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Friday, July 28, 2017

View: Best way to be a contrarian investor is to always carry your calculator

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Value investing, I believe, is one of the best long-term ways to invest in any asset class -be it equities, fixed income or real estate. Seth Klarman, one of the most famous fund managers in the United States, who runs a Boston-based money management firm named `Baupost’, had once famously said: “Value investing is at its core is the marriage of a contrarian streak and a calculator.” The idea for this column arose from the aforementioned quote. Very often, layman investors think that contrarian investing means buying something cheap. But as Klarman says, the right way to be a contrarian investor is to carry your calculator all along with you.

The good thing is contrarian investing can be implemented across asset classes. At some point in time, it can be in equity, debt or real estate. In a rare situation, when all the asset classes are doing well, gold is considered the best bet (as in 2007) as the yellow metal becomes a contra asset of all other asset classes.

In order to zero in on a contrarian, one can use several parameters. When it comes to equity one can consider PE, PB, market-cap to GDP and comparison with 10-year yield. When it comes to real estate, the parameter to look at is the gap between mortgage interest rates and rental yield. Lower the gap, better it is as this suggests that real estate has become attractive. The case in point here is: From 2009 to 2014, the rental yield in America was much lower than the mortgage interest rate, suggesting that real estate had become a contrarian asset class. Now, in the current situation, among all the asset classes, the most contrarian asset class seems to be fixed income.

It is often thought that a hawkish RBI is bad for debt market and vice versa. However, history points to the fact that a hawkish RBI keeps the debt space lively given that the target is to lower inflation. On the other hand, a dovish RBI means near term easing, but with an inherent risk of spike in inflation thereby leading to a short rate cycle. Given that the RBI has been dovish in October and November 2016, which meant that there was always a fear that the fixed income cycle was in its final stages. But now, with a more hawkish RBI, the fixed income cycle looks to have extended. The current upmove in yields, along with change in investor sentiments, has taken us back to a mid-cycle point in fixed income cycle.

The other aspect which investors most often watch very closely is the fiscal position when it comes to making fixed-income investments. The point most of the investors miss is that a fiscal policy which is countercyclical is never bad for fixed-income markets and the government expenditure only and only substitutes low private sector activity. The Japanese economy is the best example where fiscal deficits have been high for a long time without affecting the bond yields. India is undergoing a corporate deleveraging cycle and we can afford a higher fiscal deficit at this point of time. The fact that the combined deficit of the Centre and the state government has not gone up only makes the case of fixed income stronger.

In the past, Richard Koo, the chief economist at the Nomura Research, has very eloquently presented that no nation can have a scenario whereby people, companies and the government, all save. In India, we are going through a phase where people and companies, too, are saving.

What this means is that fiscal deficit is not a very good indicator for what is going to happen in the fixed-income market. In a deleveraging cycle, fiscal deficit does not play a role of increasing 10-year yields. So, the link between fiscal deficit and 10-year yield is valid only in a scenario where private sector capex and people are aggressively investing in physical assets. However, we are not in any such situation currently , which is why we think we are in a very attractive phase for fixed income.

With RBI’s inflation target moving lower to 4%, the real yield offered to fixed income investors has gone up. If we compare the real yields as the difference between 10-year yield and the medium-term inflation target of the Reserve Bank, the current markets offer a real yield of almost 3%, which is one of the highest offered by the markets in this cycle. Even if we compare this real yields against the real yields offered in other parts of the world, barring Brazil and Russia (both are cyclical commodity economies) no other fixed income market offers a better real yield. Even the real yield on US 10 year is only 50 bps. If the US real rates were to go up further, it may not necessarily translate into higher real yields for India, as well.

From an equity fund manager’s view point, 91-day Treasury bill yield is equivalent to a large cap. As on date, the 91-day T-bill yield has come down to 5.90% which is much lower than the policy rate even in a month like March. On the other hand, a product like 10-year State Development Loan (SDL) trades at 7.8% which is much higher than the 91-day T bill.

In effect, we have all the factors which make debt a contrarian investment ­ attractive valuation, negative sentiment and an investment scenario where private sector capex, credit growth are all low. This simply indicates that the time is now to invest in debt as the outlook looks attractive.

Kishore Biyani sees big future without investors

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MUMBAI: Brick-and-mortar retailing, if investors are to be believed, has a bright future in India.

The Future Group of Kishore Biyani, who pioneered organised retailing in the country, has almost doubled its market capitalisation in the past three months that witnessed consistent value erosion at online shoppers Flipkart and Snapdeal.

Three listed entities of the group now have a combined valuation of Rs 21,833 crore, more than that of Shoppers Stop, Trent and Arvind Group put together.

