Please describe your long only strategy
The long only strategy doesn’t change over different market cycles since it is very broad based. We call it a ‘hexagon strategy’ which takes into account six different parameters to find profitable opportunities in the market.
The first and the most conventional approach is looking at companies which are recording a growth in earnings, improving their profit margins, valuations and other financial metrics. The second approach is looking for ‘special situations’ like mergers, divestments, acquisitions, and insider buying/selling and so on. The third approach is adopting a contrarian approach to find out of favor stocks/sectors. The fourth approach is finding ‘turnaround stories’. The fifth approach is to find ‘leaders’ in emerging sectors. The sixth approach is ‘climbing the value curve’. For instance, sometimes people form an impression about a company based on the old positioning of the company. But if you look a bit deeply some of these companies are making attempts to become more profitable.
If we follow these six approaches we don’t need to keep changing our strategy as it takes into account all the different ways through which stock prices appreciate. Our approach is quite comprehensive.
The last four to five years have been very good for quality stocks. Now, it has become fashionable to say that we invest in quality stocks. Our belief is that quality is a part of the market in the same way that contrarian investing is part of the market. So different styles (growth, value, contrarian, etc.) work at different points in time. We want to offer an evergreen theme or an alternative which is better from a long term standpoint for our investors. We don’t have a pre-set notion that only certain sectors will do well. We just follow our hexagon approach and build a diversified portfolio which is resilient in changing market environment.
How much assets do you manage in the long only strategy?
We manage close to Rs. 200 crore in the long only strategy. If you include other strategies it would be around Rs. 1,000 crore.
What is the time horizon for your long only strategy?
We invest for a minimum time horizon of two years. We typically look for stocks which can double in three years. We are realistic enough to understand that if we are in the middle of a mid-cap rally we won’t find stocks which can double easily. So we build our portfolio in a measured manner as opposed to having a model portfolio and immediately investing all the client money on day one. So we don’t invest immediately when we get client money.
Are you seeing the reforms undertaken by the Government making any visible impact on the ground?
You have to make bold promises when you come to power. With the benefit of one year of the new government one can feel that the promises made by the government were bold. Yes, there is a little disappointment that things could have been better. But I’m sure that there will be some visible improvement in the days to come.
How are foreign investors looking at India at this juncture?
India is in a unique position. While the commodity crash is negatively impacting emerging markets, India being an importer of commodities finds itself is in a better position. Also, typical emerging nations have governance issues. There would be strong men leading a country who would not believe in democracy or there are coalitions or weak government and so on. On monetary policy and foreign exchange management front, the RBI is considered to be very prudent and well managed institution which is relatively rare in the emerging markets space. The range of options for international investors looking at emerging markets has narrowed down. India finds itself in a relatively attractive position.
The developed market (in terms of dollars) have outperformed emerging markets in the past four years. But going forward, there is no real growth as companies are not committed to make big ticket investments in developed markets. On the other hand, we are expecting that corporates will make a lot of investments in India which is a precursor to markets doing well. Thus, foreigners are confident about India because of all these factors.
Do you think Indian fund managers will continue to find opportunities to generate alpha in future?
India is an inefficient market. Passive funds have not generated investor interest in a big way and I suspect it will remain the same for a foreseeable future.
The investment management field is attracting new talent. So the hidden gems (stocks) will not be hidden for a long time. This is evident when you go for an analyst meet where you don’t even have standing space. I feel the inefficiencies in the market will go away in future. But it is hard to predict when these inefficiencies will go away.
Why have passive funds not picked up in India?
Passive funds or ETFs have a role to play when you have hedge funds which need an instrument against which they (hedge funds) can position their portfolio either in the long or short direction. In developed markets, there are other pools of capital which prefer to invest in ETFs when they have a neutral outlook on the market. We don’t have such funds in India. In India, as long as active funds outperform indices, investors will prefer to invest in active funds.
Is it a good idea to read books to learn about investing?
When you start reading the preface and about the author’s style, you start building a positive image in your mind even before you actually start reading the book. As you read more you tend to identify your style to the author’s style. Since you read a book with a positive frame of mind you tend to get influenced.
I can read about swimming but it will not save me from drowning if I don’t actually get into the water. Similarly, fund management involves meeting management and visiting plants/factories which helps you develop your own insights which reading books might not teach you. It is not a good idea to follow a particular investment style or guru. One should develop his/her own style.
What have been your notable mistakes and what did you learn from them?
Some of my mistakes occurred because of lack of understanding of business or the promoters. The other mistake was that I didn’t book losses on time. Since I had done so much research on the companies I felt emotionally invested in my companies. I felt that things will turn out right. I learnt that it is better to take your losses early.
What are the qualities of a good fund manager and what would be your advice to budding fund managers?
As a fund manager, you tend to get a lot of information from different sources. So sometimes you tend to think that you know a lot. But what I have discovered is that there is no substitute for building your individual view/opinion about each stock. It can be challenging if you are dealing in large caps because there is lot of information/wisdom about such companies which is readily available in the market. As you move down the capitalization curve, the importance of having your own judgment is very important.
The time you invest in understanding a company has a great impact on the outcome.
Also, you tend to get distracted because of the sheer volume of information coming your way. It is fine if you don’t know about a large segment of the market but it is not desirable to not know about the companies where you are investing. I would say that one should invest more time where you are planning to invest and less time on data gathering because data is not same as knowledge and knowledge is not same as the wisdom.
The Hexagon Portfolio is one of the PMS Strategies launched under the umbrella strategy viz. Long Only Fundamental Strategy (LOFS) of Forefront Capital Management Private Ltd
