It is time that gives the long-term investor an advantage, says Utpal Sheth, CEO of Rare Enterprises— the Mumbai based private equity firm that manages assets of more than $1 billion. “I would say 80-90% of market participants are in it for less than a year. As an investor, if you have the conviction and courage to stick around for the long term, most of your competition automatically reduces.” adds Sheth, noting that most people do not have the commitment for long-term investments.
Sheth, who joined Rakesh Jhunjhunwala’s Rare Enterprises as CEO and Partner in 2003, started his career at 18 and has worked with ASK Financial, HRS Insight Financial Intermediaries (a financial intermediation firm started by his father), and Enam Financial Consultants , besides being a co-founder and mentor of the Trust Group that offers a host of financial services, including debt syndication and merchant banking. Sheth, who is on the board of Trust Mutual Fund—an asset management company (AMC) spoke to Mint about his investment philosophy Terminal Value Investing (TVI) which influences all decisions taken by the AMC.
“TVI does not refer to the terminal value that you get in a discounted cash flow calculation,” Sheth explains. “It is a nebulous and dynamic concept. It cannot be a precise number because the key factors that contribute to TVI cannot be quantified. Think of it like a climber who is looking up at Mount Everest. You cannot see the top because of clouds in between. You can sense the mountain and its top but you cannot see it,” he says.
According to Sheth the factors that contribute to TVI are megatrends (that lasts several decades), leadership attributes, and intangibles (like culture, brand, institutionalization, etc.). He gives the example of e-commerce giant Walmart in the 1980s and Amazon in the 2000s. “The leaders in the sector have the ability to capture most of the value created in the megatrend. Just like Amazon captured most of the value created in e-commerce in the 2000s. This plays out over a long period of time,” he explains. “It is time that gives the long-term investor an advantage. I would say 80-90% of market participants are in it for less than a year.” he says.
“We can refer to such firms as gorilla companies and draw an analogy between TVI and gorilla.” said Sheth. “Gorillas are rare. You will find hundreds of monkeys in a jungle but just a few gorillas. They are also dominant. Other animals do not mess with gorillas. Finally, gorillas have longer lifespans (longevity) than monkeys. They are not a fleeting sensation or a fad,” he says.
But aren’t such companies expensive? Sheth counters this with an example based on price to earnings (P-E) of some companies. “There was a study some time ago comparing the ‘hindsight P-E’ of select companies in 1981 with the P-E of 2001 . They found that the market had dramatically underestimated earnings power and growth of these stocks. Those companies that apparently had the lowest ‘hindsight P-E’ (price of 1981, earnings of 2001) apparently had the highest PE (price and earnings both of 1981).
Can this philosophy be applied to a mutual fund with all its regulatory restrictions compared to proprietory asset management that he has been involved with at Rare Enterprises? According to Sheth, that is just a relative question. A mutual fund (MF) might benefit from a smaller position in a gorilla company, or it may just identify more of these gorillas over time.
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Trust MF has Mihir Vora as its chief investment officer. Vora who previously worked at Max Life Insurance and various MF houses, also has a “growth at reasonable valuation” style and considers TVI as the North Star of growth investing that influences the fund house’s stock picking philosophy. The AMC was launched in 2019 and focused on debt funds for the first few years of its existence—it is now turning towards equities.
Is Trust AMC a good substitute for retail investors who want to get a flavour of TVI (as practised by Utpal Sheth)? Sheth clarifies, “I sit on the board of directors of the AMC. My philosophy will influence the AMC. That’s about it. The AMC is run independently by a capable and committed team.” he adds.
“India is structurally in a great place. Corporate profits have shot up over the past few years from 2% to 4.5% of GDP. The amount of leverage in the corporate sector is also relatively low. Every dip is being bought. Foreign money flow has been replaced by domestic inflow and this is not timid money that panics at the sign of a correction. So, I’m not worried about the overall market scenario. There may be a few pockets of overvaluation but nothing generalised,” he says.
What about the army of retail traders that have entered the stock market who may have never seen a bear market. Will they panic and run? “If you look at long-term charts, the bear markets are just blips—you don’t even spot them. If you are a long-term investor, why would you worry about such temporary corrections?” he asks.