At the onset, I think it is worth mentioning that after studying innumerable fund managers in the US, EU and India, I’ve come to note that India has some of the best, and least celebrated fund managers in the world.
We actually have to sift through a problem of plenty, and we can afford to be picky.
PMSs are the US equivalent of “separately managed accounts”; A new account is created for each client by the fund manager and a bunch of (12-30, say) stocks are held in that account, in the client’s name. An investment in a good mutual fund or PMS ought to be thought of as a sit-tight investment, i.e something you do not ever touch (except add or pour excess savings into) and pass on to your children. Constant grass-hopping and chasing returns would work against you.
Let me start by mentioning the performance history of one of India’s most well regarded investors – Bharat Shah, who has managed the ASK Growth fund. He and his team have generated a return of 18.8% over a period of 23 years.
To put that into result into perspective, recall the compounding formula A = P(1+r)^T. The T here is time and that’s 23 on the exponent. If we round up 18.8% to 19%, and plug that into the formula, we would see that doing 19% over a 10 year period is “only” a 5.7 multiple; over a 20 year period it is a 32x on the original investment, but over 23 years that’s a 55x. This is, in effect, a fantastic outcome for anyone – if we know that risk has been managed well throughout (because this was Bharat Shah, we do).
There’s a comparable and even more notable result from Prashant Jain, who retired in 2022 after one of the most successful runs ever for a mutual fund. Jain delivered a phenomenal 18% over a 28.5 year period (109x). Again, an outstanding capital allocator with a constant eye on risk-reduction, rather than return-maximization.
Another incredible investor, Hiren Ved runs Alchemy Capital. His PMS also has an incredible record of generating a 20% CAGR over a 21 year period (46x).
If I look at the data over such long time horizons : 20+ years, say – I see that it is rare (exceptional) to go beyond 20% CAGR on a post-fee basis. This should inform and guide our own long-term return expectations.
If we shorten the time horizon and look out ‘only’ 10+ years, we see the following incredible results of 27-30% annually, net of fees, over 10-12 year periods.
- Nine Rivers Capital has generated 30% over a 11 year period. (23x)
- Vallum 27% over last 12 years (17.5x)
- Aequitas 29.5% over 11 years (22x)
- Sageone’s SCP generated 26.9% over a 11.5 year period (15.5x)
So there are a few exceptional funds who have done way higher than 20% – but over a 10-12 year period. Personally, I think it is just very hard to continue to deliver these kinds of returns over two decades, so if I were an investor in these I would still adjust my own long-term expectations downward to 20% – which by itself, is an incredible return.
If we reduce the time horizon still more, say 5 years or less, it is always possible to see what I think of as “optically bizarre” returns. Consider the CCIPL fund, for example – Counter-Cyclical Investments, run by Keshav Garg – which has generated a 66% CAGR over a 4 year period. Here’s an interview where he talks about his process.
Step back and ask how does one contextualize these incredible numbers? Managing capital is one thing, managing our self is another.
How to Manage your Return Expectations
This text below is actually an excerpt from a longer post “How to Manage your Return Expectations” but I’ve inserted it here because the other one may simply never be read, and ought to be read immediately after any tabulation of impressive returns.
Chasing returns is fraught with danger. We tend to chase because by nature we extrapolate time series. What happened in the past “must” happen in the future, or so we hope. Because a particular person/fund/manager had their portfolio return a certain rate over 2-3-5 years, we expect our very enrollment in that fund should start, the very next month, the “inevitable” time series that the past numbers implicitly “promised”.
Past returns are helpful to understand why some manager(s) may have had a) excellent security selection (the “right” businesses, at the right/bargain prices), b) the right proportions (having 1% of their fund go up 3x does not move the needle), and c) the role of luck. Any honest / self-critical fund manager will admit the help of the final ingredient.
Past returns tell us that the building blocks for relative out-performance exist with that fund manager.
