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:-
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.