Samir Arora runs
the Singapore based Helios Capital and is known for his candid talk. One
of his recent interviews to CNBC-TV18 had raised a small flutter
amongst the members of TheEquityDesk. In this connection we tried to
put forth our questions relating to his recent strategy on the markets
and also his investment philosophy.
In this article Samir talks of how his strategies are guided by the
mandates and compulsions of the fund, how the retail investor can
outsmart the institutional guy and more importantly how relevant it is
to follow each of the FII/MF trades
.
Expectations from a Hedge
Fund: I run a long/short hedge fund which means that we are always long some
stocks and short some stocks (sometimes specifically having pair long and
shorts but most of the times owning stocks and separately shorting some other
stocks). In the minds (and expectations) of our investor we are supposed to
deliver better risk adjusted returns than a long only fund. This basically
means that we under perform a rapidly rising market (for our net exposure to
the market is no where near 100% unlike a long only fund) and end up out
performing a falling market.
In general, the investor does not mind giving up a part of the
upside on the expectation that we will not give him the same downside (or draw
down) as the market.
In 2008 when the markets were falling steeply I resisted reducing
my longs or increasing the shorts in the first few months. All I was saying in
this recent interview was that if the market fell sharply (say 10% in a month)
I will not resist it this time and go along in selling/reducing net
exposure/increasing shorts for my investors are happier if I can protect them on
the downside even if I end up giving up a part of the upside (if the market
goes up soon after falling sharply and I
am whipsawed).
In our view risk is basically risk of a large drawdown (sharp 10%
type fall in our NAV over any period). In the hedge fund business, short term
performance is quite important and I have reconciled to that. Of course, the
investor is not being totally unfair for he is willing for us to give up part
of the upside to protect the downside. We try and reduce this drawdown by actively
buying puts, shorting index and shorting stocks and reducing net exposure if
markets are weak (this may be counter intuitive – for we sometimes sell when
the markets are weak instead of adding to the positions. After experience of
2008 it is not obvious to me that is a wrong strategy although we try not to
panic at every twist and turn). In general, we keep our long positions for the
long run and try and reduce net exposure in volatile times by adding to shorts
through futures markets (rather than disturbing the long positions).
Individual vs. professional investors:
How many times have we heard the
argument that individual investors are no match to professional, institutional
investors in equity market? According to conventional logic, institutional
investors have the best resources to meet the long-term investment goals of
investors.
All the strengths and resources of
an institutional investor appear real, but it is not clear how these resources
help them in developing a long-term view. Access to Bloomberg and Reuters, an
army of analysts attending corporate results conference calls and access to
other live data sources helps institutional investors gain short term edge. On
the other hand, retail investors operate with no differential competitive advantage
over institutional investors in access to short-term news. Not constrained by
any benchmark considerations and not having to show their weekly performance to
clients, retail investors are ideally suited to hold a long-term view. However,
the problem is that these investors pride on their short-term views.
The problem with the stockmarkets
is that retail investors, who have the luxury of being long-term choose to be
short-term and institutional investors, who have the resources to be short
term, use them to try and achieve long-term success. No wonder none of these
groups are successful, and the debate never ends.
Sector preferences:
In general we do not buy consumer staples, pharma and commodity
stocks and like infrastructure, financials and urban oriented under penetrated
sectors. We do not buy ultra small cap but are sometimes willing to buy
illiquid stocks. We also do not like Indian companies expanding aggressively in
foreign markets for we bet on India and not on Indians. The real factor we like
is scalability (that means that revenue opportunity should be very big- it is
for this reason that I stopped liking ENIL and TV 18 initially).
I have bought only one FMCG company and the weightage of that is
also less than 2% in my portfolio so I have not changed my big picture view
that overall I do not like this sector for various reasons (high P/E, moderate
growth, reliance on rural India which grows much less than urban India,
services and manufacturing in general, costlier to target rural customers due
to lower concentration of consumers etc)
I like commercial airconditioning business for I believe that this
is the best way to play creation of urban infrastructure- malls/IT
parks/airports/hotels/high rise office blocks etc all need a much higher proportion
of commercial airconditioning content. We own the leader in a significant way
(also because of its international business and other segments).
