the most compelling opportunities today lie in unloved sectors, where temporary headwinds have created meaningful valuation gaps. Staying true to a disciplined, bottom-up value investing approach, ArunaGiri points to emerging contra opportunities in segments such as pharma, auto ancillaries, and select IT, where strong fundamentals are not fully reflected in current prices. He also shares insights on navigating market cycles, the importance of margin of safety, and how identifying high-quality small-cap businesses at a discount can drive long-term wealth creation. Edited Excerpts –
Q) Thanks for taking the time out. Tell me your Intrinsic Deep Value Fund has delivered 16% CAGR return which is very impressive since its inception in September 2007. Take us through the performance of the fund?
A) Thanks for this wonderful opportunity to share our views.
On the performance metrics, we have an interesting perspective. Looking at the performance number in isolation does not tell the full story. The numbers always need to be viewed in the context of the prevailing market environment. From that standpoint, in our view, the current performance number is somewhat understated, as the terminal point coincides with an ongoing downcycle. In a more normalized market environment, this CAGR is likely to move upward into the 17 - 18%+ range, which the current market conditions do not fully reflect.
Secondly, this 16% CAGR, in isolation, may not appear extraordinary on the surface. However, when viewed through the lens of the power of compounding, the picture changes significantly. One is effectively looking at about 16X wealth creation over 18+ years. In comparison, during the same period, the benchmark BSE 500 (TRI) has delivered around 7.75X. That represents a very meaningful level of value creation (alpha) for investors.
More importantly, the fund has achieved this performance while staying steadfast to its value investing principles through four major downcycles during this period, including the Global Financial Crisis and Covid. Viewed in this broader context, our long-term fund returns genuinely stand out among the competition.
Q) TrustLine has been around for more than two decades with a strong research legacy. Could you start by telling us about the journey and what differentiates your approach in the PMS space?
A) Since the time we launched our fund back in 2007, one thing has remained an integral part of our investment strategy throughout the journey - our unwavering commitment to a deep-value approach in the small-cap space. This focus has enabled us to build a compelling and differentiated story in small-cap value investing.
Investing, in many ways, is like playing a sport. The longer one stays in the game, the better one gets. Experience through cycles sharpens judgment and conviction. That is the real differentiation we bring to the table.
All that we do is value investing in the small-cap space - nothing else. With this simplicity and clarity of focus, the fund has built an enviable track record and a clear, durable differentiator over time.
Q) TrustLine tracks 800+ companies as part of its research universe. How does this wide research coverage help you identify opportunities before the market does?
A) Once one decides to operate in the small-cap space, there is really no option but to turn as many stones as possible to uncover those few hidden gems. The wider the universe one tracks, the better the chances of identifying those opportunities.
In that sense, the wide set of companies that we closely track significantly strengthens our ideation process and helps us stay ahead of the market. This process, combined with our inherent contra streak, gives us the necessary edge to identify opportunities well ahead of the curve.
Q) The firm was founded in 2004 and has grown to manage over ₹1100 crore with a strong client retention rate. What has helped you build that trust with investors over time?
A) From early on, our objective was to position TrustLine as a unique platform for long-term value creation for investors. In the initial years, we had very little to demonstrate except our investment team’s deep-rooted passion for stock picking and our commitment to stay the course over the long haul. As we backed that commitment with performance over time, word-of-mouth referrals gradually enabled us to scale.
In our view, more than just fund performance, what truly helped build trust with our investors has been our unwavering commitment to process, transparency, and candid communication. The principle, “Focus on process, not on outcome” runs through the fabric of everything we do.
This process-driven approach sets in motion the snowball effect - the power of compounding - not only in fund returns, but also in other critical aspects of our business such as client retention, client acquisition, employees and other stakeholders’ retention.
In this context, it is interesting to note that a significant portion of our assets under management has come from value creation rather than fresh inflows, reflecting a very strong client retention dynamic.
Q) Your strategy is deeply rooted in value investing inspired by Buffett and Graham. In today’s momentum-driven markets, how relevant is value investing?
A) First, let us look at how one defines Value and Growth, because there are many myths around value investing.
In our view, value is not the traditional cigar-butt approach - buying
cheap stocks with little or no growth potential. That is value for value’s sake. True value investing is about getting growth at a discount, whereas growth or momentum investing is often about buying growth at any price. When one defines value this way, it can create tremendous value in India because the Indian market is essentially a bottom-up market.
For disciplined stock pickers, the opportunity set is vast. As bottom-up investors, we remain genuinely excited about the innumerable opportunities the market continues to throw up.
Q) The philosophy places strong emphasis on intrinsic value, ROE, free cash flow and margin of safety. How do these metrics guide your stock selection process?
A) Intrinsic Value and Margin of Safety (MOS) form the two pillars of our stock-picking process. MOS provides the downside cushion, while intrinsic value reflects the quality of the underlying business — measured through parameters such as high return ratios, healthy free-cash generation, potential for margin expansion, headroom for growth, and clean balance sheets with low leverage.
If one looks at our overall stock selection process, it essentially revolves around identifying high-quality small-cap companies when they are trading at a meaningful discount to their intrinsic value.
We do not follow a value-for-value’s-sake approach that is often associated with cigar-butt investing. Instead, our strategy focuses on identifying growth opportunities available at a discounted price.
We seek out fundamentally strong businesses that may be going through short-term setbacks or facing temporary market headwinds, which in turn create a widening market discount in their stock prices.
Q) Markets often swing between fear and greed. How do you maintain discipline and stick to value investing principles during extreme market cycles?
A) Our long experience through various market cycles has taught us one valuable lesson: greed and fear cycles can be extremely powerful. But what is even more powerful is the concept of reversion to the mean. That is what eventually brings sanity back to market cycles.
If one can keep rationality and objectivity intact through these cycles, it creates a meaningful edge in the investment business. A contra streak and rational thinking are in our DNA, and therefore come naturally to us, irrespective of the depth of the cycles. This remains one of the key drivers of our fund’s performance across market cycles.
Q) Your strategy focuses heavily on small and mid-cap companies, often with market caps below ₹2000 crore. Why do you believe this segment offers the most attractive opportunities?
A) There are broadly two ways to look at small-cap investing.
One is to take the conventional view that it is a highly risky space and therefore best avoided altogether. But along with that decision, one also walks away from the potential rewards - because historically a meaningful portion of alpha generation in markets has come from the small-cap segment.
The other approach is to take a more contrarian, yet objective view. That is, acknowledge the risks inherent in the space, but take the effort to understand them deeply and build a robust process to mitigate those risks. This path is certainly more demanding. It requires far more research, patience, and discipline.
But over the long run, it can also be far more rewarding. Because the real game in small-cap investing is not just about finding winners - it is about systematically weeding out the bad apples.
If one can build a process that consistently filters out weaker businesses and focuses on fundamentally strong companies, the small-cap space can become a very powerful engine for long-term value creation.
Q) Which sectors within the small and midcap universe are currently throwing up the most compelling opportunities?
A) As a value strategy, our investment approach is primarily driven by bottom-up analysis and stock-specific factors. We are not top-down investors. While we do take sectoral dynamics into account, our starting point is always the identification of compelling individual business ideas.
That said, being a contra strategy, many of our ideas naturally emerge from sectors that are currently not fancied by the market or are out of favour with much of the investment community because of some short-term headwinds or challenges. It is often in such pockets that valuation dislocations tend to emerge.
From that perspective, we are currently finding several interesting opportunities in sectors such as pharma, auto ancillaries, select IT, platform-based businesses, select engineering companies, renewables, and publishing - where valuations appear favourable and growth prospects remain promising.
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)
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