WhiteOak Capital’s Aashish Somaiyaa on the need to rebalance portfolios in Samvat 2081

Transitioning from chemical engineering to the financial markets must have been quite a leap.

Honestly, I wasn’t a great engineer—I became one mainly because in India a lot of boys become engineers first and figured out their path later. I had always wanted to be an engineer since I was a kid, so I did it. But once I was in the field, I realized it wasn’t for me. Back then, engineers were paid very little, and I was always drawn to finance and the stock markets, so I decided to shift gears.

How was the transition from the sales to finance?

I started my career in sales in the late ’90s, back when the perception of sales was very different. Many people thought sales was about ringing doorbells and selling soap. But in asset management and mutual funds, sales is much more consultative and complex. It requires understanding economic trends, following what the RBI (Reserve Bank of India) governor says, and translating those insights for clients and channel partners.

In this field, sales demands knowledge and communication skills to make information understandable. Although I had a technical background as a chemical engineer with a post-grad in finance, sales was a challenge for me as an introvert. Calling to set up appointments was nerve-wracking back then.

However, starting in sales taught me the value of clear communication and helped me solidify my understanding of the industry. In our industry, most CEOs come from either the investing or sales side, so starting in sales laid a solid foundation for my growth in finance.

What inspired or influenced you, personally or professionally? Do you find inspiration in books, movies, or something else?

Two main things, really. First, I’ve been incredibly fortunate with the leaders I’ve worked with—truly inspiring mentors right from the start. Observing their approach taught me a lot, especially one early lesson from a boss who emphasized that the best leadership is by example. That stuck with me.

Second, I’ve always been an avid reader, though I admit my reading habits have slipped a bit lately. Early on, I read extensively, which shaped my perspective as well.

Lastly, a unique part of my role involves travel—12 to 15 days each month. While I handle many responsibilities remotely, meeting new people constantly is another great source of learning.

Is there any experience or insight that has stuck with you?

One memorable lesson came from a client meeting years ago. Sometimes, clients ask incredibly insightful questions in simple terms, without any technical jargon.

I had made a presentation to a family office about why they should consider investing in equity. After listening, the client asked, “If the bank pays me 7% interest, I’m essentially paying ₹14 for every ₹1 in cash flow. But in the stock market, with P/E multiples of 24-25, I’m paying significantly more per ₹1 of earnings. Why should I choose the market over the bank?"

It was a brilliant comparison. I explained that while the bank gives a steady ₹1, a good investment in the market could grow that ₹1 into something much more over time. This simple question, free of jargon, made me clarify my own understanding in a way that office discussions often miss. Moments like these are invaluable learning experiences.

Given current market conditions, do you believe it is wise for investors to pull out or stay invested? Or perhaps reinvest in equities?

I always tell people this: if you’ve made much more than anticipated it’s wise not to get overly greedy. Think of it like this—if your target allocation was 80% equity and 20% debt, or 50-50, there’s a good chance that over the past three years, due to growth, your equity portion has gone beyond your initial goal.

When assets appreciate, they naturally take a larger portfolio share, and people tend to invest more in areas showing gains. If your allocation has surpassed its intended level, it’s time to rebalance.

For those remaining in equities, within that equity portfolio, you’re also likely more weighted in small and mid-caps, or sectors like railways, defense, and infrastructure. To stay balanced, align your portfolio with the market center—usually large caps, financials, and consumer sectors, which form a solid core.

What are your thoughts on reinvesting profits or gains?

Reinvesting in equity can be done with a reduced risk approach. For example, within equity, focus on large-cap stocks to stabilize your allocation. Alternatively, consider conservative options like balanced advantage or multi-asset funds to lower exposure. Wherever you stand right now, it’s wise to reduce risk—whether within equity or across asset classes.

The last few years have seen unusually high returns, but that’s unlikely to be sustainable indefinitely. So while there’s no need to exit entirely, rebalancing to lower risk is the prudent move for portfolio stability.

