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PGIM India AMC has launched PGIM India Alternatives. Can you tell us more about it?
In this second phase of growth for PGIM India AMC, we are clearly positioned as a Multi Manager platform and will continuously work on being able to deliver investment solutions across the public listed market segment while remaining agnostic of the wrapper or the various licenses.
The idea of PGIM India Alternatives is to provide market (benchmark) agnostic solutions with high conviction and some high conviction themes running across the portfolios to provide complimentary and portfolio completion strategies within core as well as peripheral part of the portfolios. So , across the AIF Category III and PMS strategies, you can and will see portfolios representing the above characteristics which we are confident could appeal to HNW, UHNW & Family offices.
You spoke about focusing on seeking positive operating cash flows while analyzing companies historically in different business cycles. Can you take us through your stock selection approach as a growth investor?
Our approach to investing starts with ‘What we will not do’. This approach reduces the universe on which we need to focus. The process starts with eliminating the businesses where we don’t need to focus on. We do not invest into businesses which:
- Which do not have an adequate history of positive Operating Cash Flows
- Which do not have a reasonable clean balance sheet &
- Where are there any major corporate governance issues in the past
These filters takes care of the safety aspect of a portfolio and ensures that the mortality risk in a portfolio is minimised. Once the safety factor is taken care of, we move to growth. India being a growth nation, our focus is on businesses, which are either well capitalised or there is inherent technology/ knowledge in running these business, as they are moats as well as enablers for growth.
The last leg of the process is valuations, which is looked at in conjunction with growth. Our philosophy is Growth At A Reasonable Price (GARP), which we define through the PEG model.
Besides deciding on when you enter it is equally important to get your exit right if there are red flags. Can you share what parameters you use when deciding to exit the stocks?
The investing loop has three stages, buying, holding on and finally exiting. Exiting businesses, especially, when they have done well and contributed to the portfolio is difficult, as emotions might be involved, for right or wrong reasons. It’s our observation, that very expensive businesses go through time decay and just don’t participate in the market. They either go through time corrections or price corrections, in case of disappointments, as high valuations offer very little margin of safety.
We have tried to minimise the emotional aspect by focussing on Growth at Reasonable Price (GARP) as an objective framework for valuations, both while buying as well as selling. Beyond a certain Price/Earnings to Growth Ratio (PEG) ratio, we start selling in a systematic manner, however good the business & business outlook might be.
A lot of new businesses from different sectors have entered the market through IPOs in the recent bull run. Your fund house has consciously avoided IPOs. Which sectors/industries you are bullish on and which ones would you would avoid?
We remain positive on Indian equities from a medium and long term view. The reason we have stayed away from IPOs, is in most cases, they either don’t fulfil our safety, growth or valuation parameters. A business to get included needs to successfully pass through all the above mentioned three legs.
Given the growth opportunities which will play out over the medium to long term in India, we remain constructive on:
Discretionary Consumption: As per capita GDP moves up, the strength of this trend will play out over the next decade
- As household allocation towards healthcare is moving up and people in general are more conscious about health, post Covid.
Financialisation & Digitisation: These two themes individually and in conjunction will throw out some phenomenal business opportunities for the economy and market participants
Investment cycle pickup: India is witnessing a very healthy trend of pick up in the investment cycle in the private sector, largely funded through internal accruals and not much of leverage building up. We believe we are poised to see the benefits of this over a long period of time, as long as discipline on the leverage side exists.
We have never brushed an overall sector as untouchable. Rather than a sector approach, we take a stock specific approach, while avoiding businesses and our triangular framework of Safety, Growth & Valuations help us in the process.
You have been managing small and mid cap strategies for a long time. How should one play this theme now in second half of 2023?
Mid Caps and especially Small Caps have seen a frenzy in the first half of 2023. Can they go through some price correction or time correction? We believe so. Having said that, one needs to keep in mind, that the Small Caps underperformed the Large Caps and Mid Caps by 15% approximately in FY2023. In case one takes a longer view and the breadth of the universe in the Small & Mid Caps, one can even at this point, go ahead and construct a fairly reasonably valued portfolio. Hence, in case there is some time or price correction in the rest of 2023, one could use it as an opportunity to build long-term portfolios.
While some risks can be measured and accounted for there are unknown risks which fund managers can’t be prepared for. How has your risk management process evolved and what are the risk management practices that you follow?
Mortality of a business is the biggest risk that we see in investing and or focus has been on eliminating that. The first leg in our process, ‘Safety’ is aimed at eliminating that, and a lot of back ground channel checks and audits are done by the team to achieve this. Once that is taken care of, risks like liquidity, volatility, etc. are all part and parcel of investing. Buying businesses at the right valuations, with a margin of safety in mind, helps reduce downside volatility. Overall, we try and keep it simple, knowing that given the return expectations for equities, risks can only be reduced through a process, but cannot be completely eliminated.
