How These Portfolio Managers Defied The Rout

A handful of wealth managers beat the benchmarks even as small and mid-cap rout dragged India’s top portfolio management firms into losses in 2018.

DMZ Partners Investment Management Ltd., Multi-Act Equity Consultancy Pvt. Ltd. and IIFL Wealth Management Ltd. were among the managers which returned gains more than the Sensex and Nifty last year. While the strategies they followed were disparate, the focus on quality was the common theme.

The three outpaced the benchmarks when 50 portfolio managers with equity assets worth Rs 1,03,253 crore ($14.75 billion)—more than 88 percent of the money managed by the category—lost 6.7 percent on an average in 2018, according to data compiled by BloombergQuint from disclosures to the market regulator. By contrast, the Sensex rose 5.9 percent and Nifty ended 3.2 percent higher.

DMZ Partners, which manages about Rs 140 crore, remained invested in consumer and consumer-financing companies despite a correction in valuations. Unfazed by short-term fluctuation in the valuations or disruption, Soumil Zaveri, partner at DMZ, is betting on long-term compounding of these businesses.

Jinal Sheth, associate director and senior portfolio manager-dealer at Multi-Act Equity Consultancy, said the firm’s contrarian bets on export-oriented businesses paid off in 2018. And the wealth management firm with Rs 700 crore in assets continues to own select export-oriented businesses.

Exporters benefited from the depreciation in the rupee in 2018 as the Indian currency weakened more than 8 percent, making it the worst performer in Asia.

For IIFL Wealth Management, managing investments worth about Rs 1,900 crore, the decision to sit on cash or move to non-equity assets when valuations were expensive at the start of 2018 helped. Gaurav Awasthi, senior partner and head-third party products, said the firm will follow the same strategy in 2019.

Read the edited excerpts from the conversation here:

What worked for you and what didn’t? Did you do something which was renewed in 2018 or where their bets which you have taken earlier which started paying dividends in the calendar year 2018?

Jinal Sheth: It was not effort in 2018 but more so before. The seeds were sown in 2016-17. We were telling our clients that small- and mid-cap space valuation was getting out of comfort and it got worse in 2017 when the markets did well. On an absolute basis, we were fine but there were attempts to fare well in a bull market. In 2016-17, we started identifying high-quality businesses which were not doing well. That’s where you were getting value and comfort. So, we built up over there. We were okay underperforming in a bull market. The client base is important in this business, if they believe in you, they stick by you, then it becomes easier for fund manager to do its job. It helped us in 2018 where we stood ground because of bets we have taken in 2016-17. It helped us to outperforming 2018.

You run a larger size portfolio and still manage to do well. Was there something renewed happened in 2018 or your bets taken in 2016-17 continued doing well? Maybe you were not present in certain pockets sank because of multiple issues happened in 2018.

Gaurav Awasthi: From our perspective, the focus on risk is very high. The valuation for small and mid cap is going through roof. Late last year and early this year, we were completely out of mid and small caps. In large caps, we have become quality conscious and quality-focused. It helped us get out of the volatility in good shape.

What themes you have invested in or stayed invested in 2018 worked and why did you take those bets?

Gaurav Awasthi: A lot of quality packs also did not do well. Even in quality packs, valuation matters. The NBFC crises that happened recently. Everybody in world knew that there was asset liability mismatch happening. It was just that the risk was not out in the market. Until, one day it came out and suddenly everything collapsed. A lot of high PE companies, till the growth is there,valuation will sustain. As soon as growth started dipping off, for lot of this names find valuation far cheaper. Quality for us was not in terms of high PE but low debt, where in expensive market you will not lose money.

Did you move out from select NBFCs before IL&FS storm hit the market?

Gaurav Awasthi: Even in debt, the pricing which was happening in debt market in terms of how credit was being priced was extremely mispriced in India. The kind of yields which we were getting for a lot of players, the spread between AAA and AA (rated stocks) was hardly there. While for the entire world, single A is shot through the roof, in India it is reversed. Over the last three months, if you look at valuations, the spread in India is decreasing. This poses a question that there is more damage to come in that part of credit market.

What has been the stand out set of bets that you took in allocation or being contrarian etc, which stood you very well in 2018?

Gaurav Awasthi: In the beginning of 2018, the view was emerging world is growing. If you look at ex-U.S., the rest of the world was gradually slowing down. The U.S. was the outlier, which continued to grow because of policies of President Trump.

The other view was interest rates are on the way up because of what is happening around globe, tightening and you don’t know when the cycle will end. Crude was not there as base case at that point of time. The fact that you expected interest rates to go up, the fact that you expected global growth to slow down and it went out to allocation. Anything which is linked to global economy, for example commodities, which you will want to start avoiding. Also, what is very linked to interest rates—so the NBFCs.

While we can’t claim that we saw the NBFC crises [coming] in any way, the point is if you expect the interest rates to rise then the kind of competition the NBFCs would be giving to banks will start subsiding. Banks will be competitive going ahead. If you look at housing finance companies, the underlying real estate market is not doing well. So, at some point the growth has to slowdown. We all know where the real estate market is right now from sales velocity perspective. Unless that picks up, the growth which is riding on top also has to slowdown.

So, you took bet before IL&FS hit.

Gaurav Awasthi: Yes. The front view was we thought interest rates were going up in the economy. If my two broad views are the world is slowing down and at the same time interest rates are going up, the first allocation bet is anything you are to do with global economy want to start getting out. Anybody, who has taken advantage of this entire down swaying of interest rates, on the upswing they will get hurt. That for us played out.

What is the thought for 2019 for financials?

Soumil Zaveri: We follow audacious, outlandish and unconventional approach.We are not tending to minutely focus on what interest rates will be over a year and it is very fundamental to the approach. We are in it for element of time arbitrage when others are focusing on three to six months which will have meaningful impact on some of these businesses. It is not to deny it or dismissive of it. Some of these businesses have scalability prospects which are not being measured in those time frames.

Take businesses like Eicher Motors. We take stewardship of that brand and business. When they get monthly sales numbers, it is comical tome. You look at Sherwin Williams, the paint business in the U.S. over the last decade, they published details of paint sold every month. If anyone wants to pass action judgements on it, it will be a real folly. The story played out over a multi-decade horizon.

Because we have a clear mandate, we view ourselves as a family for very limited number of families and the approach is very simple, by irreplaceable asset with irreplaceable capital. We just want to mute out the things which we are not qualified to comment on, whether it is our view on interest rate cycles. We zone out of these things. It is a zone of expertise that we can’t curate. It is not a zone of expertise which we can cultivate. So,let’s operate in zones where competencies aren’t critical.

What’s your view this year?

Gaurav Awasthi: The view sustains that global growth continues to slowdown and now the U.S. has also joined the pack. Anything which is outwardly looking not still be a great idea. Even from market capitalisation point of view while mid and small caps are corrected substantially. Valuation on mean are still higher which is true. We remain cautious in our stands, but we are not over bullish right now. We don’t think we will have substantial returns. We may, in best case, get lower double-digit returns. It is our sense, especially with lot of volatility we have.

The key is earnings have to revive. People hope every year that the first quarter will come in and you will come in the second half. If earnings come up, if capex cycle is reviving, capacity utilisation is going up,if those things played planned, then we will have huge swings where capex and related sectors may start doing well. Rather than jumping into it, it is great to wait for evidence.

The one book which you will recommend.

Gaurav Awasthi: Thinking, Fast And Slow by Daniel Kahneman. If you are able to control emotions, they you will make far more money in market.

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