Tue. Sep 26th, 2023
    The Relationship Between Fund Flows and Stock Prices, According to Prashant Khemka

    In a recent interview, Prashant Khemka, MD of WhiteOak Capital Management, discussed the relationship between fund flows and stock prices. He explained that typically, fund flows decrease after a decline in stock prices, as investor sentiment changes. The decline in fund flows may not immediately reflect the decline in stock prices, but eventually, fund flows cannot continue to support the market.

    Khemka pointed out that the perception among market participants is that as long as fund flows are coming in, the market will not decline. However, he highlighted that the stock prices can still decline despite the continuous inflow of funds. For example, on September 12, fund flows to small caps continued, but the smallcap index was down 4 percent. This volatility can continue for some time, but eventually, investors will start losing money and reconsider their investment in smallcap funds. As a result, fund inflows will slow down.

    Regarding alpha generating opportunities, Khemka emphasized that there are always opportunities for generating alpha in large caps, mid caps, and small caps. Even if the overall market is overvalued, there will still be undervalued names within each segment. The key is to identify these undervalued opportunities and generate alpha in an overvalued market.

    When asked about opportunities for absolute returns, Khemka emphasized the importance of the time horizon. He mentioned that in the near term, predicting absolute returns is difficult. However, over the long term, if the economy grows steadily, well-selected stocks can provide strong absolute returns.

    As for sector rotations, Khemka acknowledged that the market has witnessed sector rotations every three or four months. However, instead of trying to predict which sector will perform better, Khemka’s approach is to focus on identifying winners within each sector and market cap segment. By building a portfolio of long-term winners, they aim to outperform the market or benchmark regardless of sector rotation.

    In conclusion, Prashant Khemka highlighted the importance of understanding the relationship between fund flows and stock prices. While fund flows can initially support the market, they will eventually slow down after a decline in stock prices. However, there are always opportunities for generating alpha and absolute returns by identifying undervalued stocks and focusing on long-term winners within each sector.