Dear Investor,
The second half of FY25 saw a steep correction in equity markets. The Nifty50 dropped 9% while the BSE500 declined 12%, driven primarily by high valuations and a rapid outflow of foreign institutional investments (FIIs) towards US and Chinese markets. Large caps bore the initial brunt, with mid- and small-caps following soon after.
While corrections are inevitable, their speed and intensity took many by surprise. As always, a key question arises—what could we have done better as investors?
Learning from Hindsight
Our Agile strategy emphasizes long-term fundamentals and growth potential.
Yet, even sound strategies offer scope for timely tactical decisions:
- Reduce capital market exposure – Brokerages, AMCs, and exchanges often suffer doubly in downturns.
- Allocate more to deep-value stocks – Can be more resilient, but may underperform if markets favor earnings over value.
- Trim richly valued high-growth stocks – Reduces downside in volatile phases.
These actions could have softened the drawdown. Moving forward, they will guide how we assess valuations against expected growth.
Quant Strategy: A Contrasting Approach
Unlike the discretionary Agile strategy, our Quant strategy follows rules-based models for allocation and stock selection. It moved significantly into cash during this phase, helping limit the drawdown. While it may miss sharp rallies, it offers a stronger starting point for recoveries.
Investor Behavior in Corrections
Corrections often cause emotional exits near market bottoms. This time too, March saw high SIP closures, even as FIIs and DIIs began buying again.
Key takeaways for long-term investors:
- Stay invested if your horizon is multi-year.
- Avoid trying to time the market.
- Trust fund managers for rebalancing.
- Volatility is the price of superior returns.
Tax-Loss Harvesting: Worth It During High Volatility?
Let’s look at an example of tax-loss harvesting under two scenarios.
Scenario 1 – Favorable Conditions
Scenario 2 – Price Bounces Back
A 5% rebound wipes out the tax benefit—common in sharp market recoveries. With additional transaction costs, the appeal of this strategy reduces in volatile times.
Going forward too, the lessons from recent corrections will continue to shape our disciplined approach focusing on thoughtful asset selection, prudent tax planning, and avoiding emotional decisions with the aim of delivering superior long-term returns while keeping risk in check.
Agile Strategy Performance
East Green’s Agile strategy has delivered a return of 12.5% (annualized, post fee and expenses) since its inception in July 2023. Over the same period, the return for S&P BSE 500 TRI was 16.2% and for Nifty 50 TRI it was 12.9%.
Note: East Green return numbers mentioned here are time weighted and are calculated net of all fees and expenses. These have not been verified by SEBI. Additionally, performance of individual client portfolios may differ during the period.
Agile Portfolio Overview
At the end of this quarter, the sectors with highest allocation were pharma-healthcare (good risk-reward in volatile conditions), industrials (benefiting from continued capex momentum), and consumer tech (attractive growth prospects). Our allocation to capital market businesses was significantly reduced, while exposure to consumption-driven segments like retail and consumer discretionary was increased.
Note: Individual portfolios may differ depending on time of investment and subsequent capital addition/withdrawals
Key changes to the portfolio this quarter:
- Reduced positions in the capital markets segment. These include complete exits from (i) a service provider to AMCs, (ii) a stock exchange business, and (iii) a diversified capital markets play. We also reduced our position in a company with wealth management and AMC business lines.
- Exited a business focused on fermentation APIs due to repeated failure in delivery vs guidance. We replaced this with another API company which is focused on analgesics and also has aspirations in CDMO.
- Entered a pharmaceutical contract manufacturer catering to domestic formulation companies. This company has a major capacity coming online and thus has a robust growth projection for the next few years.
- Exited a recently listed niche e-commerce company given lower than expected growth guidance from them.
- Exited a company focused on computing solutions due to frothy valuations.
- Took benefit of the market correction to initiate a position in a fast-growing hospitals chain based out of south India with expansion plans in the rest of the country.
- Initiated position in a retail player with best-in-class same store sales performance and very strong growth aspirations.
