Perspectives – Solidarity

Is Value Investing dead ?

Over the last few years, traditionally defined “Value” stocks have continued to get cheaper while “Growth” oriented cos have done very well. The divergence is stark and is now prompting questions whether Value Investing is dead.

The categorization of stocks between “Growth” and “Value” is erroneous. Anything that is low PE multiple and out of favour with markets is typically labelled “Value” and anything with high multiples and fast growth is labelled “Growth”.

Implications of SEBI new guidelines on Multi-Cap Funds

SEBI came out with new guidelines last evening where Equity Multi-Cap Funds now compulsorily need to invest at least 25% of their corpus in “Mid Caps” (firms ranked between 101-250 in pecking order of Market Cap) and another 25% in “Small Caps (firms ranked 251 or higher in pecking order of Market Cap). This needs to be achieved by 31 Jan 2021.

In this note we want to address the following issues

a) How did SEBI get here?

b) Our view on this order

c) What this order means for Small and Mid-Caps in the short term?

Update from the front

We are in the midst of an economic shock. India has not been able to flatten the curve and the number of infections continues to rise. There is no visibility of a vaccine or a cure. SMEs are in distress. Neighbourhood shops are doing very little business, if any at all. Yet stock prices seem to ignore market conditions and have reached the levels of February 2020.

What is going on? Are markets ahead of themselves? Should Solidarity be taking a cash call at present to preserve some of the gains?

Why we are reluctant to take cash calls at present

We have had a few conversations with partners on why we are reluctant to take a 20% cash call at present despite the current uncertainty to re-enter when prices are more favourable. I thought it may be appropriate to share our thought process with all our partners.

I want to separate the question into 2 parts

a) The cash call on “Asset Allocation” – which is for partners to make

b) The cash call on “portfolio construct”- which is for Solidarity to make

Dear Prime Minister, give us a message of hope, courage and equanimity

Will the lockdown in India end on 17 May or will we as a country go deeper into “economic hara-kiri” ? (Anand Mahindra)

The first lockdown was perhaps right. In the fog of war, you have to act decisively till you figure out a course of action. However, post mid-April, we seem to acting more out of fear, than with “systems thinking”.

Playing the game vs being clear on what game you are playing

In trying to optimize short term performance and also long term performance simultaneously is a very hard game to play. We can choose to be smart in the short term or in the long term – but can’t choose both. It’s a rare genius that can trade short term and invest long simultaneously. Most people who claim they can do this lie about their returns.

Why did Franklin Templeton wind up Six credit funds?

Franklin Templeton Mutual Fund, on Thursday announced it would wind up six credit funds with a large exposure to higher-yielding, lower-rated credit securities.

Why did they do so? The Corporate Bond markets in India are fairly illiquid. FT schemes have got impacted because they invested in papers with low credit rating (they actively took on credit risk).

Positioning portfolios in context of the Corona Virus (5)

As a follow up on the 2 scenarios we shared earlier on 18 March, the scenario likely to play out is perhaps something between Scenario 1 and Scenario 2 that we envisaged. No one knows, “for sure”, the road map to normalization. We are likely to see 2 steps forward and 1 step back approach based on “trial and error”.

Observations on Asset Allocation

Events of the last month provide significant lessons. We have been introspecting on what we could have done differently – and there will be a time to share that with you.

However, I want to share a few other observations with you today which are topical before the event passes and memories fade.

1. The only way to protect yourself from “tail risks” is through Asset Allocation.

Positioning portfolios in context of the Corona Virus (4)

A salute to our doctors, nurses, police forces and sanitation workers who are at the forefront of this battle. A salute also to the Indian state – we are always criticized by the West, but we show our best when our backs our against the wall. And we have done a far better job than the developed world so far.

I am writing to share a few thoughts

1. Be careful how you interpret the news you are reading