Cover Story: Hunting for value

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on September 2, 2019 - September 08, 2019.

My personal mantra in times of crisis is revisit your original thesis. You should revisit why you made those investments in the first place. - Avinash

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Avinash Satwalekar, CEO and country head of Franklin Templeton Asset Management (M) Sdn Bhd, began investing in the stock market at a young age. His first experience turned out to be an educational and rewarding one and he eventually made investing his career.

Avinash, who was born and raised in Mumbai, India, had the opportunity to intern at a brokerage firm during his school holidays when he was just 16. It was during this period that he bought into some stocks using a joint trading account that he had opened with his father.

“Honestly, I did not do any research other than just follow what a famous local investor was buying into at the time. After six months, I managed to get lucky and doubled my investments,” he tells Personal Wealth.

The returns on his investments may not have been much, but it gave young Avinash a sense of achievement. After selling his shares, he took his parents out for dinner and saved the rest of the money.

While this experience benefited him, he sometimes wonders what would have happened if he had held on to the shares for the next 10 years. “If I had done so, I could have retired early,” he quips.

One of the stocks was that of Rico Auto Industries Ltd, a supplier to businesses in the automotive sector, which today provides products such as water pump kits, castings, forgings, pressings, dies and moulds. According to Bloomberg data, the stock was valued at INR2.37 per share on March 31, 1991. The share price hit an all-time high of INR99.71 in 2017. On Aug 27, the counter was trading at INR38.50 apiece.

“That was how I realised the value of research and investing in the long term. If I had spent more time analysing the company, I would have realised its tremendous potential and held on to the shares. I would not have sold them six months later and think that I was such a genius back then for doubling my money,” says Avinash.

He has since developed an investing philosophy of looking for value by adopting a more contrarian view. This approach does not only work in developed economies such as the US but also plays out well in emerging markets like Vietnam.

Avinash joined an India-based investment firm that was partly owned by Merrill Lynch in 1994 and left for Franklin Templeton Investments two years later. He was part of the firm’s US team for 16 years, where he was a vice-president and research analyst for the Franklin Equity Group and a member of the Franklin Small Cap Growth portfolio management team, among others.

In 2012, Avinash joined Vietcombank Fund Management as its CEO and chief investment officer. The firm is a joint venture between Vietcombank (a commercial bank in Vietnam) and Franklin Templeton. He still serves as chairman of the board today.

When Avinash arrived at Vietcombank Fund Management, the firm did not have a retail presence. He was tasked with launching one of the earliest open-end retail mutual funds in Vietnam following the introduction of new regulations and ensuring that the fund generated good returns over the long term.

“In emerging markets, there is always this concept [among investors] of, ‘Hey, it is a trading culture. It is short-term-oriented and you cannot do long-term investing’. This was the concern I had even before I went to Vietnam,” says Avinash.

“My colleagues on the investment side said it was a challenging market. But I wanted to prove to myself that the principles I employed in developed markets could be applied in frontier markets as well. I was not going to change my investing philosophy, which is long term and more contrarian.”

Avinash had a hard time convincing his team in Vietnam to change their trading mindset. But he persisted anyway and later, they were able to spot an undervalued seafood company.

“We invested in a company that was in the seafood processing sector. We did our research, visited the company’s plants and factories and talked to multiple teams at management level. We went south to the Mekong River Delta [to visit this company] where there were no hotels with nice rooms and beds or things like that. [The trip was not a comfortable one, but] it was valuable,” says Avinash.

“We really liked the management team after speaking with them. They had clear thoughts about what their strategy was and how to achieve it. They did not just want to grow their seafood manufacturing business but also improve their packaging, branding, freezing and shipping processes. They had the whole value chain.

“More importantly, the margin for finished seafood products is three times the price of raw seafood. If you sell seafood as a commodity, the margins are like 5%. But if you process, freeze and packaged it, the margins are 15% to 20%. There is a significant difference.

“So, the company was shifting its business towards finished products. Whenever you see a company moving from a lower margin business to a higher one, you know there will be value creation.”

Another business he spotted was a jewellery company that wanted to expand but had not garnered enough investor attention and could not secure funding. Avinash was quick to recognise its potential.

“Our premise was that Vietnam, together with other Asean countries, would be doing better economically in the next decade or two. This meant that the middle class would expand and there would be more disposable income — people would spend more on consumer-related things. Besides, gold and jewellery are popular in Asia,” he says.

“The company was doing interesting stuff in the market but when we bought it, nobody was looking at it. Why? Because people were only looking for stocks that would perform in the short term, instead of over a longer period of three to five years. The company was not performing at the time and it was tiny.

“We went to their workshop and looked at their processes. They had the commodity and a unique skillset [to refine] it. That was going to create value. They were expanding, but were not certain if they could get there. But I could see that they could.”

Under Avinash’s leadership, the firm’s assets under management (AUM) grew to US$140 million over five years. In his current role, he is no longer an active investor managing client portfolios but looks at strategic initiatives to grow Franklin Templeton’s Malaysian business.

 

Apply common sense to spot good companies

Avinash and his team were given time and resources to identify undervalued companies and conduct research on them before making an investment. But how can retail investors identify such gems?

Avinash says investors should pay attention to the things around them such as the products and services they come across in their daily lives. If they like some of these, they should find out more about the companies behind them.

For instance, a friend of his — a professional investor in the US — was an early investor in Netflix. He sold a portion of his shareholding 10 years later and made a huge profit.

Avinash points out that his friend was a Netflix subscriber in the early days and liked the company’s business model. “When the company first started, its business model was very different. They allowed you to go online and pick, say, three or five DVDs they would send you in a red envelope every month. You would pay US$7 a month to subscribe to its service.

