imgbd Wise Advice: Achieve

Keep taking singles, but go for that occasional six too!

Ashish Chaddha, Chaddha Investments, Delhi

imgbd Last week, we discussed Ralph Wanger's winning investment approach (The story of a zebra among lions). Major Ashish Chadha - one if India's most successful advisors - discusses his take on Wanger's approach, and how he blends caution and aggression to deliver a great client investing experience.

Wanger's preference is for hitting sixes, he is not a believer in taking singles. Ashish is a believer in taking a lot of singles, but always keeping an eye out for a loose ball that he can smash for a six. His approach towards the big shots is very similar to Wanger's - and with the same impact: little wonder that clients love the kind of performance his portfolios deliver.

imgbd

Ralph Wanger talks about fund managers who hit for singles versus those who hit for home runs (sixes in cricketing parlance). Wanger hits for home runs. He invests with multi-baggers in mind - not annual outperformance vs benchmark. In our business as financial advisors, I think what works best, at least for me, is a combination of hitting for singles and at the same time keeping an eye for a loose ball that you can hit for a six.

Investment philosophy

Agree with Wanger - you must articulate your core set of beliefs, which will always guide you in your investment calls. I have three core beliefs that guide me:

1. Do what is right

I pray everyday - I keep a leaf from the Bodhi tree in Gaya to keep my balance, I have this Hebrew prayer overlooking my bed to not be a mercenary and do Good, a sura from the Sura Naash in my Dining Room which tells me to keep the demons of my heart and mind in check, and the National Defence Academy prayer to the Lord - Help me to choose the Harder right than the easier wrong! And the Gita says Keep your Karma right - so no buying something for anyone else if you don't want to buy it for yourself and your family! Anytime I violate any of these commandments I screw up, else it seems to work? till I screw up. It helps to have a father who did not let me become an agent of Hoffland Finance as it was paying 10% commission, an uncle who held stocks for 60 years and his family continued the tradition and a team which is generous enough to worry about high markets!

2. Mean reversion is the eternal truth

In the military, we greet each other every morning with "Sat Sri Akal" - Truth is the eternal God. For markets, the eternal truth is mean reversion. Valuations are real, valuations don't lie. Whenever markets or a segment of the market gets too far away from the mean, it will eventually revert to the mean - no matter what people say about why it must remain where it is.

If you sell what the market is selling, the pundits are advocating, media is Tom toming, tongue firmly in cheek the young 25 year old banker is showing a 30 pc return and the client's brain has been fixed and thinks to herself "15 toh aaa hi jayega" - you are no different. At that stage however, if you think sensibly and act judiciously - that's when you make a difference.

We stopped recommending lumpsum equity funds since November 2014. We built up balances in liquid and short term funds right through 2015. We even stopped SIPs in midcap funds since 2015. We had across the board sell calls all through Dec 14, asked clients to take out money and go on a vacation. Back in Nov 2014, we saw two things that made us uncomfortable: market valuations were 22x and above, with no near term sign of earnings growth. Second, the flood of NFOs on the back of huge 6 and 12 month performance, was a danger signal for us. Mean reversion had to happen. We stayed away from equity.

We lost some business in 2015 when everybody tried talking up the market, but it refused to oblige. "Ashish toh equity mein mana Kar raha hain ki return nahin ayega, bank is saying 30 pc market mein return hain and they have a scheme which is closing in 10 days… Ashish toh agent hain, Pata nahin hain, conservative hain, kah raha hain midcap nahin khareedne ka hai, bank ke log kitna smart chhe, economy ka poora janta hain! "

I love this cycle - there is pain of losing business when you stay with your convictions, but when mean reversion happens - as it always does - you create clients for a lifetime. 2015 was a bad year for us in terms of income - you don't make anything by keeping client money in liquid and short term funds - but I think it will turn out to be a great year for us from a long term perspective, as we chose to stay away from the herd, follow our convictions and do what we believe is right for our clients.

3. Asset allocation is the default strategy

Asset classes going into extreme valuations does not happen every day. When it happens, you must believe in mean reversion and take necessary portfolio action. But for all other times, asset allocation is the mantra to swear by. Plug your ears to what everybody is saying, plug your ears to all sales pitches, don't pay any attention to media hysterics - nobody can predict the future. Asset allocation is the only truth. Keep an eye on valuations - they never lie. Decide on over or under allocating to an asset class whenever you see valuations going to extremes, either way. All other times - stick with your asset allocation. We are the serpent which guards our clients' treasures - we better do a good job of it by correct asset allocation.

Keep taking singles, but look out for the occasional six

I agree with Wanger's idea of looking at macro trends and trying to find ways to play the trend correctly. We've been doing this for years - and we've got lucky with some of our calls. Back in 2009, when there was the proverbial "blood on the streets" we took two significant calls which nobody was talking about at that time - we advised clients to invest in the PineBridge Infrastructure Fund and Mirae Emerging Bluechip Fund. Infra and midcaps - these were the most beaten down, held significant promise, and after looking at different schemes, we settled on these two as the best fund managers to play these themes. The rest as they say was history.

In 2011, we looked at the macro situation.We were convinced that the rupee will fall and wanted to identify a sector that will be immune to this. Banks came up as a thought, but rising NPAs was a challenge that didn't give us comfort. Auto and auto ancillaries was a segment that we developed conviction in - the sector was globally competitive, didn't require Government influence to drive its profitability, had a healthy mix of exports and domestic consumption, and was attractively valued. There were at that time only two sector funds that played this theme - we got clients to invest in UTI Transportation Fund. That turned out to be a big winner for clients. We have been advising clients for years to invest in US Equity Funds - and they have done very well for clients - with the US market rising and the rupee falling through the last 5 years. We follow a military operations way of functioning, we discuss ideas collectively and if one colleague shoots down an idea, we think through and delay a decision. There is no ego in being told off by a colleague!

Hitting sixes helps client portfolios show healthy returns, but we never go overboard with hitting sixes. Each of these calls would not be more than 5% of client portfolios. Bulk of the portfolio will remain in asset allocation mode, but from time to time, looking at trends, spotting opportunities and taking courageous calls has helped us deliver a good client experience.

imgbd

Content is prepared by Wealth Forum and should not be construed as an opinion of HDFC Mutual Fund.



Share this article