Dear Investor,
The chart below compares our returns viz leading index BSE 500.
In this memo we will like to share our assessment of our performance since we started our PMS journey in Dec 2021. The comparison is done for a period ending April 2023.
We started our PMS service in November 2019 and FY23 was the first full financial year of our operation. In this update, we wanted to share some info on our performance, both absolute and relative to other PMSes / benchmark indices / MFs, as well as a brief analysis of the same. We do want to be clear that a single year’s performance is not a long enough timeframe to evaluate any investment track record in equities. We firmly believe that equity investing should only be for wealth preservation and appreciation over longer term periods of 5 years+. However, we do face questions about our performance from both prospective and existing clients, so we are sharing an overview of last 1year’s performance.
Equity markets globally witnessed multiple tailwinds over FY23: the Russia Ukraine war, spiralling inflation mainly in energy & commodity prices, subsequent sharpest rate hikes by central banks to tame inflation, leading to failure of banks in US and Europe. We are happy to note that we were able to perform decently generating healthy returns for our clients. There is no doubt that there is an element of luck in our performance, but we would also like to believe our disciplined approach of only investing in high quality, resilient businesses at attractive valuations and then closely tracking each investment to constantly verify that they are not being challenged by any structural issues have also contributed to the reasonable performance.
Below is the performance of our PMS during the last 1 year, 6 months and 3 months ending April 2023 compared to the performance of key benchmark indices over the same time periods. The return delivered for your portfolio will be different depending on when you started investing with us as well as if you increased your investment corpus.
Apart from indices, we have also benchmarked our performance with that of MFs. The chart below compares the last 1 year return generated by us with the last 1-year average returns generated by each category of Indian equity MFs like large cap, small cap, mid cap and multi cap funds.
Apart from comparing with average MF returns, we have also benchmarked the last 1-year return generated by us with those of leading small cap MF funds. We have specifically benchmarked against small cap funds as 90% of our holdings are small cap companies so we are essentially small cap PMS.
We have also benchmarked our last 1-year performance against that of PMSes. As per the APMI (Association of Portfolio Managers of India) website, there were 159 PMSes with AUM greater than 50 Cr as on April 2023 end. We were the 11th ranked PMS in terms of last 1 -year performance among these 159 PMSes, which means that we are placed in the top 10%ile. Below charts highlight the relative performance of our strategy against these 159 PMSes:
Now we will just cover a brief analysis of where we went right that contributed to our healthy performance during the tough last year. We will also discuss some areas in which we feel we could have done better and that could have led to an even better performance. We believe the factors that led to healthy performance were:
We stayed away from certain fad sectors like APIs & chemicals manufacturers that had benefited significantly from spike in demand due to supply chain disruptions during Covid. These delivered handsome returns in 2020 and H12021 but have since corrected significantly since, because the supply chain issues got resolved leading to reversion in margins and topline.
We were right in taking the call to exit IT services names like Birlasoft, Mphasis, etc at the start of ~2021 only because their valuations got stretched. It was not because IT services may have a few tepid quarters or a year due to possible recession in key markets of US, Europe, etc. We are strong believers in long term secular growth prospects of IT services but of course we will invest in that at a reasonable valuation. Our call to exit most ITS names turned out right in hindsight mainly because valuations contracted for the sector even though most ITS companies did well in FY23. We are invested in one ITES company, eClerx, because we believe it is grossly undervalued. We continue to be positive about the prospects of the ITES sector and will invest if valuations cool down from current levels.
Overall, the valuation of our portfolio was much cheaper compared to the broader markets at the start of FY23. This is especially because most of our portfolio companies delivered industry leading earnings growth in FY23. The combination of earnings growth and valuation rerating helped deliver solid returns for many of our positions like TD Power, Voltamp Transformers, Mrs Bectors, etc.
The 2 key areas where we feel we could have done better are:
Engineering & capital goods sector was the clear standout sector in terms of returns in FY23. We were bullish (and still are) about the revival of Indian manufacturing at the start of FY23. However, we tried to play that theme through a larger allocation to auto ancillaries (FIEM, Gabriel, NRB Bearings, MM Forgings, GNA axles, etc). We did have an allocation to engineering companies like TD Power and Voltamp; both have done quite well in the last 1 year. However, in hindsight we must agree that we could have done better with a higher allocation to engineering companies.
On the other hand, our auto ancillaries have delivered meagre returns in the last 1 year despite very strong earnings growth. These continue to trade at sub 20xTTM P/E even though they have good growth prospects, lean or net cash balance sheets, improving RoE, etc (see table below). Sometimes, we need to patiently wait for the market to reward us. We continue to be bullish about the prospects of these companies.
Agrochemicals is one sector in which our call went wrong in FY23. We made 2 investments in this sector: Heranba and Sharda Cropchem. Heranba has been the standout bad performer with share price halving in the last 1 year. What we missed out in our evaluation of this sector was that agri inputs also benefited from an element of excessive channel stocking and thus transitory swell in demand due to Covid fears. Moreover, unpredictable lockdowns and openings in a key agrochemical intermediate producing country (as well as the end market for Heranba), China, impacted the industry in a big way. We are still positive about the prospects of these 2 companies as we believe the challenges facing these companies are transitory industry issues.
We hope to deliver healthy returns in FY24 by continuing with our philosophy of investing in good management teams at attractive valuations. Please feel free to reach out if you have any queries / concerns.
Please feel free to reach out if you have any queries / concerns.
Thanks & Regards
Prescient Capital