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Interview with Mr. Bharat Shah

Warren Buffet, the legendary investor was invited in a gathering of college students along with Bill Gates, where he remarked that his profession of being an investor is simple but not easy. In our multiple conversations with Indian public money managers this fact has come out more than often.

So, what do money managers do differently?

Below, we share excerpts from an interview we did with Mr. Bharat Shah— Executive Director, ASK Group. The interview was conducted by Sankalpo Manoj Pal— Business Development, PMS AIF World.

Sankalp Pal (SP): With Nifty at 18k, what is your investment strategy?

Bharat Shah (BS): The investing philosophy is never contextual with the benchmark, if your investment philosophy is linked to the market levels then it’s not a philosophy but it’s a convenience mechanism. Market philosophy held ransom to the whims and fancies of market movements cannot be called a philosophy. Thus, a good philosophy evolves over time and a good philosophy stays true all levels of the market. The approach to investing remains same through most times as there are very few companies in the market that deserve your attention and even fewer that deserve your money. There are certain characteristics of good business starting with the nature of the management – the management capability can be judged by ability of management to capture the growth and execute the ideas and then capital allocation, very few good businesses have the guidance of a good manager. On the other side the quality of the business can be evaluated by a few features- the size of opportunity and the growth to capture the opportunity, the quality of the growth can be judged by how much more outcomes can be generated with similar efforts and capital gone into the businesses for a long period of time.

The above factors to a good investor create a valuation range, and here the task of a good investor is to evaluate at what price the business deserves their money. The last part of the investment philosophy is to deal with the market ups and downs and stay through the course and avoid the honey traps of the market.

Investment Philosophy means doing all these things again and again, a good investor needs to be confident yet skeptical in their philosophy. This doesn’t change over time as an investor no matter where the market is. A great investor harnesses all the qualities of good business.

SP: Bharat bhai you have been investing money as a vocation for close to 3 decades now, do you think someone newer to investing might not be able to grasp basics of investing as well as you do?

BS: Parts of attribute can be acquired, improvised, or polished over time and then are those attributes which you either have or you don’t the, the science of investing and the later typically make the art of investing.

The science of investing involves understanding businesses, understanding capability of management, insights on the size of opportunity, future growth, and the concept of the economic life of the business and then discounting that to the present. The science of investing also involves making a judgement and refining the judgement. All these involve making critical decisions but most of these can be acquired or improvised over a period of time.

The art of investing on the other hand has aspects which are more intimate to the character of the person and these attribute that comprise the art of investing might not be the ones that can be acquired.

As discussed earlier investing often requires you to have contrary emotions of both faith and scepticism aggression and conservativeness and this is not an easy task to accomplish, and intellect might not be able to help here. The markets at all points in time are a mix of emotions and rationality, the nature of a good investor requires him or her to be able to apply their rationality to the emotionality of the markets, this is again a task that requires a skill which you either have or you don’t.

Another important aspect of a successful investor is the self-awareness, knowing the limitations and knowing the strengths, understanding where your inclinations lay this is a skill which is essential to investment success.

A mix of intellect and the art of investor helps them go through the various up and downs, seductions, enchantments of the market. While most focus on the science of investing there’s significant case for the art of investing.

SP: We have seen lots of popular stocks becoming significant wealth creators in the last decade. While a lot of fund managers help them though the journey, many fund managers and investors would have gotten out of them much earlier, how can you explain the differences in the opinions and holding periods in these stocks?

BS: Amongst all the things necessary for a successful investor at the pinnacle is the ability to stay the course and it is not easy at all. Despite all the skill and scientific acumen of identifying the right businesses and the winning opportunity if the temperament to stay the course is not met the investment will be a fraction of what it could be.

Staying the course is never easy, for example a rupee invested in Bajaj Fin 11 years ago is roughly Rs 100 today, however through the 11 years the rupee would have gone to Rs 4 and come down to Rs 2 and risen to Rs 8 and then back to Rs 6 and so on… during this journey it’s very difficult to convince yourself to stay the course and knowledge or skills are of little use to an investor in this regard, thus its very essential how you react to the emotions of the market and are able to distinguish what is transient and what is permanent to the business you invest in.