In the case of the 2 wheeler company we bought the stock earlier
in the year (around December/January- may be the interview was in March) and
sold it recently. After it was clear that India was having a very weak monsoon period we
decided to reduce our weightage in stocks that were strongly supported by rural
growth and consumption. Although we all expect that current drought across
rural India will not have a big impact on the market
(due to global liquidity), it cannot be the case that no company will be
affected. In general, we do react to news/views if we believe that it will have
a material impact on stock prices in the short term (even if we believe that in
the long term the stock in question is OK).
I liked real estate sector earlier this year as the stocks were
discounting serious liquidity issues- which starting disappearing as companies
raised capital. I do not like mid cap real estate companies and I do not
consider normal companies which have some valuable piece of land as real estate
companies. Also, in many such cases where a normal company has some real estate
and it sells or develops that land, there is no guarantee that they will not
invest the proceeds in their mediocre current businesses (some how all
companies which were sitting on valuable land parcels were otherwise really
mediocre).
Basically what we like are companies that can compound their
earnings for a long time with infrequent dilutions. Infrastructure sector
offers the possibility of years of growth which will basically be exploited by
the same group of companies (in each sector). I do not like areas where the top
down growth is not so obvious and not so high (telecom sector for example
currently). Within the infrastructure sector I like power sector.
We like the second largest housing finance company and own it.
General:
1. I do not think that what FIIs/MFS are doing every day makes any
impact to the stock prices and there is no reason to bother with that. The only
time it matters is if large blocks change hands which were a clear overhang on
the market( for example when Fidelity had a change of manager recently or the
TCI fund decided to exit Indian PSU banks earlier this year). In general, there
are now so many individual fund managers at each mutual fund company and they
all cannot be good, by definition, so following the MF transactions have even
less value than when you knew exactly who has bought.
2. We do not invest in a company without meeting the management
but I am not sure that each time these meetings add value (for managements are
nearly always bullish about their business and prospects). Many times the
management is very articulate in explaining their future but global issues
overwhelm the fundamentals.
3. I read 3-4 investment books a month and my all time favorite is
“Fooled by Randomness”. Other books I have liked are “Reminiscences of a Stock
Operator”, “The Future for Investors” , “Against the Gods”, “The Black Swan”.
“When Genius Failed” “Devil takes the Hindmost” etc. These books are for
enjoying not only for necessarily learning.
4. I am not sure whether family businesses are worse or better
than professionally run businesses My view on corporate governance is that in
general all companies have poor governance in absolute. The biggest fraud in India currently is the issue of warrants to
promoters with 25% down payment. However, once you accept that all companies
have pathetic governance it no longer irritates you and you can treat corp
governance as a scale rather than treat it as YES/NO factor. Therefore, some
companies have better governance than others but in absolute I can find flaws
and conceptual or philosophical frauds in nearly all companies.
5. I do not think that an individual investor needs to buy only a
handful of companies to make real money. If you hold 20-25 companies the impact
of fraud is significantly reduced.. If one stock goes up a lot and becomes a disproportionate part of the portfolio it
does not mean that you have to sell it solely for diversification reasons. I do
not consider your risk of losing paper profits in the same way as losing
original capital and therefore your portfolio may end up becoming concentrated
and that is OK. Concentration should evolve with some stocks doing really well
and not by your buying them in a concentrated fashion.
6. In my fund I do not invest in fixed income or indeed anything
other than listed stocks At a personal level, I think that individuals who are
not full time investors (and therefore have an independent source of income via
job/business etc) can afford to have a high allocation to equities. In fact
professional investors (who try to make a living through investments) should
have a certain portion allocated to fixed income to provide stability in bad
phases.
Also check: Kabhi Khushi Kabhie Gham- Samir Arora
Edited by basant - 25/Aug/2009 at 7:32am