Category: Excerpts

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RBL Bank-A hidden gem

(Disclosure:I am market making in the shares of RBL Bank)

For most savvy investors, ‘hidden gems’ are companies which fundamentally disrupt markets in ways that the market may not be aware of. This typically gets facilitated through changes in business models and the use of technology. But for the disruption to be effective, the change has to take place in large markets. Think Google, and the way it created AdSense, combining search with advertising and turning the traditional rules of the game on their head.

“The dynamism of the founder, the experience he has and how he has been able to build businesses are often most important,” says Bharat Banka, CEO of Aditya Birla Private Equity, which is an investor in companies ranging from Coffee Day Resorts (which runs the Café Coffee Day chain) to the private sector RBL Bank (formerly Ratnakar Bank).

In a country like India, where capital markets are still not deep enough, investors closely scrutinise companies for governance standards. In many cases, they are ready to make a trade-off in terms of slightly lower returns if the companies are well run and transparent. “Governance is a strong differentiator,” says Banka, citing the case of the recently-listed search services company JustDial, a current market favourite. “There were many marquee investors there already, but with high governance standards, more investors will keep coming in.”

For an ordinary investor it may be inexplicable why someone would pay a hefty multiple for a company which is growing at 25-30 percent, but very often the premium is for transparency and strong governance systems.

This played an important role in tilting the scales in favour of RBL Bank when Banka’s firm was examining investments in the banking, financial services and insurance (BFSI) space.

Though a sleepy community bank till recently, the infusion of fresh energy by way of a spanking new management team, led by former Bank of America India boss Vishwavir Ahuja and former Citi India managing director Rajeev Ahuja, ensured that Aditya Birla PE entered in the second wave of new funding, with a stake of around three percent. What also worked was a professional board and widely distributed shareholding—this ensured no single shareholder or group of shareholders could stall policies.

–from Forbes India

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What Stanley Druckenmiller learnt from George Soros

I’ve learned many things from him, but perhaps the most significant is that it’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong. The few times that Soros has ever criticized me was when I was really right on a market and didn’t maximize the opportunity

Soros has taught me that when you have tremendous conviction on a trade, you have to go for the jugular. It takes courage to be a pig. It takes courage to ride a profit with huge leverage. As far as Soros is concerned, when you’re right on something, you can’t own enough.

***

It’s my philosophy, which has been reinforced by Mr. Soros, that when you earn the right to be aggressive, you should be aggressive. The years that you start off with a large gain are the times that you should go for it.

The way to build long-term returns is through preservation of capital and home runs. You can be far more aggressive when you’re making good profits. Many managers, once they’re up 30 or 40 percent, will book their year [i.e., trade very cautiously for the remainder of the year so as not to jeopardize the very good return that has already been realized]. The way to attain truly superior long-term returns is to grind it out until you’re up 30 or 40 percent, and then if you have the convictions, go for a 100 percent year. If you can put together a few near-100 percent years and avoid down years, then you can achieve really outstanding long-term returns.

***

Soros is also the best loss taker I’ve ever seen. He doesn’t care whether he wins or loses on a trade. If a trade doesn’t work, he’s confident enough about his ability to win on other trades that he can easily walk away from the position. There are a lot of shoes on the shelf; wear only the ones that fit. If you’re extremely confident, taking a loss doesn’t bother you.

–from SocialLeverage

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Don’t let the uninvested take advantage of you

(Hat Tip Prashant)

If you didn’t have the data, you might reasonably assume that any fund manager worth his salt was heavily invested in his own fund. This ought to apply to an overwhelming percentage of all the actively managed funds out there. In fact, as a recent article in Barron’s points out, it’s the exception rather than the rule. Using data from Morningstar, they find that almost half the funds tracked were led by a manager with no money invested at all. This sorry bunch may think they’re good, and their marketing materials presumably make the case, but by investing their own money elsewhere they tell you what they really think.

And of the 7,700 funds tracked by Morningstar, only 910 had a personal investment by the manager of at least $1 million. This isn’t a high hurdle; less than this threshold either means the manager doesn’t have $1 million to invest, a paucity of personal resources that should give any potential client pause, or chooses not to.

It’s not just that it feels right to know your manager is invested alongside you. For the client, this is the only way to ensure alignment of interests and protect themselves from the principal-agent problem so prevalent in finance. If you’re a fund manager only managing OPM (Other People’s Money), your compensation is fully linked to the size of the fund you manage. The most reliable way to grow your fund is to outperform your competition. A seductively simple way to outperform is to take more risk than the others. Because if you take more risk in a rising market, you will assuredly do better than most and money, which chases performance, will follow. If the market goes down and you underperform, you haven’t lost much because it’s only your clients that suffer the returns. And if performance is really bad, you can always start a different fund.

For the investor, it’s not a bad rule to simply eliminate from consideration any investment manager not personally and significantly invested in his own strategy. It makes intuitive sense but it also provides for an alignment of interests. Don’t let the uninvested take advantage of you.-from SL Advisors

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ICICI to list insurance units when valuations are optimum

(Disclosure:I am market making in the shares of ICICI Pru)

Top private sector lender ICICI Bank will consider listing its two insurance units to unlock value at an opportune time when it feels that valuations are optimum, the bank’s chief Chanda Kochhar has said.

We will take this step when we feel that the valuations are really optimum. We can mainly look at two insurance companies — life and general insurance units,” Kochhar said.

While making it clear that there were no immediate plans for listing of any of its subsidiaries, she said, “Clearly, at some point of time we will look at some amount of unlocking of value, more so from the point of view that it establishes a benchmark and it is always good to have a benchmark.

“But the thing is that we do not really need capital, whether it is in the bank or in the insurance company,” Kochhar said.

In ICICI Bank’s latest annual report, Kochhar had said that the bank’s subsidiaries achieved healthy performance in fiscal 2014.

“Our life insurance subsidiary sustained its profitability and maintained its position as the largest private sector life insurer in the country. Our general insurance subsidiary saw strong improvement in profitability in fiscal 2014 while maintaining its market leadership position among private players.” – from ET

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Petroleum=Cash?

In 1996, the Central Bureau of Investigation began pursuing a 1993 bribery case in which members of the Congress-led ruling alliance allegedly paid the Jharkhand Mukti Morcha to help defeat a no-confidence vote and keep the government intact. In the course of that investigation, the CBI questioned Brijnath Safaya, the additional private secretary to Captain Satish Sharma, the minister of petroleum at the time the joint ventures were awarded.

In a statement recorded by inspector Harish Sharma, and reported by Outlook, Safaya claimed that in the months before the contracts were awarded he had been at Satish Sharma’s house to receive suitcases stuffed with roughly Rs 13 crore. He also said that frequent visitors to the house included Mukesh Ambani, and the heads of other private companies whose bids were eventually successful. Reliance, Safaya told the CBI, sent Sharma a total of Rs 4 crore through one S Raman in 1993—Rs 1 crore in June, Rs 1 crore in October and Rs 2 crore in December. The heads of Essar and Videocon also allegedly sent cash. At least some of this money is thought to have been routed to the JMM. (Safaya later retracted his statement.)-from Caravan