Anand Radhakrishnan, Chief Investment Officer – Franklin Equity, Franklin Templeton Investments – India, talks about his investment journey and the lessons he learnt from his career that spans over two decades.
With a career that spans more than two decades in the investment management sector, Anand Radhakrishnan, Chief Investment Officer – Franklin Equity, Franklin Templeton Investments – India, has seen various stock market cycles that has honed his investment skills and decision making capabilities. Be it the era after the technology boom or liberalisation, every cycle has left a lasting impression and taught him and his team to build a more water tight portfolio of stocks. And the result is evident in the performance of the funds he manages. Franklin India Bluechip Fund has returned 14.85 per cent on a compounded annual basis in the last two years, while the benchmark index, BSE Sensex, has grown by 6.47 per cent. His other fund, Franklin India Prima Plus, offered a compounded annual growth rate of 22.33 per cent as against the Sensex’s growth of 11.11 per cent for the same period.
A management graduate from IIM Ahmedabad and Chartered Financial Analyst (CFA), Radhakrishnan carries the task of overseeing all the local equity funds and, more importantly, mentoring all the portfolio managers in his current role. He is also the portfolio manager for some key products like Franklin India Taxshield, Franklin India Infotech Fund, and the equity portfolio of all hybrid funds. In this article, he narrates (in first person) his investment journey, his investment philosophy and the lessons he learnt from his career that spans over two decades.
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In 1994, the economy was growing well with Dr. Manmohan Singh as the Finance Minister. It was the first wave of liberalisation and markets were touching new highs. This was also a period when formula-based pricing mechanism was removed and the controller of capital issues was abolished. Hence, there was large scale IPOs as more companies accessed the markets, which eventually led to some correction. Most importantly, the investments that happened in this phase were in industries where India could not have sustainable competitive advantage. We didn’t know it earlier. Hence, without having a clear view of whether this company can eventually survive or not, we were investing in manic ideas which were hot at that time.
As the economy opened up, more companies found it tough to grow and by the year 1998, we realised that many companies were underperforming; meaning, the portfolio companies were delivering poor performance, and markets were struggling.
So, during the early part of my career I witnessed a lot of equity market volatility but very little fundamental growth in corporate earnings.
From 1998 onwards, there was global technology boom and India started participating in it and grew well. However, for every genuine company like TCS, Infosys Technologies and Wipro, there were three fake companies whose value went up manifold during that period. And the sweet boom lasted only for a year or two and collapsed in 2000-2001. It is during this time that we learnt what we should invest in and shouldn’t. We also understood what it means to be in the bubble and survive it. There was a period of lull and eventually, between 2003 and 2008, the global economic expansion started and India participated in it.
The journey after 2008 is well known to most of us, however, what the period before that taught us was, where to invest (or not to invest) and ideas to be avoided. It also helped us understand where companies make mistakes, the suboptimal decisions they take and how promoters get greedy and exploit stock market conditions.
Information and its role in decision making
During the early days, access to information was limited. With time, we got access to better quality information which aided decision making. In the early phase of our careers, we (asset managers) spent an abnormally long period of time in collecting information and spent very little time in analysis. By the time we got the information, there was not enough time to analyse it. As technology improved and information became freely available, we were able to analyse companies better and gain a deeper understanding of how they function. This change in quality of analysis is one of the biggest turnarounds I have seen in my career.
Investment philosophy: Choosing from a collection of ideas
It started in the simplest possible manner; finding a very exciting idea and investing in it. This is a retail investor’s mindset that everyone starts with. We were always on the lookout for new ideas and then we decipher macro trends. There was a time when we used to spend a lot of time pouring over CMIE and other databases and figuring out how every sector is doing. Gradually, we became more thematic in our approach.
Today, we have grown into an evolved version of our early phase; Earlier we used to be worried about what is the next idea but, today, we are worried about what is the best idea we have and can we continue to hold on to it. So we have a collection of best ideas and are on the lookout for better ideas.
Reason behind long term performance track record
There are two ways in which we add value – better thinking on the business and better understanding of the management efforts. Whenever we spot such opportunities, we tend to play on that for a longer period of time than some of our peers. We have a realistic view of where the business can go, we factor that in our expectations and marry that with the stock price.
We are also equanimous about the market volatility and remain more balanced than how the market suggests you to be. Some people believe in identifying an idea earlier than others. That doesn’t matter to me. I am not good at spotting an idea way before the wave starts.
Portfolio construction and ideation process
Investment is a team approach and you need to have the support of high calibre, committed individuals to come up with good, sustainable performance. As an individual, you have a limitation of your ability to understand and analyse businesses and track changes in those businesses. We also generate ideas from companies that we meet and anything we read. But what’s more important is the ability to differentiate one from the other and also understand the long term potential of that idea from the current starting point.