Making a sound decision once doesn’t mean your work is done, you have to do the evaluation process from time to time to ensure that logic of investing in the business still holds true.

Finally, one must be cognizant how powerful compounding gets with time and the ferocious impact it can have on your portfolio. 25% in 3 years means 2x, 9 x in 8 years and close to 16x in 15 years. In this course of compounding the penalty of missing out even a couple years of compounding would be real and huge; therefore, one has to honour and respect the process of compounding.

As a closing remark, markets don’t lack talent and intellect, in the equation of investing rewards the art part plays a very significant and large role and is often short in supply, and the art of investing is what makes the difference when it comes to returns from investments.

SP: Alpha v/s consistency? How do you look at the two and what’s your preference amongst these?

BS: Alpha and consistency are not polar opposites to each other and in fact alpha is delivered over a period of time by the consistency of thinking, approach, philosophy, discipline and skill provided that the base is set right. Tables kept for long don’t turn into diamond and hence its important investors thus begin by setting the right approach.

However, what confuses many observers is the tangibility of shorter term metrices like returns, for observers to look beyond the tangible short term is difficult and requires a lot of efforts, while evaluating things like process, risk control, philosophy and underlying portfolio are often forgotten due to their amorphous nature.

Often good managers who otherwise have good control over their destiny thus end up doing things that might not be in the best of interest to their clients and organizations due to the tangibility of factors evaluated.

SP: How should investors then evaluate performance?

BS: Over the longer term there’s only one way to evaluate a fund manager and that is performance, its only in the short term that observers might get the big picture wrong if they focus too much on just returns.

SP: How have you followed your process over a very long term by ignoring noises in the market?

BS: Ignoring noise in the market is about tackling market emotionality with your rationality if you tackle market emotionality with your emotionality you are heading for a dangerous situation. Ignoring noise leads to self-nourishment and is a great service to oneself as an investor.

Ignoring noise will always mean taming or subjugating it, it’s very unlikely that you will absolutely cut down noise and this process involves two aspects – the science and art of ignoring noise.

In the first part all the information, data, judgements, and your persistent data combined creates information, this information leads to confidence and from confidence the equanimity,

equanimity gives you the power to ignore noise and choose signals instead, however most of these data, information, efforts and judgements might seem like an incoherent set and might not mean anything but over the years they built up to make you knowledgeable enough.

The second part is about your personality and how to deal with things that happen in the market- the ability to understand that most things in the market are transient and not permanent. One doesn’t need to attain nirvana to understand this, you just need to understand enough to be indifferent to most noises in the markets, it’s like sitting in front of an ocean – when the waves hit the shore the noise can be unnerving and disturbing at first but after some time you to get used to it and the noise of the waves stop bothering you…

PMS AIF World was set up in 2019 with an aim of informed investing experience for savvy investors. Kamal Manocha, the founder of PMS AIF World, had previously worked for a decade with Citibank, Delhi. He was unsatisfied with the way banks and private wealth management firms were operating as these firms were relying primarily on relationship traits as a mechanism to acquire clients and were focussed on selling a few branded products only, especially in the space of PMS and AIFs; with low knowledge in this area, as there was no way to compare and analyze these products. But PMS AIF World is transforming this space with the power of data, analysis, audio-video content, articles, interviews, educative webinars with an aim of offering the best quality products which follow a simple approach to wealth creation along with simplistic content & analysis for an informed investing experience. We are very selective in our approach, and analyze PMS AIF products across 5 Ps – People, Philosophy, Performance, Portfolio, Price.

At PMS AIF World, all PMS AIF Products are listed with all possible information and data for investors to understand & compare these products from the lens of risks as well as returns.

