If calendar year 2017 was an exhilarating year, the last 18 months have been a bumpy ride with several participants suffering significant erosion of capital. A downturn in portfolio often turns investment managers into philosophers; it makes them humble. As Old Bridge Capital completes three years in operation since August 2016, the PMS shop has mixed feelings. In fact, star fund manager and Old Bridge Capital founder Kenneth Andrade had even told PMS investors that he often wonders whether he was just really lucky in his journey as a portfolio manager between 2003-15.
In the last 20 years, I had never to explain and then deal with the level of polarisation we have in the markets today, Andrade says. Those are big words coming from an expert who was often referred to as midcap moghul and was credited for making popular a slew of IDFC MF equity schemes. Let us have a close look at the PMS company’s All Cap Strategy.
Mumbai based Old Bridge Capital is promoted by Andrade (majority shareholder), who has over 25 years of market experience. The other directors of the company are Amit J Jasani, and Gealgeo V Alankara.
All Cap is an equity portfolio of around 20 companies that, according to Old Bridge, consists of scalable, consolidated businesses with declining capex intensity that fit into a valuation framework with a favourable risk-reward profile. It is a buy-and-hold strategy with low churn. The PMS strategy was launched on August 30, 2016. The ‘diversified’ strategy is benchmarked against BSE 500 index. It has an exit load of 3% if exiting within 18 months.
The All Cap strategy’s top holdings include Kaveri Seeds, Chambal Fertilizers & Chemicals, SRF, KEI Industries, Escorts, Greaves Cotton, IEX, PowerMech Projects, Syngene, NCC, VA Tech Wabag, AIA Engineering, Coromandel Fertilizers, Ashok Leyland, Ramkrishna Forgings, Aurobindo Pharma etc. They account for nearly 70% of the allocation. The problem is that many of these stocks have been quite badly beaten down in the last 1 year. IEX is down 23%. Kaveri Seed is down 27%. VA Tech Wabag is down 29%. PowerMech is down 31%. Escorts is down 40%. NCC is down 47%. Ashok Leyland is down 52%. Of course, there are some stocks that have held fort like AIA, Syngene, Chambal Fertilizers, SRF and KEI.
The All Cap strategy helped build Old Bridge’s position in the PMS market. By April 2018, the PMS firm managed assets of over Rs 2,000 crore. But the weak markets have led to erosion, as a result of which the total AUM (assets under management) are around Rs 1,400 crore. As per last SEBI report, Old Bridge had over 480 individual (resident) investors and about 127 corporate (resident) investors.
Apart from All Cap, Old Bridge also has another PMS strategy called Thematic Portfolio.
As on mid-August, the All Cap PMS strategy was under-performing BSE 500 across all time periods. For instance, since inception All Cap has delivered 6.2% CAGR compared to BSE 500’s 7.4%. In the 2-year time frame, All Cap has dropped by over 10% compared to 5% rise in BSE 500. In 1-year time frame, All Cap has lost 17% while BSE 500 has shed just 2%.
Do note that scheme level portfolio is not a representation of individual client’s portfolio performance. However, the PMS firm in August 2019 newsletter has informed clients that all portfolios that came in after late 2017 are in negative territory.
Take a look at the portfolio returns below.
“From a stage of exhilaration in 2017, the last 18 months have been a bumpy ride navigating polarisation of returns in the market and a significant erosion of capital in spaces we invest in. Not much worked, and for the stocks that did well, the ones that fell off cannibalised their gains. From inception, we remain marginally positive,” Andrade was quoted as saying in the investor newsletter.
He adds: “A thought does cross the mind – was I really lucky in my journey as a portfolio manager between 2003 – 15. In the last 20 years, I had never to explain and then deal with the level of polarization we have in the markets today. In investing, two years is a short period to judge the same, but the drawdowns in some of the stocks have been sharp enough for us to question our traditional model of investing.”
Andrade has told investors that as of mid-August a 90% of the stocks at NSE showed negative 18-month returns. Only two previous instances have seen these events been recorded – September 2001 and March 2009. Value in the breadth of the market is there, the portfolio manager has assured.
The drawdown on All Cap portfolio has also to do with the path it has chosen – concentration risk. The PMS firm has claimed that none of its companies suffer from insolvency risks and they are respective category leaders.
Andrade continues to believe that “financials and consumers are not the place to be” and rich valuations of some businesses are not their ways of
investing. However, the PMS investment manager expects 2020 to be a better year. “Nothing goes to zero, and the reversal should be equally swift and long,” Andrade’s note in the investor newsletter says.
Old Bridge’s All Cap strategy is not the only under-performer in the PMS space. Very few schemes have been able to stay in the positive territory, given the polarized state of markets i.e. only a few stocks are taking the index up, while the rest of them languish. Patience will be tested. There is no reason to believe that the current state of markets shows signals of bottoming out, even though all investors would like to believe so. A PMS investment is not for a brief period like 2-3 years. We believe investors should give All Cap strategy full five years time and then compare returns with benchmark to assess the amount of outperformance or under-performance.
Disclaimer: Views expressed here in this article are for general information and reading purpose only. They do not constitute any guidelines or recommendations on any course of action to be followed by the reader. The views are not meant to serve as a professional guide/investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument.