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    The Search for Alpha

    Three veteran investors share how they outperform their benchmarks in India.

    Anthony Serhan, 12/15/2016

    While the use of equity mutual funds among Indian investors is low, the move toward investing in financial assets is growing. Financial advisors in India who use mutual funds in their practices are passionately doing their part to spread the word about the benefits of investing. But challenges remain. The fund industry needs to take the message of disciplined investing to more people. This was the theme of the first day of the Morningstar Investment Conference, held Oct. 18 in Mumbai. The day closed with a panel of three investors who have nearly reached celebrity status in the Indian fund industry through the delivery of strong returns over many years. Over the course of the hour, they shared their own disciplined investing approach, as well as anecdotes from their experiences and how different philosophies and approaches can still deliver good returns for clients.

    Each of our panelists has decades of experience, is a leader within his business, and is regularly called upon by the media for his views. The panelists are Bharat Shah, executive director at ASK Group; Raamdeo Agrawal, chairman of Motilal Oswal Asset Management and joint managing director of Motilal Oswal Financial Services; and Shankar Sharma, vice chairman and joint managing director of First Global. Our discussion has been edited for clarity and length.

    Anthony Serhan: Let’s start with you, Bharat. What’s your philosophy of investing?

    Bharat Shah: Let me summarize some key points [to my philosophy]. Inclusion is a roomy political lexicon, but exclusion is the game of investing. What you choose not to do has a deep bearing on your success. So, let me start with what not to do.

    Investing is not about trying to predict market levels. Though, often, many of us try to do it, the probability of predicting markets is no better than flipping a coin. Also, investing is not about the technical timing. In the 300 years of investing history, timing the market has proven to be an impossible task.

    Investing is not trying to guess macro events— whether and when [Federal Reserve chairwoman Janet] Yellen will raise interest rates, whether Trump or Hillary will win, or whether [India central bank governor Raghuram] Rajan is there or not there. I am not saying these events are unimportant, but to confuse any of this with investing is an insult to your portfolio.

    So, with that, let me turn to what investing is. First and foremost are one’s objectives, because that has a bearing on one’s philosophy of stock selection. There are primarily two important objectives: preservation of the capital and appreciation. Preservation is vital because if you don’t preserve capital, you don’t remain in the game. Preservation is not about guarding against potential ups and downs. It is about guarding against permanent loss of capital, which would typically happen if you dilute the quality of your holdings.

    When I say “quality” I mean three things: quality of the business, quality of the people running the business, and quality of the financial position that the business has. All are linked to each other. Quality of business is a simple idea— any capability to generate a superior, long-term, sustainable, reasonably predictable return on capital. Management quality is all about good execution, sound capital allocation, and solid capital distribution and maintenance. Finally, a good financial positioning is most likely the outcome of good management and a good business. Not that you should automatically assume this is the case, so you need to verify it.

    Anthony Serhan, CFA, is Morningstar’s managing director, research strategy, Asia-Pacific.