A unique proprietary framework has been founded by PMS AIF World whereby 3 important attributes i.e. Quality (Q), Risk(R), and Consistency(C) are presented for more than 150 portfolio management services by covering 9 factors like Standard deviation, Beta, Sharpe, Alpha, Consistency Ratio, and so on. Many investors as well as the industry are using this proprietary framework to learn, compare, and select the best PMS products in India.

Here is the link to Register and access our QRC Database.

On 15^th August ’22, India celebrated its 75th Independence Day. In the last 75 years, India has come a long way… but there’s still more to achieve. Let’s look at the Indian economy & how far we’ve come.

The moment India gained its independence marked a turning point in economic history.

Historically, India has been the largest economy in the world for most of the two millennia from the 1st until the 19th century. But, due to Britain’s ongoing deindustrialization, the nation was in an unsustainable state of poverty. Less than one in six Indians could read and write. India’s survival as a single country had been called into question due to the extreme poverty and stark social divides.

Looking back upon history, we have come a long way & progressed exponentially as an economy. Once branded a “third world country,” India is now among the biggest economies of the world. The Indian economy, which, a decade ago, didn’t even make the cut in the list of Top 10 economies, is currently the 5^th largest economy in the world this year (according to IMF, based on GDP estimates). There’s still a long way to go for India, though.

Being the 3^rd largest contributor to the world economic growth, despite unresolved & ongoing conflicts with its 2 neighbours, India is in friendly terms & positive relations with almost all other countries.

Here’s a look at India’s economic journey in 5 points:

1. Food Production: One of India’s biggest achievement post-independence is attaining ‘self-sufficiency.’ From receiving food aid in the 1950s and 1960s to becoming a net exporter, India has seen a turnaround in food production. The total food production, which stood at 54.92 million tonnes in 1950, rose to 316.06 million tonnes in 2021-22.

2. Gross Domestic Product (GDP):From independence in 1947 until 1991, successive governments promoted protectionist economic policies, with extensive state intervention and economic regulation. An acute balance of payments crisis in 1991 led to the adoption of a broad economic liberalisation in India. Since the start of the 21st century, annual average GDP growth has been 6% to 7% and from 2013 to 2018, India was the world’s fastest growing major economy, surpassing China. Today, India is the world’s fifth-largest economy by nominal GDP (Rs 236.6 lakh crore as of FY 21-22) and it has grown more than 10 times since reforms process started in 1991.

Top 5 world economies as per IMF’s current estimates of nominal GDP are:

• United States: ~Rs 2016 lakh crore
• China: ~Rs 1584 lakh crore
• Japan: ~Rs 390 lakh crore
• Germany: ~Rs 338 lakh crore
• India: Rs 236 lakh crore (recorded data)

3. US Dollar to Rupee & Forex Reserves: At the time of independence, a US dollar was equal to Rs 3.30 in 1947. As of August 2022, a US dollar is approximately equal to Rs 80.

India’s foreign exchange reserves in 1950–51 were a pitiful Rs 1,029 crore (in foreign currencies and other assets including gold). In fact, India’s low forex reserves played the catalytical role in kickstarting the economic reforms.

In 1991, India had barely $1.2 billion in foreign exchange reserves, or enough to cover imports for three weeks only. Three decades since the reform process began, India’s foreign exchange reserves were placed at $ 573.9 billion as of July 29, 2022.

4. Foreign Direct Investment (FDI): In 1948, the total foreign investment in India stood at Rs 256 crore. However, since the 1991 liberalisation, FDI has become the buzzword of India’s economic story. Foreign direct investment in India is the sum of equity capital, reinvestment of earnings, other long-term capital, and short-term capital as shown in the balance of payments. India has been a popular destination for foreign direct investment (FDI) since 1991. The country has been ranked among the top 10 FDI destinations in the world for eight consecutive years. The Indian government has taken various steps to make it easier for foreign investors to do business in India. Despite the ongoing pandemic and global developments, India received the highest annual FDI inflows of USD 84,835 million in FY 21-22 overtaking last year’s FDI by USD 2.87 billion.

