Pramod Gubbi, Marcellus Investment Managers said that they look at three characteristics in a company: 1) clean governance and accounting; 2) sensible capital allocation and 3) sustainable competitive advantages.
Gubbi has about 30 years of experience in Indian financial markets. Prior to this, he served as the head of Ambit’s Singapore office from 2013-2016. Before joining Ambit, Pramod worked across sales and research functions at Clear Capital, a British equity research firm.
In an interview with Moneycontrol’s Kshitij Anand, Gubbi said we would rather focus on businesses that can deliver healthy and consistent earnings growth over a long period of time. Edited excerpts:-
Q) You have launched a new SIP program, please take us through that and how investors hedge against the volatility?
A) Markets have been and will remain increasingly volatile and unpredictable, given the advent of Algo trading, ETFs, leverage, etc.
Even the recent bout of social media-driven retail trading like we saw with the Gamestop saga adds to this volatility. Our SIP program, however, is not meant to address or hedge this volatility.
We believe the best way to handle volatility especially in equities is to a) give yourself a relatively long time horizon, at least 3 years, where the volatility drops significantly; b) ensure you are invested in companies whose cash flows are growing steadily and consistently, even through periods of economic weakness, as they make up for it through market share gains from companies who wither in the face of adversity.
The SIP on the other hand is meant to facilitate a disciplined savings and investing approach. We find that a lot of our clients have stable cashflows whether as salaried professionals or businessmen with a steady income.
Often their savings end up being sub-optimally deployed in the interim in a savings account or at best a sweep FD account veering away from their asset allocation.
This SIP allows people to stick to their asset allocation where the money is swept into their Marcellus PMS account on a pre-fixed date every month and then deployed into the Marcellus strategy of their choice, therefore putting their money to work at the earliest to fulfil their long term financial goals.
A systematic approach also addresses the behavioral biases of investors in terms of timing the market – we know the best time to invest is when there is fear but very few of us have the courage to invest then.
Q) What is your take on the markets at a time when the daily cases are topping more than 4 lakh across India? Who is buying because FIIs are net sellers in April and what is leading to the optimism?
A) As I said, it is a bit futile to make sense of stock price movements in the short term given the number of factors at play. Even if we manage to explain these in hindsight, it has very little predictive power.
So, we at Marcellus don’t pretend to understand all the various factors at play nor do we see them as relevant for investment decisions aimed at generating long-term returns.
Equities is a long-term asset class and if you are invested for a horizon longer than three years, most of these factors including who is buying and selling, are noise.
We would rather focus on businesses that can deliver healthy and consistent earnings growth over a long period of time.
At Marcellus, we look for three characteristics in a company: 1) Clean governance and accounting; 2) Sensible capital allocation and 3) Sustainable competitive advantages.
We have found that focus on such companies will obviate the need to make sense of stock prices in the short-term and instead deliver healthy returns with very little volatility as over the long run, share price returns are driven mostly by fundamentals.
Q) What is your take on the much talked about Zomato IPO, the new age digital business? Do you think the valuations are sky-high amid the challenges?
A) Clearly COVID has accelerated digitisation across several facets of life. Whilst the technology has been around for a bit, we have seen that it takes events like these to accelerate adoption by customers.
And, even after the event has passed, the adoption stays and becomes a structural trend. Zomato has been a beneficiary of this trend and has been a leading food-tech franchise in what is increasingly a consolidated and now almost oligopolistic food delivery industry.
However, valuing such disruptive new-age businesses are always a challenge, given the lack of a long track record of generating free cash flow.
Q) We are not done with the second wave, but talks about the third wave has already begun. Do you think the third wave could even be more devastating than the one we are currently on?
A) I think this question is best answered by epidemiologists. But, the little we understand based on our reading and speaking with experts is that the virus will continue to mutate resulting in further waves.
Whether these waves will be more or less devastating than the previous ones will depend on how quickly we are able to ramp up vaccinations.
Until then, best to stay safe by following the Covid protocol of wearing a mask, maintaining social distance, and washing your hands.
Q) Any lessons on investing in times of COVID which you would like to share with readers?
A) The biggest lesson is that adversity often comes unannounced and even the best experts cannot predict these things. The adversity can come from any direction.
Remember, India has gone through a variety of upheavals pretty frequently over the past decade with the 2G scam, taper tantrums, banking system AQR, demonetisation, and GST-led disruption in the informal economy, the NBFC crisis, and now COVID.
Whether it is the third wave or something else, the next upheaval could just be around the corner. The key takeaway for us is that we cannot wish away these upheavals nor can we predict them but can be prepared.
As investors who have a fiduciary responsibility towards our clients, the best way to prepare is to create a portfolio of companies that have not only weathered these storms in the past but have actually come out stronger out of each crisis as they take market share from those who failed to survive.
If we can understand what makes them capable of doing that and if those capabilities can sustain into the future, they have stronger odds of tiding through any adversity that might arise in the future.
This approach not only helps protect the downside but also provides a significant upside once the crisis is over. We have seen exactly this play out in the last two quarter’s earnings after the lockdown was lifted, where our portfolio companies delivered industry-leading topline growth demonstrating this market share gain effect.
Disclaimer: The views and investment tips expressed by the investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
