SBI Long Term Equity Fund Regular Growth INF200K01495

While evaluating stocks on the valuation front, the manager uses valuation metrics such as EV/ EBITDA, price/ earnings, or price/ book, among others — whichever is apt for a given sector. This is then supplemented by the outcome of an internal quant model. However, Dinesh Balachandran does not mind being flexible on valuation in areas where he is confident on the underlying theme and its long-term growth prospects.

He uses a combination of top-down and bottom-up approach when it comes to stock selection. That said, the portfolio is constructed with a benchmark-aware approach. While this can theoretically reduce the risk of relative underperformance, the valuation-conscious approach will result in the fund struggling during growth-oriented market phases, as the case was between 2017 and early 2020.

Balachandran inherently approaches stocks with a cautious mindset. Historically, he has refrained from taking significant positions even in high-conviction ideas, which at times constrained the fund's performance, notably in 2021 when his style was well-aligned with market trends. However, the execution of his strategy has shown marked improvement over the past three years.

The manager prefers stocks that display a positive change in their margins and have a margin of safety and good earnings outlook over the long term. On the other hand, he typically avoids investing in highly leveraged businesses. He is flexible with his stock picks and won’t shy away from investing in a company that is not best-in-class but that has a good risk/reward profile.

The investment approach is common enough, and its execution will play a key role in determining the fund’s long-term success. After initial hiccups, the strategy’s execution has shown promising results over the past few years. Sustained consistency in this regard will be crucial in strengthening our conviction. For now, we retain Average rating for the Process Pillar.

Dinesh Balachandran divides his portfolio into two parts. One part of the portfolio comprises companies where the manager is confident on the underlying theme. Here, he is willing to be flexible with valuation if he believes that the growth runway will be there for the long haul. This is more of a top-down play, and the manager will continue to hold on to these investments until the thesis is intact.

The second and more significant part of the portfolio is the cyclical portion. Here, the manager is valuation-conscious and counts on the cycle to reverse meaningfully in due course. His investments into auto and power are examples of this portion of the portfolio.

There is no predefined allocation split between the two parts of the portfolio. That said, by and large, the portfolio would always have a bias toward the value bucket.

Overall, roughly 60%-70% of the portfolio is invested in large-cap stocks. Balachandran believes that his style of investing necessitates investing for the long haul and hence invests with a three- to five-year investment horizon. He is willing to endure short-term pain for long-term gains.