It’s no surprise, therefore, that CEO Kishore Biyani is being wooed by marquee investors, who recognise the Mumbai entrepreneur’s ability to revive retailing businesses that have remained largely fragmented in the nation of 1.2 billion people.

The pioneer himself had to begin afresh after a stellar initial run when, five years ago, he had to sell the flagship Pantaloons business to the Aditya Birla Group after abortive merger talks.

Kishore Biyani sees big future without investors

“I have always been a zero to one player, and I do not need investors now, and we have learnt from our mistakes,” Kishore Biyani told ET. “We know what not to do. We are now ruthless in our operations.”

Kishore Biyani’s earliest retailing formats had sought to recreate India’s traditionally vibrant markets in an organised setting, relying more on the qualitative and behavioural aspects of purchasing to design the formats and take decisions. Five years after Pantaloons was sold and the Future Group began its journey afresh, the CEO has now become increasingly data-driven in his approach to the business.

“Today, only data drive our decisions: We are ruthless with it and there are no emotions, and 70% of the decisions are taken through technology,” said Kishore Biyani, who relied on cousin Rakesh Biyani to bring in technology and data for building a robust fashion business.

He had hit a rough patch and was forced to sell his flagship lifestyle chain after first considering to merge Pantaloons with both Shoppers Stop and Lifestyle. Kishore Biyani had to walk out of merger talks with the Landmark group in Dubai after a senior executive ridiculed the proposal.

“It was an insult that I will never forget. Mergers are always among equals. Very few people in India understand M&A. You don’t let businesses die, you merge,” said Kishore Biyani. He now runs Future Lifestyle Fashion that clocked quarterly sales of more than Rs 1,000 crore with same-store sales growth of more than 20% in the three months to December 2016 – higher than both Lifestyle and Shoppers Stop.

“Our origin lies in the fashion business and we have more than three decades of history behind what we are doing. We sell over 15 crore units of garments every year and our fashion business is now over a billion dollars. We believe that our fashion business has matured and we are now set to reap the benefits of scale, experience and power of brands in creating value for all our stakeholders,” said Rakesh Biyani, joint MD at Future Retail.

The group is also looking to sell home furnishings business Home-Town, shut sportswear arm Planet Sports and merge stores of electronics chain Ezone within the supermarket BigBazaar. There will be only small stores and big stores.

As part of a strategy to more than treble its revenue to Rs 75,000-1 lakh crore by 2021, the group has also made more than a dozen global deals in the past few years. For its next phase of growth, the company would focus on the convenience store format.

“We are looking for more acquisitions in the convenience store formats. We have built the platform now of brands, products, distribution, consumer insight and supply chain. I will be a fool if I don’t cash in on that. We will bring down prices so sharply that no rivals can match them. We will be the lowest-cost operator in FMCG and fashion,” said Kishore Biyani, who plans to open about 10,000 Easy Day convenience stores now, against the earlier target of 3,000 by 2021.

Private equity, venture capital India investments in 2016 mixed bag, KPMG

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Brexit

MUMBAI: Tear, the report said apart from 2016, which was an outlier driven by the technology startup and e-commerche year 2016 turned out to be a mixed bag for India in term of private equity and venture capital investments. The volume and value of these investments in 2016 decreased by 25% and 39% respectively compared to the year before, said a KPMG India report.

This decline was expected as the flurry of investments in 2015 was shouldered by a high volume of startup deals during the year. In 2016, the political and economic turmoil in Europe, including Brexit, rising oil prices and increased risk premium for technology/internet sector investments affected the sentiments of foreign investors, who form the lion’s share of private equity investors in the country, the report added.

According to KPMG India, despite the expected decline in the e-commerce and technology sector-focused venture capital (VC) investments, private equity (PE) and venture capital investments fared better than most other ye funding boom.

Piramal Enterprises’s SFG invests Rs300 crore in Indo Shell

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Mumbai: Piramal Enterprises Ltd’s structured financing group (SFG), has invested Rs300 crore in Coimbatore-based auto component company Indo Shell Mould Ltd, two people aware of the development said.

“The two parties had been in talks for a while and the transaction has been closed recently. Indo Shell has raised Rs300 crore through structured debt through the transaction, which will help the company refinance its bank debt,” said one of the two people mentioned above, requesting anonymity.

In an emailed response, a spokesperson for Piramal Enterprises confirmed the development.

“The deal has been completed and Rs300 crore has been disbursed,” said the spokesperson.

The company set up in 1973 now has over 55 customers, including auto makers Hero MotoCorp Ltd, Force Motors Ltd, Honda and TVS Motor Co., according to the Indo Shell website. It exports its products to more than 10 countries.

