Perspectives – Solidarity

Performance measurement – the difference between TWRR and XIRR

Performance reporting in the PMS industry had no standardized reporting till SEBI mandated managers to only report TWRR. (Time Weighted Rate of Return).

TWRR measures skill of a fund manager – TWRR does not care about quantum of money invested, only the return earned over the time period money was invested. It is calculated by multiplying returns over each time period money is invested and dividing it by the total time period. Alternatively, one can calculate this by assuming units are being issued at prevailing prices and calculating how the NAV of each units has evolved (MF method).

What I learned from Rakesh Jhunjhunwala

Rakesh Jhunjhunwala, India’s favourite investor, passed away yesterday at the young age of 62. The world knows him for his wealth, his passion for investing and for his wit. I am privileged to share a side of him not many knew by virtue of my association at his family office “RARE” between 2006 to 2014 and the mentoring I benefited from till his last days.

Rakesh “Bhaiya,” as he was affectionately referred to, was perhaps the strongest believer in the India growth story that I have known. His reasoning was India’s democratic roots and consensus-based approach meant growth would be more long lasting and gain momentum with reforms.

The stock market is not being irrational

In our last communication on 5 May, we had shared that we need to be realistic in return expectations as monetary policy is reversing which will have an impact on multiples. We are seeing this play out as the market reprices risk. There is a higher probability vs the last few months that inflation will stay elevated and that developed world Central Banks will need to raise rates aggressively and that could push their economies into recession.

Need for realism in return expectations

Conversations with partners over the past few days suggest some partners are not appreciating the change in monetary policy underway and what that means for future returns.

Hence, some points we have made earlier merit repetition.

Consequences of Putin’s war in Ukraine

Dear Partners:

In order that we can share our thinking on the current situation in Ukraine with all partners, we have put together a brief note that summarizes trends we see, their implications, and how we intend to act. I hope you find it useful.

A caveat. The situation is evolving and we typically see first order effects at present, but there will be second and third order effects which only become clearer with time. Hence, this note is “work in process”.

Investing during a crisis

It is now clear that a macro risk (Russia/Ukraine) has become a known event. Not surprisingly the markets are selling off as new information is factored into prices.

No one knows how this will end or its short term implications. If anyone tells you they do, it tells you more about them than their forecasting abilities.

The Fin Tech Valuation delusion

Technology buzzwords – “ML. AI. Blockchain. Platforms” are fueling investor delusions. We share 2 articles and also explain why we don’t own any “FinTech” as of now.

Technology buzzwords are fueling investor delusions

Signal vs noise – what game are we playing?

“In life, the challenge is not so much to figure out how best to play the game; the challenge is to figure out what game you’re playing.” (Kwame Anthony Appiah http://appiah.net/)

CLSA is a reputed broking house. It published a report 2 days ago recommending investors book profit in India.

We agree with CLSAs that valuations in India, on aggregate, are stretched. In our last letter we mentioned, we were “cautious, but not bearish” and that because we have borrowed returns from the future, we could be in for a period of muted returns.

Our process for exit decisions

You may observe we are gradually slicing out of our Specialty Chemical positions to re-allocate elsewhere.

A key choice we need to make is whether to trim on valuation excesses or to let positions compound and accept incremental underperformance due to valuation de rating.

Essentially, what game are we playing?

Will Technology firms take value away from Private Banks?

A question we introspect on significantly is whether the next stage of value migration in Banking will be from Private Banks to Digital players.

Our working hypothesis at present: well-run Banks will grow aggregate profits; however, their valuations will drift downwards as ROEs will decline.