ETMarkets PMS Speak | Outperforming in a Crash: How Qode Progress Fund beat its benchmark by 14%, explains Rishabh Nahar
But, the Qode Progress Fund managed to just do that—beating its benchmark by over 14 share factors through the brutal Q4FY26 sell-off.
On this version of ETMarkets PMS Speak, Rishabh Nahar, Companion and Fund Supervisor at Qode Advisors, decodes the technique behind this resilience—from a disciplined concentrate on high quality and worth investing to a scientific derivatives overlay that helped restrict draw back dangers.
He additionally shares insights on small-cap valuations, portfolio positioning, and why durations of market stress typically current essentially the most compelling alternatives for long-term traders. Edited Excerpts –
Q) Please take us via the efficiency for FY26?
A) FY26 was a story of two halves. The primary half noticed elevated valuations and selective market participation, whereas the second half, significantly This fall, was outlined by a pointy, broad-based correction.
Between January and March 2026, the Nifty 50 fell 14.54%, the Nifty Smallcap 250 declined 14.36%, and the Nifty Microcap 250 dropped 16.20%. It was some of the difficult quarters Indian fairness markets have seen in current reminiscence, pushed by escalating geopolitical tensions, fears of a broader battle, and a pointy spike in crude oil costs.In opposition to this backdrop, Qode Progress Fund delivered -0.20% for This fall, in comparison with -14.36% for its benchmark, an outperformance of over 14 share factors in a single quarter.
On a 1-year foundation, QGF returned +7.13% versus -5.40% for the Nifty Smallcap 250, and since inception, the fund has returned +10.55% towards the benchmark’s +2.50%.
Extra importantly, the fund ranked #1 throughout all fairness PMS methods in India for the month of March 2026, returning +1.34% in a month the place the small-cap universe fell over 10%.
The efficiency story of FY26 is actually about what did not occur — the drawdown that our traders did not expertise. That, in our view, is the actual measure of a technique’s high quality.
Q) The fund follows a multi-factor method combining high quality, progress, and worth — how do you steadiness these elements throughout totally different market cycles?
A) We do not toggle mechanically between elements based mostly on market circumstances. That will introduce timing threat that may be very troublesome to get proper persistently. As a substitute, our method is to construct a portfolio that sits on the intersection of High quality and Worth always, with Progress appearing because the validation layer.
What this implies in follow: we search for companies with sturdy earnings progress trajectories, wholesome return on fairness, and affordable steadiness sheets, however we solely purchase them when the market is pricing them at a reduction to their progress price.
Our present portfolio has a PEG of 0.64x, with 31.37% earnings progress towards a ahead PE of 20.09x. Evaluate that to large-caps, which commerce at a ahead PE of roughly 29.71x with TTM earnings progress of simply 11.12%, a PEG of two.67x. Traders are paying 4 occasions extra per unit of earnings progress in large-caps relative to our portfolio right now.
This quarter validated the method. Our proprietary issue evaluation confirmed that Worth was the one main issue that held up through the correction, declining simply 3.84% versus losses of 11 to 16% throughout Alpha, Excessive Beta, Momentum, and Low Volatility elements.
As a result of our portfolio is constructed on the intersection of High quality and Worth, it naturally supplied a ground that pure momentum or growth-at-any-price methods could not.
The important thing self-discipline is avoiding the temptation to chase momentum when it is operating. That is when valuations stretch, and that is exactly when the danger of sharp drawdowns is highest.
Q) The fund’s max drawdown is considerably decrease than the benchmark — what threat administration frameworks helped obtain this?
A) There are two distinct layers to our threat administration, and each contributed meaningfully this quarter.
The primary is portfolio development. We’re deliberate about proudly owning companies with sturdy earnings fundamentals, low leverage, and affordable valuations.
This implies our fairness e-book naturally holds up higher throughout broad sell-offs, as a result of we aren’t uncovered to high-multiple, high-momentum names that are likely to see the sharpest de-rating throughout risk-off durations.
Our portfolio firms reported 17.31% YoY PAT progress in Q3 FY26, nicely forward of huge, mid, and small-cap friends, which displays real enterprise high quality quite than value momentum.
The second layer, and the extra structural differentiator, is our derivatives overlay. This isn’t a tactical hedge that we placed on once we really feel nervous. It’s a systematic, rules-based hedging mechanism that sits completely throughout the portfolio.
Throughout This fall, the choices overlay contributed +11.08% over one month and +17.92% over three months, straight offsetting the equity-level drawdown through the sharpest section of the sell-off.
The mix of quality-oriented inventory choice and a scientific derivatives hedge produced the uneven final result we noticed this quarter. Our fairness e-book absorbed a number of the broader market decline, however the hedge greater than compensated.
The consequence was a portfolio that outperformed its benchmark by over 14 share factors in This fall, whereas limiting the utmost drawdown to a fraction of what the index skilled.
Q) With solely 30 holdings, how do you steadiness focus threat versus alpha era?
A) Thirty holdings is a deliberate alternative, not a constraint. Diversification past a sure level turns into diworsification. You find yourself proudly owning the index at energetic charges, with the phantasm of threat administration however none of the advantages.
Our view is that significant alpha comes from high-conviction positions in companies you perceive deeply, not from spreading capital thinly throughout 100 names.
With 30 holdings, each place has to earn its place. Each is chosen via our quantitative multi-factor mannequin, which screens for high quality of earnings, valuation attractiveness, and progress sustainability, after which stress-tested towards portfolio-level focus and correlation threat.
The focus additionally has an essential behavioural dimension. Once you personal fewer companies, you monitor them extra rigorously. Our quantitative course of constantly tracks the earnings and valuation profile of every holding, and the portfolio rebalances yearly to make sure we aren’t holding companies the place the funding thesis has weakened.
