This Hyderabad-based small-cap specialist is making solid money for investors using AI; here’s how
Abhishek Banerjee, Founder and CEO of Lotusdew Wealth and Investment Advisors, talks to BT about how he spots opportunities in the small-cap space that deliver stellar returns
- Aug 29, 2023,
- Updated Aug 29, 2023 10:51 AM IST
Hyderabad-based start-up Lotusdew Wealth and Investment Advisors has been using new-age tools like artificial intelligence and machine learning (AI/ML) to spot small- and micro-cap stocks in the domestic equity market. In an interaction with Business Today Abhishek Banerjee, Founder and CEO of Lotusdew Wealth and Investment Advisors, says some strategies have managed to deliver 30–50 per cent CAGR returns since inception. Banerjee also shared his views on the Indian equity market, things to should look out for while investing in broader markets and how he managed to deliver solid returns. Edited excerpts:
BT: Can you throw some light on the stock selection process?
AB: Lotusdew is a small- and micro-cap specialist that uses top-down macro for portfolio construction and risk management. Our aim is to lay emphasis on the smallest companies. We are really interested in the quality of the board that runs the moral compass of the organisation along with the quality of management that runs the earnings engine. These two are our main vectors of screening for which we collect, process and organise our own internal data lake from many disparate public disclosures for which we have tonnes of technology doing it for us daily. Hence, our edge in the market is really what we can measure upstream before it shows up in balance sheets and we rely heavily on tools like AI/ML to get to this.
BT: How many funds or schemes do you have right now?
Banerjee: We have a few active baskets ranging from nano cap stocks with a market cap ranging between Rs 200-500 crore market caps all the way to multi-cap baskets. Our Nano-cap Champ and Listed Venture Capital strategies scoreboards of listed companies on factors like credibility, associations with past institutions, other private holdings, gender diversity, board independence, tax litigation history, and earnings quality to screen about few hundred stocks out of a potential universe of 3,000 companies with less than Rs 1,000 crore of market cap. We also apply systematic deep learning techniques to equity momentum to correct deep drawdowns with our Deep Momentum strategy. Our High Frequency strategy makes use of high-frequency indicators to construct liquid small-cap portfolios and eventually, our fundamentally picked Value Momentum is a multi-cap basket. Apart from this, we can offer complete financial planning including but not limited to tax optimisation services. It’s incredible how much money people can save even if they are salaried if they file taxes correctly and make use of all the clauses. This is something that AI can help a lot with by looking at their transaction history and income tax statutes.
BT: How much return have you delivered since inception?
Banerjee: Different strategies have performed differently. The best-annualised returns have been achieved with High Frequency and Listed Venture Capital Strategy. They have north of 50 per cent in CAGR. Other younger strategies like Nano-cap Champs and Value Momentum also have excellent returns but shorter track records. Their past CAGR is again north of 30 per cent.
BT: How much do you charge for your service from your clients?
AB: We charge a fixed fee of about Rs 1,500 per month for each strategy. We don’t charge based on AUM so a client can pay a fixed fee and consume advice for unlimited assets.
BT: How do you see domestic equity markets from here onwards? Why?
AB: India is still a developing capital market. This means you don’t get access to different parts of the economy as a pure play in the listed space. For example, if you were excited about space as a pure play you won’t find any listed company that does only space. We have companies ranging from L&T, which is an old and established company, new IPOs like MTAR to more obscure suppliers like Linde Chemicals for example. In such a market, often the best way to build a diversified exposure is through financials which is also why you see it as a part of the indices in India. Generally, financials are value plays as their balance sheets are opaque and difficult to understand for most analysts-hence they perhaps trade at a discount to a simpler business and more like conglomerates. Given we have a solid view on NPA cycle, there is more credit discipline after the IBC process and the fact that inflation is benign, financials will remain our better bets, provided you choose the right stocks among all the listed business models.
BT: Which space do you think can deliver solid returns to investors: Large-, mid- or small-cap?
AB: The answer is always in our opinion is select small-caps over a complete business cycle. The main reason is that they are focused businesses and have dominant business models in the areas they operate in. We view them as micro monopolies. Apart from this, it’s well known that over a 10-year period, nominal GDP and large-cap returns have had the same CAGR historically and small-caps always add another 2-3 per cent on top of it going by historical records and we don’t see why this will be different over next 10 years.
BT: What are the things one should look into while investing in small- or nano-caps?
AB: As these companies are promoter-led, the investor must look at the ecosystem of possible market makers, quality of board governance, and quality of existing shareholders’ and earnings quality as a way to screen them. Also, they need to focus on hard-to-change facts like the number of locations they operate in, diversity and perceived independence of the board to name a few.
BT: How do you see India compared with other major developing economies?
AB: India is one of the largest and fastest-growing economies that is led by a democratic government and has independent regulators. This combination makes Indian capital markets very robust to a more closed system of other larger economies like China where policymaking may be more sudden. Hence, the relative predictability of long-term policy actions makes India a very attractive destination compared to other economies purely from a sustainability point of view. Apart from this, the demographic advantage, well-run large, listed companies, export-driven listed markets and benign inflation outlook adds to the attractiveness.
