Masterclass with Super Investors
Kenneth has over 25 years of experience in the stock markets and has been the fund manager of Kotak and IDFC mutual funds. He currently runs a PMS by the name of Old Bridge Capital Management and manages upwards of 3500 crores. He likes to own companies that are capital efficient. Let’s learn from him how to pick stocks and play market cycles.
How did he start investing in the stock market?
Kenneth’s interest in the stock markets was due to his father. His father used to invest in IPO. His father was an NRI, and during the 1990s, there was a special quota for NRIs investing in IPO. He got fascinated by the volatility of stock prices and wanted to capitalize on that.
When he came to Mumbai, he worked at financial magazine, Capital Markets, for one and a half years and was involved in sector research. Thereafter, he joined a few small asset management companies before finally making a breakthrough in the year 2002-03 when he joined Kotak Mutual Fund as a fund manager managing 680 crores. Then he moved on to Standard Chartered Mutual Fund, which was acquired by IDFC Mutual Fund. He was given a choice to pick up the old Classic Fund (Higher AUM) and a newly launched Premier Fund (180 Crores of AUM). He picked up Premier Fund as the fund was allowed to hold a concentrated portfolio and could invest in new-age companies as per the fund mandate.
His investment philosophy:
Kenneth’s investment philosophy was valuation driven and not momentum driven. He had purchased stocks like GlaxoSmithKline Consumer, Page Industries, Bata India and Asian Paints at a PE ratio of 12-18x. These, as we all know, have been multi baggers.
He buys companies that show capital efficiency and according to him, it is the sole determinant of valuation and stock returns. Management skills can also be evaluated on the basis of capital efficiency.
How? Well, in a cyclical downturn, even the best of management cannot do much to save the company from experiencing a slowdown.
However, this class of management does a lower capex and keeps the balance sheet asset light. This in turn translates into higher ROCE even in a downturn. This is how he quantifies management quality.
EV/Sales is also a metric that Kenneth uses in order to pick up the right stock.
Kenneth is a data driven investor. He recalls a time when he started investing in NBFCs. He allocated the money in such a way in different NBFCs that he was able to create a synthetic bank in the portfolio. For instance, he bought Shriram Transport in vehicle financing, Sundaram Finance in MSME financing and many other monoline NBFCs that were able to diversify the portfolio. Added to this, he was able to buy all these at a valuation multiple of less than one times the book value.
He visits a lot of companies, typically two per day in order to gain conviction in the stock ideas.
Lessons from Kenneth’s Investment Journey:
- Look for companies trading at an EV/Sales less than 1.
- Identify a sector in which all the companies are making losses. This ideally is unsustainable and indicates a bottom of the cycle.
- Pick companies with good capital allocation policies. He analyses the incremental return on capital to see companies generating good return ratios.
- The usual allocation is 6-7% to a single stock in order to keep a balance between too much diversification and too much concentration in the portfolio.
- The job of an investor is to buy capital efficiency. It does not matter which stock or sector you buy.
- A high cash balance is not a drag on the portfolio. It’s better to be safe than to be sorry.
- The stock market is like a real estate cycle. You start with the center of the city (like buying large cap stocks) and then as prices become expensive, you move to the outskirts (like mid and small cap), until finally the liquidity vanishes and the cycle completes.