In the Samvat 2080 trading year, we saw strong performance from capital goods and autos, while banks lagged. Looking ahead to Samvat 2081, what trends do you anticipate?

I’d say a couple of things here. First, there’s an English saying, “shoot where the rabbit will be"—essentially aim for where the target is headed. Over the last five years, for instance, the Nifty has delivered around 18% compounded, but sectors like defense and certain public sector enterprises have delivered up to 50% compounded returns, or two to three times that of the Nifty. Meanwhile, some consumer discretionary, IT, and pharma sectors have given roughly half of Nifty’s returns.

Markets are inherently mean-reverting, and we always see shifts in relative valuations. In fact, in the last 2-3 months, we’re already seeing this reversal with IT, consumer discretionary, and pharma emerging as the best performers. So, it seems that many portfolios are positioned for where the market was last year. With these shifts, rebalancing portfolios is necessary for most investors.

Do you see sectors like IT and consumer discretionary performing well going ahead too?

Yes. Even with banks it is beneficial to take a countercyclical approach. Markets are already rotating, and it is wise not to stay overly focused on sectors where you saw high returns in recent years, as markets operate on relative value.

The rotation has begun, and I believe it will continue, with different sectors likely to lead. Large caps, for instance, may outperform compared to mid-caps, although small caps remain a vast space with new opportunities emerging regularly. So, while small caps offer constant innovation, I’d lean toward large caps, particularly over mid-caps, as they’re a more limited space.

Is the rotation limited to sectors or are we also seeing a shift in market capitalization?

Yes, we're seeing a shift in market capitalization as well. Over the past month, large caps have outperformed both mid caps and small caps. While I'm very optimistic about small caps due to ongoing innovation, I believe mid caps have already risen significantly.

Large caps, on the other hand, have good potential. Over the last five years, the Nifty has delivered around 18% compounded returns, which is above average but not extraordinary, and earnings for the Nifty have also compounded at 18%. So, the top hundred large-cap stocks still look promising.

As for small caps, I won't generalize since there’s a continuous flow of new ideas, but mid caps have clearly increased substantially.

Many mid and small-cap companies are planning to go public. What’s your view on this?

White Oak doesn’t generalize its approach; we don’t subscribe to the conventional wisdom that advises against participating in certain IPOs. Instead, we evaluate each IPO on its own merit. Our team actively assesses many IPOs, and we may consider investing after they are listed, sometimes even a few months later.

It’s important to remember that we’re not in the 1990s anymore. Back then, many people had negative experiences with IPOs. However, as of 2024, the landscape has changed. Today, these companies aren’t novices; they’ve often been backed by private equity for 15 years, showcasing a solid track record. They are relatively mature businesses that have established market positions before going public.

While we don’t invest in SME IPOs, we see significant potential in mainboard IPOs. It's essential to evaluate them based on their current business history rather than through the lens of past experiences. Many promising companies are entering the market, and we carefully analyze the value they offer and how we believe they will perform.

Let’s take a closer look at equity as an asset class and its attractiveness for investors.

Engineering training shapes your thinking in lasting ways. For instance, Charlie Munger emphasizes the importance of a latticework of mental models for understanding various phenomena. This multidisciplinary thinking is integrated into your education.

At White Oak, we often explain asset allocation using chemistry. Mixing different asset classes is like combining chemicals, each contributing unique properties to create something entirely new. While I can discuss asset allocation in straightforward terms, using a chemistry analogy makes it accessible to a wider audience.

Another example is the relationship between interest rates and bond prices. Instead of explaining it directly, I compare it to the placement of a door handle. The handle is positioned at the edge of the door so that less force is needed to open it. This concept of leverage explains why bond prices fluctuate more significantly with changing interest rates.

Real-world analogies enhance our understanding of financial markets, underscoring the importance of multidisciplinary thinking. While I might have been a poor engineer 30 years ago, I believe that the connections formed in the brain are never wasted; they continue to influence how we think.