ASK Emerging Opportunities Portfolio | Next Decade of Wealth Creation

Despite touching all-time highs last week, Indian indices have a lot to offer to investors over the next decade, since we are in the run for a $5 trillion economy. The target has been derailed slightly but crystal gazing into the next decade for emerging opportunities has not. This is the firm belief that we carry at PMS AIF WORLD, and keeping the same in mind, we hosted a webinar with Mr. Nimesh Mehta – Director/Head – Sales & Products, ASK Investment Managers Ltd. and Mr. Anant Jalan – Portfolio Manager, ASK Investment Managers Ltd to discuss and deep dive ASK Emerging Opportunities Fund (EOF) in the AIF format.

To put ASK Investment Managers into perspective for the audience, Mr. Kamal Manocha, Founder & CEO, PMS AIF WORLD, highlighted the accolades and awards won by the ASK Investment Managers at PMS AIF WORLD Awards 2020. The ASK Indian Entrepreneurial Portfolio (IEP) stood out in the 5 year and 10 year on the basis of risk adjusted returns.

Speaker’s Experience

Mr. Anant Jalan has over 15 years of experience and has managed the India Focus Fund at Goldman Sachs Asset Management team in India. With a double honours in Computer Science and Economics, Pennsylvania University, Wharton Business School, he does bring a lot of experience and knowledge to manage the ASK Emerging Opportunities Fund at ASK IM. Mr. Nimesh Mehta has two decades of experience with him. He is also the author of the book titled Sales Booster: The New Science & Art of Selling, currently available on Amazon.

Excerpts from the Discussion

Fund Manager, Mr. Anant Jalan, elucidated the investment philosophy of ASK Investment Managers focusing on capital preservation first, and then appreciation of capital achieved by compounding of earnings shown by the businesses owned in the portfolios. ASK Investment Managers Ltd. manages and advises total assets of ₹30,000 crores, and is one of the largest discretionary portfolio managers in India as of July 2021.

ASK Investment Managers stands for implementing the bottom-up approach.

The key elements of the investment strategy involve the size of the opportunity, quality of businesses, good management and earnings growth, and value at offer. In short, Quality at reasonable price or growth at reasonable price. High quality earnings growth is sustainable when the size of the business opportunity is large, business quality is supreme and a sound management team to run the show. It leads to long-term value creation with significant returns to all investors. The price/earnings ratio is followed to gauge the value at offer, whereby the present value of the future cash flows is relied to understand right valuation at all point of time.

Recently launched ASK Emerging Opportunities Fund in the Alternative Investment Fund format, is a flexi-cap portfolio with a mid-cap bias. Businesses that are leaders in right sectors are preferred. The idea is that today’s mid-cap businesses that show growth with consistency will become large cap stocks over next decade. And that is where these are seen as emerging opportunities.

The world has realised that it is not best to rely on China as the sole producer and supplier of various goods. This has shifted focus to the subcontinent especially in the specialty agri-chemicals. Likewise, the shift from unorganized to organized is driving the booms in the diagnostics and footwear. The scale of electronics production in China is unfathomable with various cost-efficient strategies in place for all companies. The manufacturing has been subsidised by the government with the introduction of Production Linked Incentive (PLI) scheme. The access to smartphone and high-speed internet has covered half the country, which was around 5% a decade ago. It has brought in a paradigm shift in the technology sector combined with the Covid 19 event. The offline to online shift has benefitted the digital companies in the country and they are bound to perform. This is further enhanced by the tech savvy and the young population of India. The digital adoption is very rapid leading to cost efficiencies and scaling of businesses.

The earnings growth of the Nifty Mid-cap 100 remained negative throughout FY18-FY20. In stark contrast, the ASK Investment Managers Universe of midcaps outperformed the benchmark in both the years. The focus on identifying high quality businesses with large opportunity size does provide a substantial return to investors. The quality midcaps have grown at the rate of about 20-30% over the last two years. The companies invested by the firm exhibit relatively lower earnings volatility and hence tend to outperform the benchmark. The companies identified as midcaps for the fund’s flagship scheme IEP in 2012-13 are today’s large cap stocks.

The ASK Emerging Opportunities Fund has 25-30 carefully identified stocks. The quality businesses are filtered down from the top 500 companies as per capitalization. Subjective evaluation of management quality and rigorous filters on ROCE provide further clarity on companies to select. Carefully crafted portfolio helps to manage risk consciously and minimize it.

Mr. Kamal Manocha put out a beautiful point that given the mid cap indices have not outperformed Multicap indices over last 10 years. And the multi cap portfolios/fund have generated better returns in comparison to the midcaps over the same period. Why should a long-term investor invest in a mid-cap focused portfolio now when markets have run up.

Mr. Anant Jalan replied by clarifying that the ASK Emerging Opportunities Fund is not a mid/small cap fund, but a flexi-cap fund with a bias towards those large size midcap that have potential to become large cap over time. So, portfolio’s current bias towards midcap provides an opportunity to build wealth and overtime portfolio’s mid-cap bias will automatically reduce. He quoted the example of ASK’s IEP portfolio over last 11 years to express the expected journey for this ASK EOF. In short, ASK EOF AIF aims to invest and hold companies that have superior growth prospect over 5-7 years.