Long periods of out-performance may well be followed by periods of underperformance. Some of the best value investors in the world exhibit this pattern. It is worth asking yourself – are you mentally prepared to stay calm & do nothing especially during the (inevitable) periods of underperformance? or have you created in your mind the (unrealistic) expectation that your fund manager(s) can never underperform & should consistently and always be outperforming a) the relevant benchmark & b) every other fund manager you know?
So when we invest with a fund, the first thing we should be doing is setting very realistic return expectations for ourselves – over a long period of time (ideally 5-10+ years). This is crucial to avoid a) disappointment & b) shopping behavior (my fund only returned X%, I know of a fund which did X+Y% – I should therefore switch)
Developing conviction in the wisdom & abilities of your fund manager(s), before you invest – is essential.
That said, what are “realistic return expectations”?
If I invest in one of the PMS services I respect, I would expect some outperformance relative to mutual funds & would set my bar at 20% p.a.
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When in doubt, stay conservative. Between longevity of reasonable returns and potentially high returns which may fizzle or worse, hurt – we are always better off with the former.
Consider Vallum (Manish Bhandari), and SageOne (Samit Vartak).
Vallum Capital
This is one of the best-performing PMSs in India over 2011-2023. Manish makes his thought-process open to the public on his blog “Valuenomics“. He frequently shares what he’s reading, and has even posted his fund’s annual letters online. If you are considering them, it may be worthwhile reading through them all.
Here are a couple of interviews of Manish Bhandari (one, and two).
I’ve read all the posts on his fund’s blog, and they make for very interesting reads. His piece on real estate “The End game of speculation in Indian Real estate have begun” (August 2013) is one of the most solidly researched & elegantly laid-out arguments on this subject I’ve read.
Vallum is primarily a mid-cap focused PMS, with some small-cap investments as well. They tend to have half their portfolio in contrarian/business turn-around opportunities and the other half in “growth-at-a-reasonable-price”.
Their investment approach (as I see it) is closest to the one espoused by the fund managers of Marathon Asset Management [UK].
“At the heart of Marathon’s investment philosophy is the capital cycle approach to investment. It is based on the idea that the prospect of high returns will attract excessive capital (and hence competition), and vice versa. In addition, an assessment of how management responds to the forces of the capital cycle and how they are incentivised are critical to the investment outcome.”
Manish has the highly esteemed Sankaran Naren as a mentor and guide [always important to know / note who people look upto or have learned from] A substantial effort is made to find opportunities where one does not pay too much for growth (emphasis on contrarian opportunities & supply side mechanics). For more on this, consider reading the excellent book Capital Returns. My tweet-thread on the best ideas from this book is here.
SAGEONE
This is run by Samit Vartak. As part of my learning process, I followed Samit on Twitter, and read all the quarterly/annual newsletters from their site. Samit, was also interviewed by Vishal of SafalNiveshak, who conducts probably the best interviews of investors that I’ve come across. I’ve spoken to Samit a number of times over the past several years and my impression is that he is very level-headed, humble & thoughtful.
I attended the 2017 Asia-focused Value Investing 2017 conference put together by Shai Dardashti & John Milhaljavic [who run The Manual of Ideas]. Over an hour and half, Samit presented an investment idea & Shai asked a whole lot of first-rate questions. My takeaway is that the depth of their ‘homework’ is excellent. Later that year, Samit presented the idea (Balkrishna Industries) in India at IIC 2017. Video link here. Samit also presented at IIC 2018 and has been interviewed several times since by media outlets (look on Youtube). If you really wants to know about their investing process, there’s plenty of good material online. Here’s a part of a conversation that I think illustrates the kind of diligence they do before initiating a position. They tend to lean towards higher quality names with strong cashflow visibility. If you write to SageOne & ask, they’ll share with you their PMS deck which you can study to build your conviction.
Of Interest
How heavily back-loaded compounding is : my note on the power of compounding.
My note on Why Equities, and why India?