Can you give a brief overview of your strategy in terms of what you are trying to achieve for investors, your investment process, and the make-up of the investment team?
As you would expect from a country with the oldest stock exchange in Asia, India has many opportunities. That said, to capture these opportunities without taking undue risk requires a significant amount of effort to understand companies. Our strategy follows a bottom-up investing approach that focuses on tracking companies at a "microscopic" level from three perspectives: first, the strength of the business model and its sustainability, second the quality of the management team running the business, and lastly the valuation to be paid. To follow this rigorous process effectively, we ensure that we do not stretch ourselves too thin by investing across many companies. We, therefore, run a concentrated portfolio incorporating the best ideas. To illustrate this approach, our top ten names constitute 45-50% of the portfolio. This framework of investing also ensures that every aspect of ESG is fully embedded into the core of the investment process rather than being an add-on.
In short, the strategy is a fundamental, research-driven, high conviction, 40-60 stock portfolio that seeks to outperform its index. The strategy demonstrates high active share, is unconstrained as to style, sector, or market capitalization, and has a medium- to long-term investment horizon. The strategy benefits from local insights from a long-standing, on-the-ground experienced, and stable investment team in India.
How have you been trying to weather the storm caused by the Covid-19 pandemic and what could be the longer-term implications for your strategy?
Managing money for us is the same now as it was in the pre-Covid-19 era and will remain the same going forward. We will continue to invest in well-managed companies that can efficiently deploy large sums of capital to embrace disruptive trends on the back of their financial strength and management acumen. These would include well-run financials, exporters such as IT and pharmaceutical, consumers, and investment-related sectors such as materials and housing-related companies.
Of course, we had to manage risk effectively throughout the pandemic. During the initial stages in 2020, we stress-tested every investee company's ability to withstand the lockdown. Our thorough analysis concluded that companies that aggregate to 5% of our portfolio would need to borrow money to sustain themselves. Our firm belief was that none of them will have any trouble achieving this. The rest of the portfolio comprised of either companies providing essential services, or having enough cash on the balance sheet to sustain themselves without resorting to any borrowings. We were very confident that our companies will emerge stronger out of this crisis due to their excellent business franchise coupled with resilient balance sheets. This has proven to be the case.
Can you identify a couple of key investment opportunities for your fund you are playing at the moment in the portfolio? This could be at a stock, sector or thematic level.
In our view, COVID-19 will profoundly impact the economy and global flow of goods, capital, and people. The pandemic has hastened trends including digitization, direct-to-consumer, climate change mitigation efforts, geopolitical rewiring of supply chains and new demand for health and home. These trends are not all new. However, the current scale of disruption across industries is rare and will provide opportunities for nimble stock-pickers.
While the markets have recovered and reached a new high and the price-earnings multiples have risen, we believe that strong investment opportunities abound. In particular, the portfolio is expected to benefit from the following trends that will unfold over several years:
Housing. The government-led initiative is leading to good progress in rural and semi-urban construction across India. Investment-related companies in this space see unprecedented demand due to housing construction.
Health and wellness. Companies in the pharmaceuticals space are seeing good demand for pharmaceutical products and in general, people have become aware of the importance of health. Further, the cost of reducing spends on healthcare leads to more outsourcing to India.
Digitalization. Everything related to digital is seeing tremendous growth. Indian IT companies are expected to benefit significantly from digitization in the next few years, with digital accounting for over half of revenues by 2025.1 Electronic road toll which was being talked about for years has got implemented. Fintech companies are seeing higher growth. Ecommerce companies and companies enabling this ecosystem are seeing excellent customer acceptance.
Geopolitical rewiring of supply chains (Outsourcing). For instance, some IT companies gave good guidance for next year. Similarly, some pharmaceutical companies are expanding their capacity to meet global demand, while chemical companies are focusing on backward integration.
ESG Imperatives. With investors sentiment and regulations promoting ESG, this dimension is also giving opportunities to invest as it impacts the cost of capital for firms that are greener and more in tune with changing social values.
For further insights on what's driving growth of the Indian equity market see Siddhartha's recent blog Equity Market ‘Force Vectors' Just Got Amplified in India
Investing involve risk, including a possible loss of principle.
For important information on PineBridge, please visit www.pinebridge.com/global-disclosure.
1 Source: NASSCOM, "Future of Technology Services," as of February 2021.