“What we learn from history is that we don’t learn from history” – Desmond Tutu

Highlighting the above quote, Mr. Nimesh Mehta answered the question on market timing. He answered that it is quite difficult to understand where the markets are going and how they will pan out in near future. Whenever the Indian market has fallen by more than 30% due to an unforeseen activity, the absolute returns over subsequent 3-year periods are in triple digits most of the time. Most of know that Buffett’s net worth is $104 billion but little do we know that $101 billion (Source: Newspaper articles, Business bulletins) came after his 65^th birthday. More than skill, it was about the time in the market. 99.9% of his wealth has come due to the fact that he stayed invested for a time period much more than that of an average investor.

On January 14^th, 2020, the IEP Portfolio had an NAV of ₹55 which investors felt was the peak at that point of time. However, the NAV on July 30^th, 2021, is ₹78.5 after taking a plunge of 30.7% in March last year. This means 43% return from the Nifty high in January 2020 just before the Covid 19 fall. (Source: ASK Investment Managers)

Investors have a penchant to keep looking at the price which leads to neglecting the value that the business has to offer.

The size of opportunity, the quality of business, the quality of management and the earnings growth along with valuation should be on the focus and price will catch up to your estimate.

Mr. Kamal Manocha laid stress on the intriguing stiff competition the AIF structure is facing currently from the pre-IPO funds that have a similar horizon and have done marginally better. In fact, over last 3 years. Speakers pointed out that the pre-IPO funds have a risk that the company does not go public for various reasons and the investment tends to remain illiquid. So, on risk adjusted returns, listed space of quality mid-caps pans out better than unlisted space. Also, wealth creation requires longevity, and Pre-IPO funds take 2 years to create portfolios because they have to wait for IPOs, and so the time to reap investment is only 3 years (assuming total life of fund at 5 years). In fact, most IPOs actually create multiple times more returns after listed. ASK EOF AIF will invest and create portfolio in its first year, fund will have a hard lock-in the first two years after Final Close, the next three years will be exit load protected and the last two years will not have any exit load. So, 7-year time period of ASK EOF AIF is designed to provide disciplined wealth creation experience to investors whereby returns are reaped from growth in the emerging opportunities over this period. And equity investors are generally advised to have a horizon period of 5 years, and this fund will be free of exit load after 5 years. Mr. Kamal Manocha interestingly added that the best way to create wealth is to see absolute returns of 10x in 10 years rather than risky investments in pre-IPO funds for high short term CAGR. He further mentioned that investors stand to gain from a long-term investment horizon. For e.g., the IPO for Dr. Lal Path labs did generate quick 25-30% returns post IPO but today the stock price is around ₹4k, generating a 10x kind of returns from its IPO price and this is wealth creation.

The ASK EOF has been designed as an AIF structure rather than a PMS structure to make it more conducive for high performance experience. The portfolio manager has the option to invest in less than ₹40,000 crore market cap companies, and closed ended AIF structure helps achieve that. Secondly, ultra HNIs and promoters like the AIF structure rather than the PMS structures of multiple reasons.

Learnings & Wisdom as ending remarks…

Mr. Anant Jalan added that bottom-up flexi-cap strategy gives wonderful returns rather than betting on a particular sector. However, he added that sectors like chemicals, electronics manufacturing, technology, and the healthcare are bound to perform well in the coming decade. He also added that the stock price returns tend to follow the earnings growth over a time period. The loosely held term for investors is midcaps as the 3^rd and 4^th position held in a sector may be a midcap and a not so dominant player with low market cap may also be termed as a midcap. It is crucial to identify and differentiate businesses on the type of sector they are in and the value at offer. The leaders in the midcap portfolio should be dealt with a longer investment horizon. Reasonable price and sufficient margin of safety are crucial factors in identifying businesses in different sectors. The price to pay for a stock is more important than the returns generated in the last few years.

Goal setting is an important learning shared by Mr. Nimesh Mehta. He shared that he always has a goal, whenever he invests in a stock – he had kept his daughter’s education in mind while investing in Bajaj Finance at ₹300 a share. In quick time it touched 4 digits but people advised him to sell the stock as it was overvalued. He was bewildered at what came along as price did fall numerous times and he has been a part of the journey to around ₹6500 levels for the same as we speak. It was crucial for him to stick to his goal and define an objective for the same. Moreover, the investors’ attitude also has a role to play and its development will play an even bigger role in generating returns.

The webinar was capped off by advice from Mr. Nimesh Mehta stating that all forms of social media should be avoided in the first two hours and last two hours of the day. It avoids all negativity present and helps to focus on the larger picture in mind. The stress from the financial world should be balanced by physical activities or sports. Lastly, reading helps to gain a different perspective to daily chores and helps to achieve tasks set out, be it financial or physical.

Self-discipline is the ability to make yourself do what you should do and when to do whether you feel like it or not, says Albert Hubert.

Kamal Manocha concurred with speakers’ views and stated in the end that India has a lot of potential in the coming 10 years with growth like never before. Good investing with discipline and right attitude will create tremendous wealth over next decade. And this sums up the business model of PMS AIF WORLD…