The ticker junkie effect

Dated: 9th of May, 2017

 Performance and Portfolio Activity
The portfolio was up 4.81%  Dollar terms for the month of April, 2017, compared to the investible  Indian index, Nifty 50, which was also up 2.40%. Stocks continued their  broad rally upwards in prices as they have been for quite sometime now.


Earnings  season news flow dominated in the month of April. I can go into the  details about how some of our holdings, which have reported, have done  in the quarter or financial year gone by but I think a general comment  of 'no negative surprises' is a better way to put it. For example, HDFC  Bank reported an ~18% growth in PAT in FY17 while IndusInd Bank reported  a ~21% growth, with both banks maintaining their asset quality. The two  auto holdings in the portfolio, Eicher Motors and Maruti Suzuki,  reported a ~45% and ~35% growth in net profits in FY17 respectively.  Maruti Suzuki has been (even to my surprise) extremely successful in  re-branding itself in the past two years with its Nexa foray thereby  aiding to its margin uplift.


Even though valuations are stretched  by any measure, as it is almost all over the world in equities, I do  not think that we are at a point where we can make a fair and rational  assumption that a major correction is on the cards. I do not see any  real exuberance in markets as what we see in media, to my mind, is a  general caution as to how markets have rallied thus far. It is when we  stop hearing these valuation concerns we should take notice. 


Change in compensation structure
I  have always believed that an investment manager should only be paid to  make money for a client/ partner while keeping fiduciary duty paramount  at all times. While this flies at the current scenario of investment  management fee structures around the world, I must confess I have been a  part of that crowd, although quite consciously and unwillingly.


Certain  changes at KGS has now enabled me to incorporate a fee structure which I  believe is true to my thinking and also to what I think is right. The  changes to the fee structure are as follows:- 

  • While targeting 5- 10% p.a. above hurdle rate, we have changed our hurdle rate to Nifty 50 USD with a High Water Mark.
  • The  management fee has been abolished and the only charge that will be made  to the client will be the administrative fee required to maintain the  managed account. 
  • A 20% performance fee will be levied which will be accounted yearly and with a high water mark provision. 
  • There  will be a claw back arrangement in place, amount limited to cumulative  prior 5 years of performance fees compensating for any cumulative  underperformance as compared to the hurdle rate (cumulative). This claw  back provision will only apply to asset managed for any 5 year period  (except in a condition where the Investment Manager underperforms the  hurdle rate (cumulative) in any rolling 3 year period).


I  want to emphasize that KGS is able to do this because of its extremely  lean structure (where all analysis and execution stop with me). It  always seems crazy to me that an army of analysts are needed to select a  few stocks for a portfolio. Moreover, of all the investment houses I  know of, I have known none where portfolio managers are obligated to  select stock from the pool of selections the analysts made. In fact, I  know of a few investment houses (some major ones) where portfolio  managers even proclaim that they don't use their analysts at all. So  much for the fees!


My learning in markets thus far: the ticker junkie effect
I  am fully cognizant that I am not 80 years old and I have many many more  aspects to learn from markets, many irrational behaviours (some mine,  some of the crowd) to see and many economic conditions to live through.  However, I also think that thus far, the little learnings I have gained  are invaluable to me as they allow me to test my beliefs through time.


When  I started out in markets, and by that I mean with my own money, say 10  years back, I was a ticker junkie, a know it all guy, wanting to trade  in the most exotic derivatives just to show that I knew how structures  modeled on exotic math worked. Over time, as I lost money (although  luckily, I never somehow bet the whole house), obviously, the hard pain  of losing money started knocking sense as time went by.


It was  only a few years before starting KGS that I realized how the most  simplest of structures in markets, stocks, was the only real game in  town to make any real money. I have analysed many successful investment  managers around the world and overwhelmingly two factors strike out.  One, either they are pure long only stock portfolio managers who  invariably work with a long term view or two, they work on the basis of  taking human interaction out of the investment management process to its  entirety. If we think about it, it may become apparent that, both those  two methods are essentially trying to take the ticker junkie factor out  of the investment management process.


I have, since the past 6  months, been in an effort to reduce the negative impacts of the ticker  junkie effect on the portfolios I manage. On a day to day basis, unless  something really strikes out (say a 10% fall in stock price or a  corporate development, and in which case, an email alert comes to me) I  don't find it necessary to look at portfolio performance everyday. I  plan to try and reduce this ticker junkie effect close to zero.


I  am not sure to what extent I will be successful but of what I have  observed till now, the results are positive and moreover, the investment  decision making process I feel is becoming more sound.