Many star mutual fund managers have left the industry to strike out on their own with Portfolio Management Services (PMS) and Alternative Investment Funds (AIFs). Kenneth Andrade, after a stint with these vehicles, recently returned as Founder Director and Chief Investment Officer of OldBridge Asset Management. We spoke to him to understand the fund’s plans. Excerpts:
It is rational that a mutual fund manager would move out of the industry to launch his own Portfolio Management Service, because in a PMS you can work with less restrictions and earn a higher fee. But why would a successful PMS manager return to launch a mutual fund?
I have been managing money from 2003 and have been doing so with a mutual fund for most of the time. To start a mutual fund in India, any company has to have a five-year regulatory track record. From 2016 to 2021, all our existing formats were in the regulatory domain: PMS, advisory service and AIFs (alternative investment fund). This made us eligible to apply for a MF licence. So now I’m back again with OldBridge Asset Management.
When Parag Parikh launched their mutual fund, they wound down their PMS and moved their personal assets into the mutual fund to avoid conflict of interests. What are your plans for the PMS?
We subscribe to the view that there is no point in confusing investors with too many structures. If our mutual fund has a specific product, we endeavour never to have the same product on other platform. We will avoid portfolio overlaps between our mutual funds and other products. On the other hand, our commitment to the PMS and AIF remains structural. The PMS and AIF licenses are very valuable to us. With PMS, we can do things that we can’t with mutual funds. I can run a under 10 stock portfolio in a PMS, for instance. In AIFs, too, we can do things that mutual funds or a PMS can’t do – use leverage, for instance.
As per the regulatory format, I am the CIO of the mutual fund and my colleague is the Principal Officer for our PMS and AIF. We have a research-sharing arrangement. I am the principal shareholder in OldBridge Capital Management, which owns 100 per cent in the AMC, so there is no incentive for me to treat any business differently.
In a PMS you can take concentrated sector bets that go beyond 25 per cent and stock bets beyond 10 per cent. You can’t do this in an MF, so will that be a constraint to performance?
No, not at all. Beyond a certain point, adding weightage in specific stocks adds to the risk without contributing to the return. Our business is really about capturing execution cycles of managements. Once you capture that, it is best to take out cash from stocks doing well and redeploy it in the next such idea. My investment style is to buy stocks when they are in the value zone, and sell them when they are in the momentum zone. Sticking to stock-specific exposure limits gels well with that style of investing. Once a stock becomes a momentum bet, the incremental risk can get too high to justify the return potential. Without risk controls, I may get it right in one company or two, but I can’t replicate this performance again and again, which is what you need to do in a mutual fund.
We are launching a focused equity fund to start with because this is a category that allows a concentrated portfolio, with 15-30 companies at a time. This has been my style of investing for a very long time.
Your track record with IDFC Premier Equity, of earning a 21 per cent CAGR over a long time, was built when there were fewer SEBI rules on market-cap categorisation, etc. Will such rules constrain performance today?
I think the Focused Equity product that we are launching allows us to be flexible about market-caps. We can repeat this with multi-cap or flexicap funds. We want to focus on one product for now. We plan to work on its track record and make it critically important to us. We have no plans as of now to launchg more products.
OldBridge mutual fund has also said it will be staying away from passive funds. This is contrary to the general belief that India will go the way of the US and that active managers will find it increasingly harder to beat the index.
In the last 15 years of my experience, I have seen active managers in India create significant alpha in the long run, though there have been patches of underperformance. We are in that camp which believes that alpha generation is possible. Yes, the market may go to 70 per cent in passive funds. But the remaining 30 per cent will present a large enough opportunity for us.
The aspiration of active managers like us is to find stocks that stand a chance of getting into the indices. We buy early when the stock still has reasonable value, and when the stock is attractive to mainstream investors, then hopefully passive managers will enter later. Market cap is a function of profitability. If the business and earnings pan out as we think, market cap will follow. If you can capture an industry which is at an inflection point, and find a company in it with growing market share, a place in the index will follow.
Today we see many bubble-like signs in the market – IPO over-subscriptions, crazy returns on SME exchanges and how easy it is for anyone to make money from equities. Is this a good time to launch a mutual fund? Couldn’t you have waited for correction?
Timing is not something we can control, because when you receive your licence you have limited time to launch. That is why we kept our NFO open for the minimum possible time of three days. Coming to your question about whether this is a troubling market, in pockets it is. What’s happening on the SME exchanges is India’s cryptocurrency moment. There was a time when any new crypto that was launched attracted frenzied interest. But has the collapse of that market impacted the broader financial markets? The answer is no because it was tiny compared to mainstream markets and economy.
That apart, the way India has stood up post the pandemic is quite remarkable. If you look at corporate balance sheets, debt in India has come down when corporates in the rest of the world leveraged up. Interest rates in the rest of the world are sharply higher, but in India on a decadal basis, they are almost flat. That’s the structural advantage showing up in Indian market valuations. I am not going to judge broad market valuations, but there are definitely sector-specific opportunities out there. We are reasonably confident that we can find the 25 or so names we need.
How will you navigate financials and over-valuation in mid- and small-cap stocks?
Constructing a portfolio today is not going to be easy. In March 2023, everyone was selling equities and buying bonds, today it’s the reverse. I am, however, seeing some sectors making a new high only now after 2008, and some doing that for the first time since 2015. While stock prices are just back to their old levels, earnings and the opportunity in some of these companies have grown.
We hold only one lending business in our portfolio and nothing more. I don’t own the largest two index weights in financials. How I see it is that if I don’t own the top two stocks which are a large part of the index, I get a bigger opportunity to own the non-consensus part of the market, where I see many names that are just bottoming out in their industry cycle. Step back to 2008-2010 and you had infrastructure, B2B lending and commodities doing well. In 2018-2020, you had FMCG, autos, private financials outperforming. In 2028-2030, the cycle will be completely different. We are fairly confident that if you concentrate your portfolio on that 40-45 per cent of the market which is not favoured by the consensus, you can position your portfolio to participate in those future profit pools should they grow. In consumer and bank names, I believe in individual stock-picking, it is not a sectoral trade.
For our funds, we will be looking at stocks between a $150 million and $500 million market-cap. Our view is that when you find stocks in the $150-million bracket at the right time, when they are out of favour, the probability of getting to a 10X kind of return is good, if you get your thesis right. At $500 million, the returns will be more sedate. We are in this for the long haul, because we are betting on execution going right.