5. Sensex & Nifty: Having completed 40+ years into existence, the 30-share Sensex, India’s oldest stock market index was launched in 1986, but 1 April 1979 is the base year when the index was set at 100. The Sensex touched the four-digit figure for the first time in 1990. On 25 July 1990, the Sensex closed at 1,001 and it has grown multi-fold since then. The Sensex is seen as the barometer of India’s growth and reflects the changes in the economy over time. At the time of writing this in August 2022, the Sensex is currently trading at 58,700 levels, i.e. a CAGR of ~17% since inception (excluding dividends).

India has come a long way since its independence from the British rule 70 years ago, and so have the country’s stock markets. In 1996, the National Stock Exchange (NSE) created and administered a settlement fund and launched Nifty 50 Index (a broader benchmark index as compared to Sensex) with a base value of 1000. At the time of writing this in August 2022, Nifty is currently trading at 17,500 levels, i.e. a CAGR of ~12% p.a. since inception (excluding dividends).

Why is Indian economy at the cusp of a massive growth cycle?

India is the world’s sixth-largest consumer market and has been a member of the World Trade Organization since 1 January 1995. As of 2020, it ranks 63rd on the Ease of doing business index and 68th on the Global Competitiveness Report. With 50 crore workers, the Indian labour force is the world’s second-largest. India has one of the world’s highest number of billionaires. The country has free trade agreements with several nations, including ASEAN, SAFTA, Mercosur, South Korea, Japan, and several others which are in effect or under negotiating stage.

The service sector makes up 50% of GDP and remains the fastest growing sector, while the industrial sector and the agricultural sector employs a majority of the labour force. India is the world’s sixth-largest manufacturer, representing 2.6% of global manufacturing output.

Nearly 66% of India’s population is rural and contributes about 50% of India’s GDP. India is the world’s largest manufacturer of generic drugs, and its pharmaceutical sector fulfils over 50% of the global demand for vaccines. The Indian IT industry is a major exporter of IT services with $196 billion in revenue and employs over 4.47 million people. India’s chemical industry is extremely diversified and estimated at $178 billion. The tourism industry contributes about 9.2% of India’s GDP and employs over 4.2 crore (42 million) people. The construction and real estate sector ranks third among the 14 major sectors in terms of direct, indirect, and induced effects in all sectors of the economy. The Indian textiles industry is estimated at $100 billion and contributes 13% of industrial output and 2.3% of India’s GDP while employs over 4.5 crore (45 million) people directly. India’s telecommunication industry is the world’s second largest by the number of mobile phone, smartphone, and internet users. It is the world’s 24th-largest oil producer and the third-largest oil consumer. The Indian automobile industry is the world’s fifth-largest by production.

India has a retail market worth $1.17 trillion, which contributes over 10% of India’s GDP. It also has one of the world’s fastest growing e-commerce markets. India has the world’s fourth-largest natural resources, with the mining sector contributing 11% of the country’s industrial GDP and 2.5% of total GDP. It is also the world’s second-largest coal producer, the second-largest cement producer, the second-largest steel producer, and the third-largest electricity producer.

India has maintained a consistently higher growth rate since the process of reforms was introduced in 1990s. The government has undertaken several measures to make it easier for companies to do business in India. These include the liberalization of FDI norms, streamlining of tax regime, tax incentives to encourage investments, implementing the Goods and Services Tax (GST), and so on.

The year 2022-23 is the 3rd Year of this decade and we see it Optimistically as well as Cautiously for India. The next quarter-century could mark India’s rise as a nation, making it an Indian Century in a wholistic way.

The pace, ideology, and policies behind the economic and non-economic reforms adopted over the last decade are leading India to attaining higher ranks in the world economy over the ongoing decade. Having said that, enormous amount of Wealth can be created if one makes the right investments at the right time. Indian economy will only grow on the back of businesses that steer this economic growth for India. The eye to identify this businesses lies with very few professionals, and it is important that your investments are channelized towards these fund managers who can compound your wealth by 10x in the next 10 years.

