Please describe your investment approach and how it has evolved over time.
My investment approach is about buying high quality businesses which have superb underlying economics (high and sustainable ROCEs) and have the ability to re-invest their earnings in such a way that they continue to show growth for long periods of time. In essence, the philosophy is about buying companies that have deep moats around them and also have large sized business opportunities that can be harnessed for decades to come. Of course, the biggest challenge is to buy such businesses at sensible prices and this usually turns out to be the most daunting yet exciting part of the game.
What were your notable mistakes and what did you learn from them?
My biggest mistakes were made in 2006 and 2007 when I purchased businesses that were showing high growth but were essentially doing that at the cost of worsening balance sheets and cash flows. The chink in my armor came to light around the financial crisis of 2008 when external funding stopped (both debt and equity) and internal cash flows were just not enough to sustain growth for such kind of companies. Consequently, many such companies just went off the cliff and it was then that I realized the importance of moat based investing and buying companies with strong cash flows and ROCEs. Like I just mentioned, this lesson has been built into my core philosophy now, lest I get carried away again during such mad rallies in the future.
How do you generate ideas and what is your selection process before an idea gets added to the portfolio?
Before getting excited about a business, I first try to check whether a particular business really adds any value to the society at large and its customers in particular. In other words, does it possess a right to exist? Once I am satisfied about the business catering to an essential need, the next question is whether it has a right to win. This is where a lot of time is spent in terms of understanding the competitive dynamics of the industry in which the business operates, pricing power of the business, government regulations or controls if any and so on. It is noteworthy here that not all businesses that solve an important societal need create value for investors, which can be substantiated if you think about the airlines industry. It is therefore essential to address the above questions.
Once this is done, the next step is a thorough financial analysis of the business. This entails studying historical financials to check how it has behaved in the past at different points in the economic and business cycle, whether the business generates strong cash flows or is dependent on external sources of funding every once in a while, are the margins stable or volatile and so on. Once I am satisfied that the company has all the ingredients to generate value for investors, it is gradually introduced in the portfolio at the right valuations.
UTI Mahila is conservative scheme. It also invests a small portion in equity. What kind of companies do you prefer investing in this scheme in the equity space?
The investment philosophy here is no different from the one mentioned above. Once I am satisfied that a great business has been identified I prefer to add that to all the portfolios that I manage over a period of time.
How does India fare at this juncture vis-à-vis other emerging countries?
India at this juncture is standing tall amongst all other emerging markets. During 2003 to 2008, all emerging markets were painted with the same brush and money was flowing into any and every country that was defined as an emerging market, essentially because it was felt that these are high growth destinations. While this played out well for some time but the global financial crisis of 2008 brought to fore the very different characteristics of each of these markets. While BRICS was coined as a term that supposedly represented a homogenous set of countries having an underlying set of factors in common, that myth has been broken in the last few years. Russia is expected to show a negative GDP growth, Brazil shall clock a low single digit growth like South Africa and China has hugely decelerated from about 10% growth to roughly around 6.5% growth. If you contrast this to India, we should be clocking around 7.5% this year and gradually moving up from here in the coming years. This huge dispersion in performance amongst various emerging markets has forced foreign investors to look at each country separately rather than as a single block. I guess this is where India outshines the rest of the pack and therefore shall continue to attract foreign capital. There will be ebbs and flows depending on the global macro as well as geopolitical factors but underlying momentum in FII flows shall continue and perhaps get better.
What is it required to be the best at your job?
I guess the biggest quality of a fund manager is to have a multi-disciplinary approach towards investing which essentially comes from reading as much as possible on varied subjects and issues. Discipline, perseverance and patience are qualities that in some sense are essential for a successful fund manager. Lastly, fund managers need to accept that not everything that happens in the market has a logical explanation and therefore one should never try to seek answers and draw patterns when none exist. This equanimity can help you in staying focused on things that are under your sphere of influence and shutting yourself to noise.
What is your advice to budding fund managers?
Each one of us has personal biases in life but such biases should never creep into the decision making process. This is where the behavioral side of investing becomes important for fund managers to understand and is a good starting point for young fund managers. Also try to develop your own unique investment philosophy as early as possible in your career and then stick to it.
One book which inspired you a lot…
I guess there is no one book that can make you a successful money manager. Like I mentioned earlier, you have to keep reading as much as possible. You can shorten your learning curve by reading the investment philosophies of some of the successful investors. One of my personal favorites is "Common Stocks and Uncommon Profits" by Philip Fischer ( written in the 1950s) because you realize that the basics of investing are the same even after half a century and that it pays to keep your investment philosophy simple.
