Let me start off with a definition : what is a long term investment?  A long term investment is one that you can’t sell in the short term!  We too have some of those “long term investments” in our portfolios!

But jokes apart, we have seen some phenomenal growth in the Indian economy over the past 5-7 years.  All of us – fund managers, distributors, investors have been fortunate to have participated and enjoyed the fruits of this phenomenal growth of the Indian economy and the market.

Our view over the next 5-7 years is one of optimism. In this journey of expansion and growth, we will get bouts of nervousness and anxiety from time to time. Markets will dip from time to time. But this is what makes it a market full of opportunities. It is also a market where, if you have clarity about your investment rationale and time horizon, you should be able to make the desired money you seek.

I am going to take you briefly through the journey of the Indian economy and market over the last few years, a perspective on where we are headed over the next few years and also how we have evolved as an equity money manager over the last few years, our learnings in the market and the processes that we have put in place to ensure we don’t repeat mistakes we made.

Indian economy : a sustainable growth story

We have witnessed a significant structural change that has benefitted all participants.  The first phase was 1991-2000, when the economy was opened up, when foreign investments were welcomed, when the licence raj was dismantled.  This laid the foundation for the accelerated growth we saw from 2001 onwards.

In this decade, we have seen a virtuous circle that has made the growth story very sustainable. We saw companies focus on efficiencies – which boosted their earnings – which attracted global and local investors – which fuelled their growth and expansion plans – and therefore led to sustainable earnings growth and GDP growth.

From 2005 onwards, we have seen the emergence of several new sectors – which have large employment generation potential – sectors like organised retail, real estate, BPOs etc.  Growth of these sectors is very inclusive in nature and further fuels overall GDP growth – making the growth story a lot more solid and sustainable.

The last 10-15 years has completely changed the scale of businesses in India.  From 1995 to 2009, sales of Sensex companies has grown 14 times while profits have grown 25 times. In the same period, Reliance Growth’s NAV has grown 40 times.

If there is one lesson that stands out it is that long term investing always pays rich dividends – irrespective of timing.  The last 13-14 years have seen every political party and coalition getting a change to rule the country, we have seen terror attacks of very high intensity, we have seen the Ketan Parekh scam, we have seen the dot com bust, we have seen the global meltdown and overnight disappearance of global investment banks like Lehman and Bear Sterns.  And yet, the market went up some 6-7 times in this period and funds like Reliance Growth went up much higher in this period. 

In a market which is in a structural upturn, there will be short term hiccups.  The key is to remain focussed on the long term picture.

The next 30 years will belong to India

That was the story over the last 15 years.  What next? Where are we headed?  One thing is very clear.  When a country gets into a structural upturn, the growth story doesn’t last for 5-7 years – it goes on for 30-35 years. We have seen this in Japan, China, Korea, Hong Kong and several other such cases.  The Indian growth story began in 2003 – it still has many years more to run.

In India today, all the 3 growth drivers – savings, consumption and investment are in place – which should enable a sustainable high growth path for several years.

It took India 60 years (1947 to 2007) to become a 1 trillion dollar economy in terms of GDP.  The next trillion will come in just 6 years. That’s the new trajectory that the Indian economy has embarked on.

As wealth increases, the propensity to consumer more and also move into higher end luxury products will also increase.  This is exactly what we are seeing in India today. Imagine the impact of 1 trillion dollars being added into the Indian economy in the next 5-6 years.

From an MF industry perspective, if we are indeed going to grow to a 2 trillion dollar economy in the next few years and savings rate remains robust, even if 10% of household savings finds its way into the markets – whether through mutual funds or insurance, we can see US$ 50 Bn of annual flows from retail investors. Overdependence on FII flows will not be a worry over the long term for our markets.

Another very interesting observation : by 2014, the GDP of BRIC countries will equal that of USA – both of which are projected to be around US$ 16 trillion.  With a market cap to GDP ratio of 1 (US today is at 1.2), the combined market cap of the BRIC countries should increase from US$ 7 trillion to 16 trillion over the next 5 years.  If market cap is set to more than double in 5 years, think of the amount of FII flows that are likely to come into these growing economies.

Today, global investors own about US$ 10 trillion of US stocks and only US$ 1 trillion of the combined BRIC markets stocks.  This balance is bound to get corrected over the next 5 years.

The big shift in wealth transfer is well under way and we have no doubt that this will only accelerate in the years ahead.

Research process is the key to harness market opportunities

Having a robust research process and a great research team are absolutely vital for any money manager to truly harness this market opportunity.

There are new sectors emerging all the time.  Telecom was a sunrise sector a few years ago just like real estate and retail are today and so will the case be with a number of emerging sectors like education.  It is critical to begin tracking these sectors from the very early stages – even if investment opportunities are not immediately available.

We have today a research and fund management team that I can say is second to none.  We have a very experienced and talented fund management team and a very strong research team with a good blend of some highly experienced seniors, some solid middle level managers and some bright young sparks in the team.  Apart from the fundamental research team, we also are building up a quant team. The quant team helps track global trends and correlations, helps fund managers overcome biases that might creep in sometimes.

Growth or value ? Top-down or bottom-up?

Lot of people ask us this question : are you growth or value investors? Are you top down or bottom up in approach. My answer is very simple : Hamara kaam hai paisa banana – our job is to try and make money.

India is a land of opportunities : we call ourselves opportunistic investors. There are times when you have to be growth oriented, there are times when you have to be value oriented. There are times when you have to take a sector call. There are times when you have to be just bottom-up oriented. From our perspective, we look at life each day at a time. Whatever we achieved until yesterday is already reflected in yesterday’s NAV. Today is a new day, and offers a new set of opportunities. We try to be opportunistic, we keep a very open mind to all ideas – we don’t want to close out any idea because we are married to one style.

That’s what has worked for us in the past and that’s the approach we will continue with in our efforts to maintain and build on the track record that we have delivered so far.