We, at PMS AIF World are a responsible and long-term investment service provider in the space of Alternates and we are constantly striving to help investors make informed investment decisions. Book an appointment with our Experts and invest through us in the best quality products.

While rate hike fears have eased down a bit, it’s now time to factor in the next demon in line: Recession.

Let us understand how some of the top economies of the world are grappling with recessionary fears.

US, Europe, UK
The drop in Brent and WTI, to a very low level in early August on fears of recession and softening global economic growth is worrying global investors. So, the pertinent question is: Have the markets factored in a possible recession looming over developed economies?

As of June, Quarter ’22, US GDP declined for the second straight quarter, more or less a confirmation that the world’s largest economy may be entering recession, if 3rd quarter show negative GDP as well.

The recession fear looms over the United Kingdom as well, as with a rise in the price of natural gas, recession fears have intensified in Europe.
As Ukraine completes 6 months of going into war, the devastation is felt way beyond its borders.

The Euro, Europe’s de facto currency is at a 2 decade low. Let us tell you what does this imply. Europe has 27 countries and 19 of them use the Euro as its currency. The Euro is losing its value because European economies are facing 3 major challenges –
– Energy Crisis [this can single-handedly destroy Europe’s economy]
– High Inflation [currently at a 25-year high at ~10%]
– Political Turmoil

Europe’s growth engine, Germany, the largest economy in Europe, gets almost half of its Gas supply from Russia. Based on macros, if Moscow cuts off this supply completely, Germany could lose $225 bn in 2 years. Couple this with inflation, it is evident that the Euro zone is not insulated with the rising cost of living. The numbers are scary across Europe- from energy to food, everything is becoming expensive.

Italy, Europe’s 2nd largest economy is also losing its trust in the face of the world economy. The political chaos tumbling down Italy might be a trigger to shake up the entire European economy. Investor confidence in the German economy is at the lowest level in at least a decade- this was seen when Investors dumped Italian govt. bonds in July ’22.

UK [technically not a part of the EU but a major European economy], is in a dire state. The Bank of England expects the country to enter a recession from the fourth quarter of this year, which will last until the end of 2023.
The US, EU, and a the large part of the Western world is very clearly heading towards an economic recession.

China
China’s current status in the global economy is not what it once was. The US has been actively working to keep China from having access to cutting-edge technology. China’s property sector, which contributes to around a quarter of their total GDP, is suffering. Droughts, heat waves, and flash floods have been causing a lot of problems for China lately. These problems are happening at an alarming rate due to climate change. Experts predict that the heat wave could be one of the worst in global history.

Indian Equity markets are highly skewed. As of 9^th Sept-22 closing, the markets crossed a market capitalization of Rs 283 lakh crores ($3.5 trillion). It is imperative to note here that the 30 companies that form the Sensex 30 are worth more than half of India’s total market cap, and the 50 companies of the Nifty 50 pack constitute about 2/3^rd of the total Indian equity market valuation, and the top 100 companies constitute about 80% of the equity markets. Hence, it is evident that the markets are highly skewed.

In a skewed market, 2 things happen:

• If the top 50 companies are running expensive, the whole market looks to be highly expensive
• If the top 50 companies are running cheap, the whole market looks to be cheap

Insight #1: The valuations of Top 100 companies do not convey the valuation of the broader markets.

Beyond the Top 100 companies, there are a lot of businesses that are of decent size (but do not qualify as large caps) as well, that have been performing well in their respective line of businesses.

When one focuses on the scrips forming Nifty50, one limits himself to only certain sectors like banking, finance, and insurance [35% of Top 100 stocks]; IT [15%]; FMCG [14%]; and 8-10% each of Oil & Gas, Pharma, Auto; and so on.

Insight #2: Nifty & Sensex constitute of only few sectors like Banking & Finance, IT, FMCG, Oil & Gas, Pharma, and so on. Sectors like Construction, Textile, Specialty Chemicals, Travel & Tourism, and so on are also crucial to the Indian Economy but are hardly a part of Nifty & Sensex.