How much money one allocates to an idea is a function of two things: the magnitude of expected return and the certainty of the magnitude. Therefore, it is not important to have an idea of how big the business can become. Rather, you should know the probability of it not happening. Then you will be able to weigh the return vs. the risk. The risk is not stocks volatility but that of the business not expanding or growing the way you expected it to grow.
Portfolio construction process is the question of balancing the upside potential with the probability of it not happening or going wrong. Is the starting point advantageous or disadvantageous? Are you early or late in the idea? All these things determine how much you allocate in a portfolio. The objective is that the portfolio should be bullet proof and there should be no dramatic deterioration due to a few bad investments. There should be enough options for you to get lucky. Of course, we have to take certain basic risk otherwise one cannot get lucky.
The idea is also to not to make it diversified across sectors but diversified across concepts, like which stage of a business you are looking at, what percentage of your allocation goes towards a mature business, proven high quality names, high risk and so on.
Valuations – pay up for quality versus overpaying
Financially, it is not hard to find that out. For every unit of excess return on capital employed, by and large you know the financial value of the company. If you don’t want to go through the financial rigmarole, then adopt shortcuts. Inter-temporal comparison solves the problem and it requires some experience to do that. You take Company A in one sector and Company B from another, which compares in certain aspects like size, history, longevity, quality, pool of profits and so on. After making necessary adjustments, such comparisons will highlight the extent of undervaluation or overvaluation of the stock.
These are interesting ways of telling people that something is expensive and something is effective. My favourite example is that in the peak of 2007; the market capitalisation of Unitech and Infosys converged to the same number – Rs. 70,000 crore. Today, you don’t even know if one stock trades anymore while the other is a winner. Unless you make this kind of comparison, you won’t be able to figure out whether it is overvalued and undervalued.
Assessing management quality
Information levels have gone up dramatically and we analyse balance sheets and annual reports of companies thread bare. There are many companies that consistently disclose information without dramatically changing it year on year. Clearly a management’s quality is judged by its depth and continuity – that is, it should not be person led and there should be consistent improvement in the quality of management. For example, very early in the cement industry, logistics was a killer cost for all companies. In the 90s, Ambuja Cements moved clinkers in barges to Mumbai from Gujarat and cut down logistics cost and got a higher profit per tonne of cement. This is the reason why Ambuja called itself a logistics company and not a cement company. An industry which is viewed as commodity, the company positioned itself differently and delivered higher profit per tonne for a long period. Being innovative and staying ahead of the curve is also an important measure of quality of management which eventually translates into shareholder value.
Risk and its role in investing
The commonly used measures of risks, such as beta of a stock, I believe, are not as useful metrics anymore. Beta of a stock is a function of beta of the profits and if profit is volatile then the stock will be volatile. If profit is stable, stock will be less volatile. Over a period of time, beta changes as businesses themselves change. If business is moving from high to low volatility, it becomes a less risky stock to own and vice versa.
Second, we need to answer for ourselves – how much do you tend to lose when things go bad? Risk of loss is measured by taking the negative days into account. If you tend to lose more money on a bad day, there is no value to earn more money on a good day. This means that you are not managing your risk efficiently. If market goes up, you make more money. Many of our funds tend to add value to the bad phase in the market. The collection of stocks we have to hold up during the volatile times.
Risk is measured by how non-diversified you are in your construct. Has your portfolio become excessively value oriented or does it have expensive stocks? So you measure risk by any metric other than pure volatility.
There are a few common mistakes which happen in every fund manager’s life. You might have a certain view about a company or sector, but there are many times in your career when you are forced to change it due to many factors. While one keeps resisting it, at some stage you succumb to the pressure. And more often than not, it happens at the worst point of the company. This happens because you are in a competitive industry and are measured on a weekly, monthly, or quarterly basis and people want to know why we don’t have stocks that competitors have in their portfolio and are performing better with it. This is a behavioural mistake we end up committing. With great conviction you will take a decision to hold on to your view and with least analysis you will abandon it.
On a lighter note:
Any advice that has stayed with you forever and by whom: “If you own the stock and want to sell it at some point, leave some money on the table for the next buyer. Do not try to catch the top.” This was given by my ex-supervisor when he tried to inculcate some selling discipline in me. It has worked well as more often than not, in trying to get the best price, people are stuck with a stock longer than they should.
Your hobbies: Classical music, Indian Philosophy and Long distance running.
If not an investment manager, what will you have become? I would have taken up the other campus job that I got, which is an Operation Research role in Asian Paints. Not sure where that would have led me to, eventually.
A book that is a must-read for all serious investors:
There are many books and tough to filter out one. One of the recent books that I finished reading and found very interesting is “Fortunes Formula : The untold story of the Scientific Betting System that beat the Casinos and Wall Street” Among many things, the book helps one to develop a framework of allocating capital among multiple ideas with different risk/return trade-offs.
“If you own the stock and want to sell it at some point, leave some money on the table for the next buyer. Do not try to catch the top.”