- Initiated position in a microfinance company with a thesis of bottoming of asset quality and good upside potential from here given the valuation correction.
- Additionally, for risk management we trimmed our positions in (i) a consumer tech company, and (ii) a diagnostics business.
Quant Strategy Performance
Our Quant strategy, which was initiated in May 2024, has delivered a return of -0.4% (post fee and expenses) vs 2.6% for S&P BSE 500 TRI and 5.9% for Nifty 50 TRI in the same period.
Note: East Green return numbers mentioned here are time weighted and are calculated net of all fees and expenses. These have not been verified by SEBI. Additionally, performance of individual client portfolios may differ during the period.
As highlighted in our previous letter, the primary objective of our Quant strategy is to minimize portfolio drawdowns during adverse market conditions, even if that occasionally means giving up some gains during sharp rebounds. This quarter was a case in point.
The portfolio performed steadily in January and February, but the swift recovery in March led to mild underperformance for the quarter. This is in line with the inherent trade-offs of a risk-managed approach—we prefer capital protection over chasing short-term returns, especially in uncertain regimes.
During the quarter, our models reduced equity exposure a few times, based on risk-off signals. Whenever the portfolio was invested, it saw sector shifts—moving more towards pharma and manufacturing, while holding positions in capital goods.
There is often concern about missing the market’s best-performing days. However, research (notably by Meb Faber in “Where the Black Swans Hide & the 10 Best Days Myth” ) shows that most of these ‘best days’ occur close to the worst days, typically during volatile periods. Missing both often has a far lesser impact on long-term returns than popularly believed.
Our focus remains on managing risk dynamically and staying ready for more favorable market phases, while protecting capital during challenging ones.
Market Outlook and Way Ahead
The Indian market, unlike its developed peers, continues to remain in a corrective phase. This has been driven by sustained capital outflows, largely due to higher yields in the US and emerging opportunities in markets like China. Additionally, earnings across several sectors have fallen short of expectations, dampening investor sentiment. That said, select pockets of the market still show promise. For now, the indices appear to be in a rangebound phase, and a clear catalyst—potentially a positive policy or budget announcement—may be needed for a meaningful rebound.
Our investment approach remains consistent across both the Agile and Quant strategies. In Agile, the focus continues to be on identifying high-growth, quality businesses available at reasonable valuations. These are the stocks that are best positioned to benefit when the broader market recovers. In Quant, our decisions remain rule-based and backed by extensive back testing. As such, market trends and improvement signals will guide future allocation decisions.
Across both strategies, disciplined risk management continues to be the foundation of our investment process, enabling us to remain steady across all market cycles.
Best Regards,
East Green Advisors LLP
Disclaimer/Disclosure:
This document is issued by East Green Advisors LLP [East Green PMS]. This document has been
prepared and issued on the basis of internal data, publicly available information, and other sources
believed to be reliable. The purpose of this letter is to provide general information about the market and
the house view of East Green Advisors LLP. It is produced for information purposes only and should not
be construed as investment advice to any party. It does not constitute a prospectus or offer document or
an offer or solicitation to buy any securities or other investment. All opinions, figures, charts/graphs,
estimates, and data included in this document are as of the date of issuance and are subject to change
without notice. While utmost care has been exercised while preparing this document, East Green PMS
does not guarantee the absolute accuracy of the information provided and disclaims all liabilities, losses,
and damages arising out of the use of this information. The statements contained herein may include
forward-looking statements that are based on our current views and assumptions and involve known and
unknown risks and uncertainties that could cause actual results, performance, or events to differ
materially from those expressed or implied in such statements. Readers shall be fully responsible and
liable for any decision taken on the basis of this document. Investments in securities are subject to
market and other risks. East Green PMS does not offer any guaranteed or assured returns. Please read
the disclosure document carefully before investing. Past performance should not be taken as an
indication or guarantee of future performance. Additionally, the performance data mentioned here has
not been verified by SEBI.