In follow, 30 well-chosen small-cap companies throughout numerous sectors and end-markets supplies real diversification of enterprise threat, which is what in the end issues, whereas retaining the focus wanted to generate significant alpha.
Q) What’s the rationale behind sustaining roughly 89% fairness publicity and 11% money — are you positioning defensively?
A) The money part requires a little bit of unpacking, as a result of it isn’t money within the conventional defensive sense. A significant portion of it represents earnings realised from our choices positions which can be but to be redeployed, alongside the usual buffer we preserve for ongoing choices exercise. It’s working capital for the derivatives overlay, not idle capital sitting on the sidelines ready for the market to fall additional.
That mentioned, we aren’t artificially stretching to be totally invested both. At present valuations, we imagine the fairness holdings we’ve are priced attractively, and we see no cause to dilute the portfolio with lower-conviction positions merely to achieve a notional 100% fairness goal.
The extra essential positioning sign is in our valuation indicators. Our Valuation Unfold Index at present reads 37, suggesting equities are buying and selling at a significant low cost to historic norms.
Our Relative Valuation Gradient has moved to 92, one of many highest readings we’ve noticed, indicating that small and micro-cap firms are considerably undervalued relative to large-caps.
These indicators inform us that the risk-reward in our present holdings is genuinely engaging, and that the surroundings favours staying invested with persistence quite than elevating money defensively.
Q) Smallcaps have been unstable — how are you positioning the portfolio within the present market surroundings?
A) Volatility in small-caps shouldn’t be new, and it isn’t one thing we attempt to keep away from. It’s one thing we attempt to use. The This fall correction was broad and sentiment-driven, not elementary.
Our portfolio firms reported 17.31% YoY PAT progress in Q3 FY26, but costs fell in step with the broader small-cap universe. That divergence between earnings supply and market value is exactly the surroundings through which affected person, disciplined traders construct positions at engaging costs.
Our present positioning displays that conviction. We aren’t rotating into large-caps or growing money in anticipation of additional volatility. The information doesn’t assist that call. A PEG of 0.64x on a portfolio rising earnings at over 31% shouldn’t be a place you wish to abandon as a result of headlines are troublesome.
What we’ve accomplished is use the rebalancing course of to improve high quality throughout the small-cap universe. Throughout This fall, we trimmed a place with vital US export income publicity, the place tariff-related uncertainties made near-term earnings visibility troublesome to underwrite, and redeployed that capital right into a domestic-focused cybersecurity firm with sturdy order visibility and margin high quality. That is an surroundings that rewards selectivity throughout the small-cap universe, not wholesale retreat from it.
Our proprietary indicators additionally sign enhancing circumstances. The Development Navigator has begun recovering from its deeply compressed lows, and the Relative Valuation Gradient at 92 marks a number of the most compelling relative entry factors for smaller firms that we’ve seen in a number of years.
Q) What funding horizon ought to traders realistically have to learn from this technique?
A) We’re candid about this. QGF shouldn’t be designed for traders with a one to 2 yr time horizon. It’s a small-cap technique, and small-cap investing virtually by definition requires the persistence to sit down via durations of valuation compression that bear no relationship to underlying enterprise efficiency.
The present quarter is an efficient illustration. Our portfolio firms are rising earnings at over 31% yr on yr. They don’t seem to be in monetary misery.
Their aggressive positions haven’t deteriorated. But costs fell sharply as a result of macro fears triggered indiscriminate promoting throughout the phase. An investor with a two-year horizon would possibly have a look at that and really feel uncomfortable. An investor with a five-year horizon appears at that and recognises it for what it’s: a possibility.
We advocate a minimal horizon of three to 5 years, and ideally longer. The valuation anomaly in small and mid-caps, the place you’re paying 0.64x PEG for 31% earnings progress, doesn’t persist indefinitely, however the market’s means of correcting it may be sluggish and non-linear.
The traders who profit most from this technique are those that stay invested via the complete cycle, permitting the compounding from high-quality earnings progress to say itself as valuations normalise.
Q) What can be your key message to traders contemplating allocating to QGF in FY27 amid the gloom and doom seen globally?
A) The very best time to spend money on high quality small-cap companies is exactly when it feels uncomfortable to take action, and proper now, it feels uncomfortable.
Let us take a look at the info objectively. Our portfolio trades at a ahead PE of 20.09x towards trailing earnings progress of 31.37%, a PEG of 0.64x. Massive-caps are buying and selling at a PEG of two.67x.
Traders are at present paying 4 occasions extra per unit of earnings progress for large-cap security than for small-cap high quality. That may be a hanging divergence, and one which historical past suggests doesn’t persist over a 3 to 5 yr horizon.
Our Relative Valuation Gradient, which measures the relative attractiveness of small versus large-cap firms, is at 92, one of many highest readings we’ve ever noticed. Traditionally, readings at this stage have preceded a number of the most compelling return durations for affected person traders in smaller firms.
The companies in our portfolio are rising. The valuations are engaging. The derivatives overlay has demonstrated, in dwell market circumstances, that it meaningfully limits draw back. And our Development Navigator indicators that the interval of most uncertainty could also be giving technique to one the place clearer traits start to emerge.
Gloom and doom make for compelling headlines. Additionally they make for compelling entry factors. For traders prepared to look via the near-term noise and suppose when it comes to a 3 to 5 yr enterprise cycle, FY27 might nicely look again on as one of many higher entry factors into high quality small-cap equities in recent times.
Our message is easy: keep affected person, keep disciplined, and make investments with a supervisor who has the instruments, each on the fairness facet and thru systematic threat administration, to navigate what comes subsequent.
(Disclaimer: Suggestions, options, views, and opinions given by consultants are their very own. These don’t symbolize the views of the Financial Instances)