“I, too, was a Netflix subscriber back then and I can tell you why the business model made sense. I looked around at local video stores and found that I would have paid US$4 to rent a DVD for a week. Through Netflix, you could pay slightly less for three DVDs and get movies you may never be able to get from the stores. Netflix had a warehouse that stored all kinds of movies in DVD format.

“US$7 a month was not a lot and it made sense for consumers to subscribe to Netflix’s service. The odds were you would subscribe to fewer movies later when your excitement [over subscribing to the service] subsided. However, you are still paying US$7 a month without fail. The business model was great for  Netflix and it caught my friend’s attention.”

So, his friend did more research and eventually became an early investor of the company and held on to his stake for almost a decade. “Yes, such observations and investment thought are not rocket science. It is merely applying common sense. But you can say that common sense is sometimes not so common or people do not take action when they see such an opportunity,” says Avinash.

 

Be diligent and rational when making decisions

Apart from having the ability to find good companies, investors should always know what they are investing in and remain rational in all market situations, says Avinash.

For one, investors should be diligent and familiarise themselves with the companies they want to invest in, such as studying their business models, products and services. Investors should also be disciplined in conducting research, have a clear idea about what they will be investing in and not get influenced by fads or adopt the herd mentality.

“The Netflix story is a good example. The investor is a subscriber of its service and knew how the business model worked. Then, he did further research on the company,” says Avinash.

“Most of the time, investors enjoy speaking about the investments they made. But if you tried to dig deeper, they may not be able to provide their rationale and realise that they need to have further conversations with their investment adviser.”

Just like seizing investment opportunities by applying common sense, being disciplined in making investment decisions is easier said than done, he adds.

On top of this, investors should try to remain calm and rational when markets are experiencing a meltdown. These are the times when emotions kick in and investors start questioning every assumption they made on the prospects of the companies they invested in.

“When things are going well, nobody worries about anything. When things go wrong, all of a sudden, you start questioning everything about your investment. You may panic and say, ‘Well, I should sell. It looks really bad’,” says Avinash.

“Companies miss their targets and CEOs sound depressed about the numbers going down. Emotions play havoc with everybody, regardless of whether they are institutional or retail investors. We are all human beings.”

What can investors do under such circumstances to reduce the impact of their emotions? He says they should revisit why they made the investments in the first place.

“My personal mantra in times of crisis is revisit your original thesis. You should revisit why you made those investments in the first place. The whole action of revisiting could be a simple thing like reading the notes you wrote earlier [about the company] and ask yourself, ‘Why did I like these guys then? Have these things changed?’ If they have not, there you go. You buy more.”

If the key is to remove as much emotion as possible from investment decisions, could robots — which are computer programmes and algorithms — be better investors than humans? Avinash does not think so.

While several quantitative funds (which use numerical methods to make investment decisions) have seen fantastic returns over the past few years, many of these quant funds tend to wind up when a major financial crisis hits the market. “If you do some research on how many quant funds have survived the 2008 global financial crisis, you would find that there aren’t many,” he says.

Despite the advancements in technology, algorithms still cannot accurately predict market behaviour in volatile times. “These algorithms make investment decisions based on historical data. But history never repeats itself in exactly the same way, [it only bears some similarities],” says Avinash.

“Also, these models make investment decisions based on correlation. They can come out with a portfolio with a mix of different asset classes that have a low correlation with each other to achieve a better investment outcome. But when you are in a crisis, all asset classes move in the same direction. Their prices go down. That is when your models break down.

“Obviously, it has been 10 years since the global financial crisis. But I do not think we are at the stage where the human element can be taken out of investing. I think there is still some time to go [before robots can fully replace human investors].”

 

Growing the retail business

Avinash Satwalekar took the helm at Franklin Templeton Asset Management (Malaysia) Sdn Bhd in the middle of 2017. One of the first things he did was to look at the firm’s retail business strategy to see if there was room for further growth in this segment.

What Avinash noticed was that while Franklin Templeton had been helping a number of institutional investors to manage and grow their money, it could do better in reaching out to high-net-worth individuals (HNWIs) and other retail investors. “Globally, our business is largely in the retail space. But locally, we are mainly in the institutional business. So, we wanted to explore ways to expand our retail business,” he says.

Avinash decided that the firm should continue growing its retail operations as it had established a good track record by managing institutional investors’ money and was a strong brand name in the local financial services industry. So, he came up with a different strategy to grow the firm’s retail business.

Franklin Templeton would focus on its strengths, which is product manufacturing, and continue to provide local asset management firms with a range of funds that could add value to their existing products. These products could be emerging-market funds that allowed HNWIs to invest in Latin America (such as Brazil, Columbia and Chile) or developing countries in Eastern Europe (like Poland). These funds could then be offered to investors via a feeder fund launched by a local asset management firm while the target fund would be managed by the team at Franklin Templeton.

In fact, the firm has launched several products under this strategy, including the CIMB-Principal Global Technology Fund (under Principal Asset Management). The fund feeds into the Franklin Technology Fund, which invests predominantly in the US tech sector.

“We have been able to grow our business quickly with this strategy,” says Avinash. As a result, the firm’s retail business has tripled since 2017.

While Franklin Templeton currently does not have plans to acquire a local asset management firm, Avinash does not exclude the possibility of doing so in the future. “Some of the [smaller] local firms are strong in the Malaysian market. From an AUM perspective, it does make sense for us to acquire a local player,” he says.

“But we have not done so because to me, it is important to find a firm with a similar investment culture and philosophy and has a great team.”

As Franklin Templeton celebrates its 10 years in Malaysia, it continues to focus on the growth of its business as well as hiring talent to support the global firm’s local and regional businesses.