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Hyderabad-based start-up Lotusdew Wealth and Investment Advisors has been using new-age tools like artificial intelligence and machine learning (AI/ML) to spot small- and micro-cap stocks in the domestic equity market. In an interaction with Business Today Abhishek Banerjee, Founder and CEO of Lotusdew Wealth and Investment Advisors, says some strategies have managed to deliver 30–50 per cent CAGR returns since inception. Banerjee also shared his views on the Indian equity market, things to should look out for while investing in broader markets and how he managed to deliver solid returns. Edited excerpts:
BT: Can you throw some light on the stock selection process?
AB: Lotusdew is a small- and micro-cap specialist that uses top-down macro for portfolio construction and risk management. Our aim is to lay emphasis on the smallest companies. We are really interested in the quality of the board that runs the moral compass of the organisation along with the quality of management that runs the earnings engine. These two are our main vectors of screening for which we collect, process and organise our own internal data lake from many disparate public disclosures for which we have tonnes of technology doing it for us daily. Hence, our edge in the market is really what we can measure upstream before it shows up in balance sheets and we rely heavily on tools like AI/ML to get to this.
BT: How many funds or schemes do you have right now?
Banerjee: We have a few active baskets ranging from nano cap stocks with a market cap ranging between Rs 200-500 crore market caps all the way to multi-cap baskets. Our Nano-cap Champ and Listed Venture Capital strategies scoreboards of listed companies on factors like credibility, associations with past institutions, other private holdings, gender diversity, board independence, tax litigation history, and earnings quality to screen about few hundred stocks out of a potential universe of 3,000 companies with less than Rs 1,000 crore of market cap. We also apply systematic deep learning techniques to equity momentum to correct deep drawdowns with our Deep Momentum strategy. Our High Frequency strategy makes use of high-frequency indicators to construct liquid small-cap portfolios and eventually, our fundamentally picked Value Momentum is a multi-cap basket. Apart from this, we can offer complete financial planning including but not limited to tax optimisation services. It’s incredible how much money people can save even if they are salaried if they file taxes correctly and make use of all the clauses. This is something that AI can help a lot with by looking at their transaction history and income tax statutes.
BT: How much return have you delivered since inception?
Banerjee: Different strategies have performed differently. The best-annualised returns have been achieved with High Frequency and Listed Venture Capital Strategy. They have north of 50 per cent in CAGR. Other younger strategies like Nano-cap Champs and Value Momentum also have excellent returns but shorter track records. Their past CAGR is again north of 30 per cent.
BT: How much do you charge for your service from your clients?
AB: We charge a fixed fee of about Rs 1,500 per month for each strategy. We don’t charge based on AUM so a client can pay a fixed fee and consume advice for unlimited assets.
BT: How do you see domestic equity markets from here onwards? Why?
AB: India is still a developing capital market. This means you don’t get access to different parts of the economy as a pure play in the listed space. For example, if you were excited about space as a pure play you won’t find any listed company that does only space. We have companies ranging from L&T, which is an old and established company, new IPOs like MTAR to more obscure suppliers like Linde Chemicals for example. In such a market, often the best way to build a diversified exposure is through financials which is also why you see it as a part of the indices in India. Generally, financials are value plays as their balance sheets are opaque and difficult to understand for most analysts-hence they perhaps trade at a discount to a simpler business and more like conglomerates. Given we have a solid view on NPA cycle, there is more credit discipline after the IBC process and the fact that inflation is benign, financials will remain our better bets, provided you choose the right stocks among all the listed business models.
BT: Which space do you think can deliver solid returns to investors: Large-, mid- or small-cap?
AB: The answer is always in our opinion is select small-caps over a complete business cycle. The main reason is that they are focused businesses and have dominant business models in the areas they operate in. We view them as micro monopolies. Apart from this, it’s well known that over a 10-year period, nominal GDP and large-cap returns have had the same CAGR historically and small-caps always add another 2-3 per cent on top of it going by historical records and we don’t see why this will be different over next 10 years.
BT: What are the things one should look into while investing in small- or nano-caps?
AB: As these companies are promoter-led, the investor must look at the ecosystem of possible market makers, quality of board governance, and quality of existing shareholders’ and earnings quality as a way to screen them. Also, they need to focus on hard-to-change facts like the number of locations they operate in, diversity and perceived independence of the board to name a few.
BT: How do you see India compared with other major developing economies?
AB: India is one of the largest and fastest-growing economies that is led by a democratic government and has independent regulators. This combination makes Indian capital markets very robust to a more closed system of other larger economies like China where policymaking may be more sudden. Hence, the relative predictability of long-term policy actions makes India a very attractive destination compared to other economies purely from a sustainability point of view. Apart from this, the demographic advantage, well-run large, listed companies, export-driven listed markets and benign inflation outlook adds to the attractiveness.
Also read: APL Apollo Tubes shares in focus on report promoters may sell 0.85% stake via blocks deals today
Also read: Paytm, ITC, Zomato, Axis Bank shares: As foreign inflows fall, here's how FPI favs fared in August