Investment Management

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.

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?

Developing a process to shut out the noise

The most frequent question we get from partners is what do you think will happen to the market.

Bitter truth: it is the wrong question to ask because no one knows.  

Why is this so?  Because markets move due to multiple variables, not all of which are visible or predictable. 

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”.

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

Interpreting news flow

We have witnessed a black swan event.  We need to wait out the storm.  We will not panic and sell unless we believe the fundamental 3-5 year prospects of a company have been significantly challenged.   Selling now – just because there is short term uncertainty  – will crystallize a temporary loss and make it permanent.