But who holds this market? What is the shareholding pattern of the Indian Equity markets as a whole?

About 55% of the total market cap of Indian Equity markets is owned by promoters [the market cap of US is $48+ trillion, but promoters holding is only roughly about 6%]. About 19% is owned by FIIs [Foreign Institutional Investors], about 14% is owned by DIIs [Domestic Institutional Investors]; and the balance 12% is owned by PMS Managers, Family Offices, Retail Investors, HNIs, and so on.

2/3^rd of our market, which is the top 50 stocks- here, the promoter’s stake is around 51%. In the basket of the next 50 stocks [Stock #51 – 100], the promoter’s stake is around 53%; whereas in the basket of Midcap Stocks [Stock #101 – 250], about 59% is the promoter’s stake. In the next basket of Stock #251 – 500, about 57% is the promoter’s stake.

Moving on the bifurcation of investments done by FIIs, it is noteworthy to realise that about 1/3^rd of their investment is into the Top 3 Stocks [Reliance Industries, HDFC, and TCS]. About 80% of their investment is into the Top 50 stocks. For domestic [institutional & retail], if one is holding any of these stocks, one has to actively track FII movements as any FII action on these stocks can affect its price.

A similar situation pans out at the end of DIIs- about 80-85% of their money is invested into the top 100 stocks.

Insight #3: 7-8 businesses constitute 75-80% of Nifty/Sensex, and the market cap as a whole; but they do not make 70-80% of the Indian economy- hence the disconnect is visible between the economy & the markets.

To put this into perspective, one can witness that between 1^st Jan-2008 to 15^th July-2013 – over these 5.5 years, while the Sensex was more or less at the same levels, our economy’s GDP grew 8.5% p.a. in real terms. To give a more recent example, from March 2020 to March 2022, the economy has not moved at all [GDP fell 7-8% in FY21 and went up by the same % in FY22], but the markets have gone up crazily!

Insight #4: Sensex & Nifty’s job is to reflect what’s happening in Sensex & Nifty companies, and not the entire Indian economy.

Let’s break this down to connect the dots. In the last 2 years, businesses in sectors like banking, financial services, IT, benefited from the disruption… and these are also the sectors that form about 70-80% of the total market cap; hence, Sensex & Nifty witnessed a rally, reflecting growth in businesses that form 70-80% of Sensex & Nifty.

On the other hand, businesses in sectors like Real Estate, Tourism, Textile, Construction, and so on, took a setback. These are businesses that constitute a good part of the Indian economy but aren’t the highlights of Nifty or Sensex. Hence, the economy took a hit as well, as major businesses that form the economy did not reflect growth in the said period.

Insight #5: What constitutes our economy, and what constitutes the Sensex & Nifty are very different businesses.

Thus, it is evident that there is a disconnect between the markets & the economy but that does not imply a negative correlation. It is simply a structure that plays out at times and as participants of the market & as contributors to India’s GDP, we should be aware of this phenomenon and not remain naïve.

The growth prospects in India are growing and India is poised to grow at a rapid pace over the next few decades- both in terms of market cap & GDP.

Attributes of last decade were low growth and high liquidity, so mid and small cap returns were not much different from large cap returns.

However, attributes of the current decade are high growth and low liquidity on account of quantitative tightening; so, high performance investing in this decade is all about investing in the space of businesses beyond top 100 companies.

Thus, we list the best Multi Cap PMSs which are designed to participate and outperform in this decade:

One thing which every equity or a debt investor, every money manager and every advisor has followed throughout year 2022 is Fed’s stance, and its consistent rate hikes. For those who have witnessed this in the past remember how Fed brought rates down to 0% from as high as 4.75% after GFC. The same is reversing now, so remembering history is important to understand the present and projecting the future.

Date & Time:06^th January 2022, 04:00 PM – 05:00 PM IST

Speaker: Ashish Agarwal, Managing Partner and Head – Private Equity, Edelweiss AMC

Moderator:Kamal Manocha, Founder & CEO, PMS AIF WORLD