Anand Shah, Chief Investment Officer, BNP Paribas Mutual Fund, says his primary investment philosophy revolves around spotting high growth companies in superior sectors.
A typical day at work for Anand Shah begins at 8 AM when he’s gearing up for the morning meeting with his team where every team member is given the opportunity to discuss, debate and put forth their suggestions. The meeting revolves around analyzing companies, the sectors they operate in and how the current macro-economic scenario plays for the company in question. Through the day, Shah juggles his time between two key roles: managing his team of investment professionals and meetings with other internal and external stakeholders.
The seed for Shah’s interest was sown while he was still in business school at IIM-Lucknow where he took a single credit course on investment strategies. He learnt about the Warren Buffet way of investing, modified to the Indian context. And this interest has only grown stronger in the 15 years that he has spent in the asset management business. Before joining BNP Paribas, he was Head-Equities at Canara Robeco AMC and Co-Head Equities at ICICI Prudential AMC Ltd.
Even while he was at business school, Shah put together a cheat sheet for himself, one that has been modified, rewritten and improved upon over the last decade and a half. Through the experience gained from his various jobs, he has also fine-tuned his investment philosophy and the processes that goes with it. “Fundamentally, it is all about capturing the fastest growing companies in the country, but the process through which we get there is ever-evolving,” he explains.
Getting a firm fix on the approach
One aspect that Shah has focused on through the years is to spot sectors that are growing much faster than the GDP. Then, the goal is to identify the fastest growing companies within that sector that has a sustainable competitive advantage.
“Can they maintain their growth rates? What if the there is a lull in the macro-economy, can this company go through a difficult period and still get back to the top? These are the kind of questions we ask ourselves before investing in a stock,” he quips.
Of course, Shah also keeps an eye out for the quality of the management and leadership, integrity, and valuation of companies. Talking about valuation, Shah makes a very important point. “During my earlier days, I was uncomfortable paying too high a valuation and ended up buying into companies that were more attractive, value wise. However, I have come to realize that paying a premium for a good business can be more effective than buying a cheaper (in terms of valuation) but inferior business,” he explains. Even when it comes to selling a stock, Shah believes that it makes sense to sell for weakness in a business versus selling because valuations have become over-heated.
Shah also believes in spotting businesses not just based on its current performance today, but also based on how the business will pan out in the future. He cites the example of how he bought into Bharat Forge a few years back. “The thesis then was: there are a few things in the business that are not right today. But when we weighed the future in, it looked like a good buy and we went ahead and bought the stock, and it worked out.”
Shah emphasizes on the importance of differentiating between risk and volatility. Of course, volatility is when a stock price goes down and then comes back up. “We don’t even try to manage volatility,” says Shah. But, risk is something every fund manager needs to manage.
Be it the research stage or the portfolio construction stage, he and his team keep an eye out for companies whose stock price can never come back up, after going down. This could happen at a sector level or a company level. “Your sector as a whole may depend on rate cuts and other aspects that you don’t have any control over. But the question we ask ourselves is: Can this stock survive a bad environment?” quips Shah.
Additionally, Shah keeps a close watch on the benchmark index. He specifically watches out for companies with much higher earnings growth, at least 800 to 1000 basis points more than companies in the benchmark index. “The basic idea is to have a high-growth portfolio with a beta of less than 1, which is shaped over time. Even if the valuations are at a premium, what we focus on is delta in both earnings and price to earnings ratio,” he emphasizes.
In short, Shah is sticking to the fundamentals of his investment philosophy. It is simply about a company having superior earnings growth rate and sustainable competitive advantage over a period of time. An interim price to earnings decline is something he doesn’t try to manage.
On the macro-economic front, Shah keeps an eye out for how key indicators are impacting the companies he’s tracking. “To give you an example, we’re aware of a slowdown in China. But the question for us is: how does it impact a particular company or a particular sector?” says Shah. Recently, his team was tracking the metals segment, but decided to pass on the sector as a whole, keeping in mind the slowdown.
The other aspect that Shah points out is the role of behavioural bias in the decision making process and how the bias changes based on data analysis. While one may not favor a sector because of past performance, he also very well understands that the fundamentals may change. Shah explains that he had stayed away from the construction and real estate sector for a long time, but realized after several years that there were two or three companies that were different from the rest. Shah simply says, “A lot of research goes into these decisions. Often, our own biases change, thanks to data.”
Going back to the basics of equities as an asset class, Shah points out a simple, yet very important aspect of investing. “By investing in equities, you’ve the opportunity to buy into companies, run by the best entrepreneurs in the country,” he says. At BNP Paribas, Shah and his team of investment professionals maintain a simple 3H framework for themselves: honesty, hard work and humility. Shah says, “This framework applies to any job, any profession. But, for us, the third H – humility to learn is very important.”
As we draw this interview to a close, Shah explains that the Indian economy has all the ingredients – especially the demographics – for long-term success. It is up to the country as a whole to bring together all these different factors to ensure sustainable, long-term GDP growth. One aspect that Shah really wishes for is to take advantage of low-cost capital available right now to build up the country’s railways, road and metro infrastructure. “This will not only help in near-term job creation, but also play a crucial role in enabling long-term growth,” says Shah.
Prem is founder and editor of The Smart CEO Media Labs, the content creation partner for Beyond Basics@Wealth Advisors. Additionally, he’s also the founder-editor of The Smart CEO, a magazine focused on conducting in-depth, responsible and meaningful interviews with India’s leading CEOs. For Beyond Basics, Prem will lead the Entrepreneur Journeys section, specializing in interviewing senior entrepreneurs and business owners.