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Holistic Approach to Investing – Pelican PE Fund

Popular culture has always used equity investment interchangeably with gambling / speculation. This has come about due to two reasons- easy entry/exit (liquidity) availability through the stock markets and daily movement of prices. Both these factors are unavailable with any other asset class and prompt equity investors to take quick decisions thereby abetting trading/speculation. The cacophony created by the media adds to confusion of the lay investor, finally causing more harm than good.

We are of the strong belief that in the case of investments long/ short term is a misnomer. Most investors confuse its definition with the one provided by the Income Tax Department (>1yr long term, <1yr short term). Investments should instead be viewed more holistically. All asset classes go through a well-defined cycle, the length of which will depend on various macro and micro factors. While real estate is generally considered to undergo a 10-15 year cycle from boom to bust, Equity investments move from crest to trough over a period of 5-7 years.

 

In the case of Equity investments, Price Earnings (PE) is a simple and powerful tool that could be used to gauge the status of the Equity Life Cycle (ELC). The movement of PE happens due to both change in Price (P) and change in Earnings (E). In a rising PE scenario, the sentiment is positive and is reflected in the higher prices and supported by earnings growth. However as the prices start to move faster than the earnings there is PE expansion and eventually a bubble scenario. The bubble bursts when the prices are no longer justifiable to the earnings offered. This would be the end of the ELC. On the corollary, as the PE reduces, the earnings cushion the prices up until the discount becomes too high and attractive indicating an end to the sell off and beginning of a new ELC.

 

Mapping the PE over a period, would indicate the ELC range. For a given fundamental scenario, price moves up and down based on factors like risk appetite, liquidity, macro risk and other similar systematic reasons which are not diversifiable and therefore the need to provide for standard deviation based levels. Statistically, the range between +/- 2s (standard deviation) from the rolling Mean PE is where 95% of the trading takes place. Breaking this range above (Euphoric) or below (Despondency) is generally an outlier event and continues only for a short period before returning back within the range. Investment returns are maximized when timed near the lower band of the ELC.

What do you MEAN?

Another concept that warrants attention here is that of “Mean reversion”- over a period of time any abnormal activity will eventually revert to the Mean or Normal. It is a concept that is well researched and practiced in different formats across the world and for different reasons. In the stock market parlance researchers investigate and predict price movement using multiple tools. Fundamental analysis value mispriced stocks on the expectation that earnings, margins, growth rates will move towards the sector average, and depending on the anticipated change a buy or sell recommendation is provided. In the case of technical analysis over bought and over sold decisions are taken based on the variance from the Mean. Even in the case of Behavioral studies the analysis of the herd (mean) is considered most important.

For practical actionable purposes, mean reversion can be visualized in two ways- Firstly, across a time series, where the parameter under study has deviated from its long term average and currently trades either above or below. This can provide reason to either enter or exit (timing) the markets. Secondly, on a cross- sectional basis, a set of similar companies are placed against each other for comparison. Stocks can be selected (stock picking) using this method by gauging the variance from the group mean.

While this process might sound simple at the outset there are a few caveats. Reversion cannot be timed and in the famous words of Keynes “ The market may remain irrational for a longer period than you can remain solvent”. Structural and technological changes in the market or sector can cause permanent shifting of the mean and impede reversion all together. Finally the time period of data under consideration and the parameter for study are totally subjective. Hence long periods of data may be irrelevant to the study as situations might have changed over time thus resulting in a higher or lower Mean value. Parameters such as Mean PE, PBV, ROE encompass most of the market fundamentals or sentiments hence are better indicators to arrive at investment decisions.

Our investment strategy marries the concept of Dynamic Mean reversion with our understanding of the Equity Life cycle. It doesn’t involve predicting the time line of the ELC nor the return to normal as we are cognizant of the fact that it is a futile attempt. Instead we invest schematically phasing out our cash allocation at pre-defined levels provided by the Mean PE, thereby protecting our capital and capping our downside risks. We call it the “Fair Winds and Following Seas Approach” wherein Investors achieve their objective by simply moving along with the cycle. We invest in a concentrated portfolio of Large cap market leaders. While our Large cap exposure reduces the unsystematic risk, the concentrated nature of the portfolio enhances the risk adjusted performance both during bull as well as bear markets. Further it also avoids several un-defined risks that may arise while trying to identify small/mid cap stories (identifying tomorrow’s Unicorns approach!). Risk of Research failure is often a less acknowledged fact!

In conclusion, we strongly believe, by reducing the element of subjectivity and investing based on what the market offers is a much easier and effective approach to investment management. Investors with good temperament and clear understanding of economic cycles will merit this approach for long term capital building.

Insolvency and Bankruptcy code – Is there a resolution in sight?

Insolvency and Bankruptcy Code (IBC) enacted in May, 2016 is the latest attempt by the Government of India to create a single law with an all-encompassing framework. This will facilitate creditors to recover their dues by either by effecting a turnaround or through winding up of stressed assets. It was enacted in order to resolve the lacunae and the delay under the current recourses available to creditors in the form of provisions of Indian contract act or the options available through special laws including, Recovery of Debts Due to Banks and Financial Institutions Act, 1993, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, Sick Industrial Companies (Special Provisions) Act, and the Winding up provisions of the Companies Act.

With an established deadline and clear process involved in resolution, IBC is a handy and quick way to sort out stressed assets, compared to the existing laws. The process is further strengthened by independent insolvency professionals guiding the entire course, thereby limiting the scope of collusion between Banks and Managements. According to RBI data, a total of 540 cases has been admitted by IBC, of which 79 cases (c.15%) have been resolved. This against an average 4.3 years to resolve issues relating to stressed assets in India. The average recovery rate of banks before the Act was introduced and during the period between 2015 and 2017 was 26.4% on their Gross Non-Performing Assets (GNPA), 41% for private banks and 25.1% for public sector banks. The recovery rate under the erstwhile laws, like SARFAESI, have been much lower at 10.8%. Initial numbers reveal that the average recovery rates under IBC has been promising at around 33%.

