Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Third-party distributor 3PD has partnered with an Indian equities manager, ValueQuest Capital, for the institutional and wholesale markets in Australia and New Zealand.
ValueQuest, a boutique with a seven-year track record for its offshore strategy, known as ‘ValueQuest India Moat Fund’, was formed in early in 2013. Sanjay Bakshi, and Paresh Thakker are the founders, managing partners and key members of the investment team, based in India.
Paresh Thakker
They started with some domestically sourced separately managed accounts from inception and launched the offshore fund in 2014. The fund has about US$75 million under management, from 12-15 family offices and endowments.
Rob Harrison and Steven Larkin, the 3PD principals, said last week (July 15) that they hoped to launch an Australian-domiciled fund for the wholesale market as soon as possible. Like most Indian funds for offshore investors, the India Moat Fund is registered in Mauritius, which offers Commonwealth laws. It also used to offer tax advantages, but these have largely been whittled away.
The strategy is a high conviction absolute return fund which blends value and quality styles. The founders, who have different backgrounds in financial services, say they came to the same conclusion as to the best way to manage long-term investments separately, before they met in about 2011 and struck up a friendship. They had both trained as chartered accountants.
Paresh has spent about 20 years involved in M&A Investment in listed companies including both small and large companies. His work required an intimate knowledge of valuation tools and business processes.
“I was curious to understand businesses,” he said. “We usually joined the boards of the companies and I tried to understand the mindsets of the entrepreneurs behind them. One conclusion that I reached was that it was better to identify a few businesses with long-term horizons than a bigger number.”
Bakshi, who has been investing in public markets since 1994, says he “caught the value investing bug” while studying in the UK at the London School of Economics.
Originally, he favoured the style of Ben Graham, often referred to as the ‘father of value investing’ but later he preferred the style of Warren Buffet. Graham’s approach tends to be more mathematical, identifying cheap stocks, whereas Buffet also assesses longer-term characteristics of quality.
After he returned to India he took up investing on behalf of some family offices and became an academic in behavioural finance, as an adjunct professor at the Management Development Institute, Gurgaon. A popular course taught by him was ‘Behavioural Finance and Business Valuation’.
The ‘India Moat’ strategy currently consists of just 11 stocks which have proved resilient during the pandemic, which has had a severe impact in India. As in other countries, some industry sectors have thrived during the crisis. The portfolio is usually about 15 stocks.
As an example, ValueQuest invested in two ‘gold lending’ stocks, Muthoot Finance and Manapuram Finance, which have done very well. Gold lending in India goes back more than 1,000 years, Bakshi says. They operate like pawn shops, lending to cash-strapped borrowers and hold gold as collateral.
ValueQuest exited the “customer-facing sector” early in the piece and has very little exposure to consumer spending.
Harrison said that for the average Australian and NZ investor their exposure to the India growth story was probably limited to two-three stocks within a broad MSCI ACWI global portfolio.
“We did a fair bit of research looking for a suitable manager to partner with, which offered a portfolio as a satellite beyond beta plays. India and China are where the most exciting opportunities are,” he said.
ValueQuest, already has one client in Australia, which declined to be identified.
Greg has worked in financial services-related media for more than 30 years. He has launched dozens of financial titles, including Super Review, Top1000Funds.com and Investor Strategy News, of which he is the former editor.
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