The second person cited above said the transaction is part of Piramal’s plans to focus on increasing its loan book in areas such as auto components, transportation and logistics.

“Outside of their historically strong area of infrastructure and energy, these are the new verticals that they are focusing on keenly,” he added.

Indo Shell has a total of eight manufacturing units in Coimbatore and the US. It makes more than 200 different components.

The company manufactures components for two-wheelers, four-wheelers, tractors and other commercial vehicles. It also supplies components for other industries such as petroleum, aerospace, construction and home appliances.

Some of the major components manufactured by the company include two-wheeler engine cylinder blocks and hydraulic valve bodies.

Khushru Jijina, managing director at Piramal Fund Management, the wholesale funding arm of the Piramal Group, had said that the SFG unit is focused on expanding its activities beyond infrastructure and will also focus on a wider portfolio of products to help companies meet financing requirements.

Piramal’s SFG agreed to invest Rs150 crore in Smaaash Entertainment Pvt. Ltd, a sports-based entertainment firm co-owned by cricketer Sachin Tendulkar.

Prior to the Smaaash investment, the SFG’s core focus was operating infrastructure and renewable energy.

the SFG was in advanced talks to invest Rs800 crore (about $120 million) in solar power producer ACME Solar. Piramal SFG was investing Rs900 crore ($132 million) in Essel Infrastructure Ltd’s solar platform across India.

SFG is expanding its product portfolio to include offerings such as loans against shares and senior debt

Buffett says $100 billion wasted by investors trying to beat the market

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Brexit

Billionaire investor Warren Buffett devoted a substantial portion of his annual letter to deepen his long-running critique of investment fees.

Over five pages, he updated Berkshire Hathaway Inc. shareholders on a bet made almost a decade ago that a low-cost fund that passively tracked the S&P 500 Index would outperform a basket of hedge funds. He also laid anew into the rich for being suckered by Wall Street investment advice, which he estimated has wasted more than $100 billion over the past ten years.

“When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients,” he wrote. “Both large and small investors should stick with low-cost index funds.”

While Buffett was doubtful that the wealthy would take his advice, his argument has gained steam. After years of underperformance, hedge funds are facing a revolt by endowments, pension funds and other institutional investors that have decided they aren’t getting their money’s worth. Meanwhile, index funds have been on a tear. In 2016, passive strategies attracted $504.8 billion in new money, while active managers saw $340.1 billion in redemptions, according to data from Morningstar Inc.

Buffett, 86, has been making his point for more than a decade, most visibly through his $1 million bet with Protege Partners. The billionaire challenged the asset manager to pick a group of hedge funds that it thought would beat an S&P 500 Index fund over 10 years.

On Saturday, he gave an update: The bundle of hedge funds had compound annual returns of 2.2 percent in the nine years through 2016, compared with 7.1 percent for the index fund. The billionaire estimated that about 60 percent of the gains that the hedge funds produced during that period were eaten up by management fees.

“That was their misbegotten reward for accomplishing something far short of what their many hundreds of limited partners could have effortlessly — and with virtually no cost — achieved on their own,” he wrote.

Buffett will almost certainly win the wager when it ends on Dec. 31. Proceeds will go to charity.

Praise for Bogle
He also praised Jack Bogle, the 87-year-old founder of Vanguard Group. The pioneer of indexing was once an outcast in the investment world as he eschewed riches to provide real value to American investors, Buffett wrote.

“In his early years, Jack was frequently mocked by the investment-management industry,” Buffett wrote. “Today, however, he has the satisfaction of knowing that he helped millions of investors realize far better returns on their savings than they otherwise would have earned. He is a hero to them and to me.”

Buffett’s remarks on indexing have been jarring for many of his followers, not least because he has spent a career finding ways to generate market-beating returns at Omaha, Nebraska-based Berkshire. The billionaire threw a bone to that crowd in his letter, reiterating his stance that it’s not impossible to beat the index.

“There are, of course, some skilled individuals who are highly likely to out-perform the S&P over long stretches,” he wrote. “In my lifetime, though, I’ve identified — early on — only ten or so professionals that I expected would accomplish this feat.”

He also sought to distinguish between investment fees that money managers charge and the kinds of fees that Wall Street banks earn for helping to arrange deals.

“Berkshire loves to pay fees — even outrageous fees — to investment bankers who bring us acquisitions,” he wrote. “To get biblical (Ephesians 3:18), I know the height and the depth and the length and the breadth of the energy flowing from that simple four-letter word — fees — when it is spoken to Wall Street. And when that energy delivers value to Berkshire, I will cheerfully write a big check.”

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