Our Performance: Because of our unique approach of only investing based on absolute value and not following ‘fully Invested’ or ‘Model Portfolio’ approach, it is important to evaluate our performance based not only on overall returns but also on the performance of the invested portion (Table 1).
Table 1: Performance of Sameeksha PMS for FY2017
|XIRR % Return
|XIRR % Return of Benchmark (CNX Nifty 500)
|XIRR % Return
|XIRR % Return of Benchmark (CNX Nifty 500)
We would be first to admit that performance of last year has benefited a great deal from strong liquidity in the market which was accentuated by falling interest rates. Lot of cash that was deposited in bank account due to demonetization is finding its way into the equity market. As such a good percentage of our performance has come from increase in valuation rather than growth in cash flows of companies we invested. We certainly understand that such performance it is not sustainable.
Balancing immediate need to deliver performance while building foundation of our firm for the long term: During the year, we tried to balance need to invest money based on our philosophy with our continuing endeavor to evolve and strengthen our investment framework. We strongly believe in setting up template driven processes that allow us to produce standardized but high quality outcomes at high productivity. As such, we have invested in a number of initiatives to strengthen our investment process. These initiatives include: 1) Templates for standardized and detailed financial forecast, 2) Long term growth model for Indian economy, 3) Estimates of market opportunity for constituent industries that our invested companies participate in, 4) Tiered checklist to help us eliminate names that we would not invest, 5) Template for Investment summary to document our investment decision, 6) Templates and log for recording views post any event including financial results and 7) Screens to monitor quarterly results of thousands of companies and identify potential investment opportunities.
Our absolute valuation criteria and stock selection: We started the year with market valuations certainly not looking cheap. In such an environment, many investors tend to stop looking at absolute valuation and instead focus on relative valuation to justify investing. On the other end, it becomes particularly hard for an absolute return investor to find ideas that meet his/her criteria. However, by deploying sufficient resources (seven member team, among the largest for equity investments), we have been able to identify quite a few companies that met our absolute valuation requirements.
Table 2 gives a snapshot of our stock selection funnel.
Table 2: Sameeksha Selection Funnel
|Further Evaluation with Basic Model
|Detailed Evaluation with Full Model
Where we Invested: We would put the investments made by us in three buckets: First, notwithstanding generally rising market, we were able to identify stocks that easily met our stringent criteria throughout the year. These were either under-researched or not widely followed names that were undervalued or names that were benefiting from various tailwinds that market was yet to recognize. Second, we were able to invest in some high quality companies that saw correction in share prices during the demonetization period. And third, we invested in some names on which we were able to take contrarian view based on our due diligence. Brief details of investments we made are included in the attached Annexure.
Importance of timing: Though markets are at highs, our approach to investing based on bottom-up analysis and absolute return criteria forces us to think about increasing cash position rather than simply follow “fully invested” approach. We hope that with such an approach, timing of investment in Sameeksha PMS for any new or existing investor would prove to be less critical than what it would be when investing in other products. Indeed, one can increase the risk of “buying at the top” when investing in a product that follows “fully invested” approach.
Lessons Learned: We believe that we will continue to learn from our investment process and outcome. As such, we want to highlight the lessons we learned from the year gone by:
- First, Sizing of each position. Based on our concern about froth in the market, we chose to diversify rather than take concentrated bets. With a hindsight, such a strategy may have diluted our performance. In stocks we had the highest conviction, we could have gone for large position sizes.
- We did much better whenever we invested primarily on our most important valuation criteria. In cases where we “relaxed’ the criteria, performance has been less spectacular. Though we can think of counter examples as well, we would prefer to stick to our valuation criteria.
- In stocks with low liquidity, we were constantly dealing with a tradeoff between buying without affecting the price versus buying sufficient quantity as quickly as possible even if that meant driving up the price a bit. We choose to stick to our valuation discipline and that prevented us from buying sufficient quantity of some names. Perhaps allowing for small 5-10% appreciation while buying could be a way to approach such situations especially if we believe that overall market trend is likely to be firmly positive We are aware of the pitfalls of this strategy though and we must be able to identify overall market trend; in weak markets, we must stick to our valuation discipline.
- There are times when an investment case appears very compelling but it has not gone through our entire investment process. In some instances we could never finish our investment process due to lack of management access and in such a case we missed out on building a sufficient position. There are no easy answers in such situation.
Hope you found the above information useful. I know that you have many options to invest and hence we deeply appreciate if you can can evaluate us as well. Please let me know if you wish to see any additional information in our future correspondence or if you have specific questions with respect to investing in Sameeksha PMS.