The institutional frame work includes, Insolvency Resolution Professionals, information utilities, Adjudicating authorities such as – National Company Law Tribunal (NCLT), Debt Recovery Tribunal (DRT) and the Insolvency and Bankruptcy Board of India (IBBI). It also establishes funds for insolvency resolution, liquidation and bankruptcy and provides guidelines for quick identification of stressed assets and bringing in the same for arbitration and resolution.

Once a default happens, the control of the company shifts from shareholders to committee of creditors to restructure the company. This in turn is expected to avoid delays in resolutions and also limit the erosion in firm value due to such delays. The act aims at resolution of insolvency cases, within a period of 180 days extendable by another 90 days. Further IBC assigns priority on the distribution of proceeds from sale of assets, with more importance given to settling the cost of insolvency, secured creditors and workmen dues. It is to be noted that Central and State government, have been accorded relatively lower priority.

When a case is referred to NCLT by the IBC, banks have to make an upfront provision of 50%, which increases to 100% if these enter into the liquidation process. Any recovery from the process is considered on an as and when basis in the income statement by the respective banks. This means, banks are not allowed to estimate the recovery amount and provide for lower or staggered provisions of such distressed assets. While this provides for better transparency in terms of financial statements, this also discourages banks to voluntarily refer their cases to IBC, for the fear of taking hit on their balance sheet. In fact, it is interesting to note that, of the 540 cases pending with the IBC, only 198 are from banks, the majority cases being initiated by operational creditors (234 cases), and defaulting companies themselves (108 cases).

The ordinance limits promoter participation in submitting resolutions to the committee of creditors. This was included in order to acquire a wider participation and better resolution price for the business. However such limitations have imposed certain practical problems for smaller companies. While the larger ones with valuable assets garner sufficient interest during selloffs, only promoters are interested in bidding for the smaller companies. Amendments have been made recently in the ordinance, relaxing the constraint on promoters. As per the new norms, promoters will be allowed participation, provided they repay their outstanding’s within a month and clean up their debt, within the time limit provided. Private equity funds can also bid for stressed assets.

The establishment of IBC and NCLT has been greeted with positive reviews, especially from international agencies. Recently, India jumped 30 places in World Bank’s ease of doing business. One of the key reasons attributed to this was the enactment of IBC. IBC is certainly more accommodative, transparent and provides hope for the resolution of distressed assets that plague the banking sector. However, one has to be careful in giving into this euphoria. We responded with similar elation during the introduction of, the now much vilified, SARFAESI Act, one does hope to live and learn.

Our Testimonials

Aparna Ramesh, Client

Aparna Ramesh, Client

Pelican PMS investment strategy is based on strong fundamentals with emphasis on capital protection. Their investment policy is simple and sustainable and showing patience educating the clients on the investment model. The Portfolio reporting systems are organised with utmost transperancy. Thank u Pelican!!!

Ramki, Client

Ramki, Client

“pelican is one of fund managers managing my portfolio. ..there are many ways to invest and make wealth but wealth creation if it has to sustainable there has to be a methodicity which kanu their MD follows. .other pms invest the moment you invest..but in pelican they time the market and the nifty…I thought it was a contrarian approach but later I understood it was not so….in pelican you shall be assured of safety of capital and a definitive appreciation to your capital…patience to their approach may irk us but it worth the irk”

Ravindran V, Client

Ravindran V, Client

“The most important aspect of Pelican PMS is that their strategies are simple, safe and attainable. For a retired businessman like me who wants to relax, travel, and enjoy without a concern about the investments and security of his wealth, Pelican PMS is my top pick. When you add their periodic and exemplary reporting, I would recommend them as the first choice to anyone.”

Revathi Sanjeev, Client

Revathi Sanjeev, Client

With a hectic work schedule and changing scenarios that we need to keep abreast of, it is difficult to keep a close watch on the financial market too. But why should I worry when I have someone trustworthy to take care of it for me? I am a happy customer, who has turned a profit even in this volatile market, thanks to Pelican PMS, who are diligent in their study and manage portfolios of all their customers. Their approachability and drive towards customers’ satisfaction is remarkable. No investment portfolio is too small and due diligence is never compromised. The firm’s collective experience spans many decades and they apply this expertise thoroughly to advice their investors.

Srikala Venkatesh, Client

Srikala Venkatesh, Client

Pelican Holdings has been advising me and managing my investments for over nine years now. The amount of time money is kept in liquid funds before being deployed into stocks, made me initially wonder whether they would invest at all. The duration of holding while the markets moved up kept me guessing when they would sell. The outcome was good and satisfying. Having gone through the cycle once I am comfortable with the process, patience & method is the theme, not excitement. I like their service and reporting quality too. I wish them all the very best.

Suresh Kalpathi, Client

Suresh Kalpathi, Client

Pelican Holdings have been financial advisors to our Family for over two decades now. They work with integrity, are diligent and advise is based on fundamentals with emphasis on capital protection.Their execution and reporting are transparent. They have been ready to put in time & effort at anytime, through the years, to assist with data & information for reasoned decision making.

Vimal Kumar, Client

Vimal Kumar, Client

keeping in view the fundamentals of the investee company. They are in no hurry to deploy the funds, but rather wait till the valuation is right. This strategy has proven right especially in the current turmoil in the market for the past 2 years. – Vimal Kumar, Client. I am impressed with Pelican team’s patience to invest at the right time and at the right valuation, not swayed by market sentiments,