‘We like consolidating, not fragmenting, sectors’

 

Portfolio Management Schemes and Alternative Investment Funds (hedge funds) are some of the options that investors with a fairly large saving pile can consider, if they have a robust risk appetite.

These investments combine the indirect approach of mutual funds, but give investors some discretion in the instruments the money is invested into. Since these schemes are governed by SEBI, investors can have a fair degree of comfort.

Kenneth Andrade, who has 25 years of experience in equity markets under his belt, including 10 years with IDFC Asset Management Company, has formed Old Bridge Capital Management, which offers two portfolio management schemes and is currently rolling out its first alternative investment fund, Vantage Equity Fund.

In this interview with Business Line, Andrade explains his investment strategy and market view

What does the name Old Bridge Capital signify? How did it all start?

We are a group of investment professionals who used our individual experiences to put Old Bridge Capital together; to pool some capital and to put it to use. We have been doing this to the best of our ability over the last two years. Active PMS started two years ago and we have a single alternative investment fund.

We call ourselves Old Bridge Capital because the term points towards margin of safety. In ancient Rome, before a bridge was opened for public use, the engineer of the bridge had to stand below the bridge. This ensured that the engineer constructed the bridge with a high margin of safety. That’s how we try to put our portfolios together. We try to ensure that the valuations of the stocks that we put in the portfolio are right and give us enough margin of safety on the downside.

You have two types of PMS. Can you tell us about the strategy you adopt to pick stocks in these schemes?

We have launched two portfolio management schemes, in the thematic space and in the all-cap space. The all-cap portfolio invests across market capitalisation and across industries.

We have selected companies that are solvent, that is, those with lower gearing. We like companies that are market leaders and consolidate the industry. The perfect metric for us is incremental market share. We like industries that are consolidating and not fragmenting. Usually when industries go through down-cycles, consolidation happens around the number one or number two players as the bottom-end of the industry falls off.

We like efficient allocators of capital. We don’t mind buying companies with 9 per cent return on equity as long as it is the highest in the industry.

Can you tell us which industries you will invest in now?

It cuts across the board. We have been buying into utility. We like the media space, right through the value chain. We do like commodities and own quite a number of commodity stocks in the portfolio. We also have a fair number of companies that are based on the rural theme.

Any numbers on the returns made by the schemes?

The return numbers are client-centric. We have a sub-set of a little more than 30 companies that we work with. Depending on the point where the client comes in, we design the portfolio for the client. The universe remains the same with some deviations in some points in time.

We have upward of $300 million as our corpus and we work with a standard flat fee.

Can you talk about your alternative investment fund?

The alternative investment fund is an extension of the thought process we use in PMS scheme.

It’s a vehicle we have put together in December and we are trying to raise money through that vehicle in March. It’s a 100 per cent long only equity product. Our minimum ticket size in AIF is ₹1 crore.

How important is the growth of the business to you?

Trying to predict growth is quite difficult. That’s because growth is linear in nature — it could be 5 per cent one year and 10 per cent the next. We like to concentrate on the other aspect of the business, which is supply.

When there is a supply constraint in any space, the business gets pricing power that aids profitability. Supply is predictable because you can find out how much capacity is coming into the industry at any point in time. We try to focus on the demand-supply mismatch, with emphasis on the supply-side economics. While demand could be linear, growing at a steady pace, supply is not linear in nature. It could increase at say, 20 to 50 per cent per annum.

You have seen quite a few market cycles during the course of your career. How do you view the current phase? Is this similar to the 2000 or 2008 peak?

You cannot have a linear growth in equity prices, and 2018 is when it is taking a pause. But this time, we have much stronger corporate balance sheets. There are macro challenges – both domestic and international – that have made the cost of capital higher, pushing yields upward. That is putting pressure on how you would value equity.

My sense is you will not go on the historic low in valuations. Given that companies have fairly solvent balance sheets and there is no risk to capital, it is now a question of how earnings grow. Given where the earnings cycle is and given the capacities on the ground, compounded growth in profitability could easily be in the high teens over the next two to three years.

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