By Baniya Beast,
Manish Bhandari recently wrote to his shareholders via annual letter. He runs Mumbai-based PMS called Vallum Capital. He has rich and deep experience in Indian capital markets. Bhandari was Portfolio Manager at ING Management overseeing AUM of USD 500 Mn. He rose steadily from being sell-side analyst at HDFC Securities where spent 6 years in formative days of career.
His linkedin profile introduces him as Falafal Lover | Novice Pianist | Failed Photographer.
There’s lot to learn and imbibe from him. Let’s analyze his portfolio, strategy and temperament!
Portfolio Returns vs. Benchmark
Bhandari has managed to deliver supernormal return when calculated from inception of October 2011. Let’s analyze his results.
I’m flabbergasted to know his FY19 returns. How can a smallcap portfolio manager dealing in highly volatile securities go down by just 8.4%? This year gets him ahead of lot of guys in this business. Majority of them are down between 15-40%. Just to give a perspective, widely followed investor Porinju Veliyath’s PMS Equity Intelligence portfolio was eroded by 44% at the end of January.
Concentrated Portfolio – High conviction bets
Bhandari plays on concentrated portfolio with total number of stocks in the portfolio not exceeding 10. He likes to bet big on high-conviction companies where he can see sectoral tailwind in place. All the stocks in his portfolio have key change in sector dynamics as the primary trigger.
Bhandari is known to possess calm nerves and this can be seen in portfolio activity above. His fund’s portfolio turnover was mere 20%-25% p.a. for past 8 years. He is someone who doesn’t indulge in portfolio churning to generate trading returns. This is in contrast to a portfolio with 60% churn (average churn of mid-cap mutual funds), 20 bps broking cost pre GST and 30 bps of impact cost, and LTCG taxes, reduces the Terminal Value of portfolio by 5.5 per cent over half a decade of investing.
Portfolio churn therefore becomes one of the key criteria for you to evaluate before investing.
These should be in no way be considered as investment recommendation.
His thesis on Balrampur Chini
We (Vallum Capital) mentioned to you last year about our investment in the market leader of sugar and ethanol manufacturing in India. The sector went through difficult times due to surplus production in Maharashtra and resultant over-supply of sugar cane. Institutional shareholders under various competitive pressures reacted impatiently by liquidating approx. 15% of the shareholding in this deeply cyclical business eroding 60% of price in matter of two months, ignoring upcoming long term positive structural changes.
As envisaged, the government formulated sugar cane to ethanol conversion policy and laid the foundation of one of the biggest reform of this sector. In Brazil, on an average 55% of sugarcane finds its way in ethanol production, balancing the surplus/deficit of sugarcane. This policy will substitute imported oil, save precious foreign exchange and counterbalance production cycle of sugarcane thereby profits for the companies would become far more sustainable. Moreover, the higher coverage area of better quality seeds in UP has resulted in significant improvement in yields and operational parameters resulting in cost leadership in Industry of the company.
This debt free company is likely to achieve earnings more than Rs. 600-700 crore – in a depressed sugar price cycle, and is available at market cap of Rs. 3,000 crore. The business value has crossed our initial purchase price by a margin. The company is in the midst of its third consecutive buyback plan in year 2019, to utilize its free cash flow for shareholders. We believe our investment should reward us, suitably.
Lew Sanders of Sanders Capital, in one of his communiqués spoke about mean reversion being an interesting aspect of investing in a world where the principal dynamics in the world’s capital markets revolves around a tug of war between feeling secure and actually making money. In the end, the feeling generally wins out.
Substantial amount of money can be made if a value investment manager is willing to spend the bulk of his or her professional life feeling depressed, isolated, and afraid – waiting for the forces of mean reversion to relieve the stress. At that point the manager can sell and use the proceeds to rebuild portfolios, and engage yet again with anxiety. This question, of course, is philosophical, depends on one’s investing style and temperament.
Bhandari is unique, he communicates only once a year with his investors through his annual shareholder’s letter. He dislikes the current form of communication undertaken by portfolio managers which takes place daily/weekly/monthly. He says majority of these letters are low on information quotient and these letters keep repeating themselves or borrow someone else’s view.
This article was originally published by author Baniya Beast.