Investors looking for the next source of alpha should resist the temptation to chase markets, sectors, or asset classes that have already generated strong returns and instead focus on areas currently out of favour, said Kalpen Parekh, Managing Director and CEO of DSP Mutual Fund, at the ET Alpha Wealth Summit on Thursday.

Speaking at the summit, Parekh cautioned that one of the most common investing mistakes is assuming that recent winners will continue to outperform. According to him, future alpha is often found where returns have been scarce, investor ownership is low, and market interest remains limited.

“If you want to search for future alpha, search for where alpha is not there today,” was the central theme of his remarks as he urged investors to think beyond prevailing market narratives.

Parekh highlighted how investor preferences tend to shift with recent performance. A few years ago, many investors believed Indian equities were the only place where meaningful alpha could be generated. Today, after a period of strong global market performance, the narrative has shifted toward international investing. According to him, both views are influenced by recency bias.

Investors often become convinced that the asset class or market that has performed best recently will continue to do so in the future. However, market history shows that leadership rotates across countries, sectors, styles, and asset classes.




“Themes change. Countries change. Asset classes change. Investment styles change,” Parekh noted, emphasizing that markets move through cycles and no single segment remains dominant forever.One of the key points made by Parekh was that investors should not automatically associate strong economic growth with superior stock market returns.

He cited China as an example. Despite being among the world’s fastest-growing economies for decades, Chinese equities have not consistently rewarded investors in line with the country’s economic expansion.

According to Parekh, stock market returns depend on several factors, including capital efficiency, profitability, and the valuation investors pay, rather than GDP growth alone.

Instead of trying to predict the next winning market, Parekh advocated diversification across multiple potential sources of alpha.

He shared data comparing Indian equities, US equities, global equities, Chinese equities, and gold over an extended period. An equally weighted portfolio across these asset classes, rebalanced annually, generated returns broadly similar to Indian equities while experiencing substantially lower volatility.

The analysis showed that while returns were only marginally lower than a pure Indian equity allocation, portfolio volatility was nearly halved. For investors, this means diversification can help improve the investing experience by reducing sharp fluctuations without materially sacrificing long-term returns.

Parekh argued that many investors focus excessively on returns while underestimating the impact of volatility. Investors are generally comfortable with market fluctuations when returns are strong. However, conviction is tested when an asset class or market goes through an extended period of weak performance.

This is often when investors abandon their strategy, sell investments, and miss eventual recoveries. According to Parekh, a diversified portfolio helps investors remain invested during difficult periods because it reduces dependence on any single market or investment theme.

Another important lesson from Parekh’s presentation was the need to study downside risks before making investment decisions.

Rather than asking how much an asset can potentially earn, investors should understand how long it can go without generating meaningful returns and whether they can remain invested during such periods. He noted that many markets and asset classes have experienced prolonged phases of disappointment, even after periods of strong performance.

For Parekh, successful investing is not about accurately predicting the next market winner. Instead, it is about constructing portfolios that can participate in future opportunities regardless of where they emerge.

His message to investors was clear: future alpha is unlikely to come from the most crowded trade or the most popular market narrative. More often, it emerges from neglected areas that few investors are paying attention to today.

Rather than chasing yesterday’s winners, investors should focus on diversification, maintain discipline, and position themselves for opportunities that may not yet be visible

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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