Reflections on the FY that went by
FY23 was a brutal year for many investors and portfolio managers alike. What worked well over the past cycle not only stopped working but also fell the most. Imagine buying the best businesses in India and getting hammered with a -10% return in a financial year. The best performing mutual funds and PMS schemes of the 2018-21 run are closer to the fourth quartile than they are to the first quartile.
It has become quite a predictable trend – those who hog the limelight in a cycle tend to underperform the most once the music stops. We shouldn’t blame the fund managers, that’s just how the media attention cycle plays out.
How was FY23 for us?
What we did well was to take a few brave decisions –
Staying away from overpriced quality names rather than seeking refuge in them as we went into volatility at the beginning of the FY
Getting out of IT Services completely and having nil exposure there. I spent 3+ years as an IT salesman a decade ago and understand this game well enough. Management teams in IT services are like diplomats, they rarely sound alarms in investor calls even if they know that things are about to get difficult
Bucking the trend and sitting tight with decadal underperformers like ITC and L&T, the so called “capital misallocation” businesses, the so called value traps
But what swung the game in our favor was the pivot into economy facing stocks. Each one of these is up more than 50%, one is up almost 3x. This was neutralized to some extent by our exposure to financialization & chemicals that got beaten out of sight in this FY.
On an average we’ve closed FY23 with a positive return between 5-9%, decent for a year when the benchmark delivered a negative return. But this could have been far better, and that is what stings a bit. We managed to do enough things right so that the mistakes didn’t hurt too much.
What skills did we pick up in FY23?
We’ve gotten to some level of competence in technical analysis and this is one of the inputs we take into building portfolios now. We’ve completed one year of using TA actively and this clearly has been a productive addition to our repertoire. Middle aged dogs can pick up new skills after all.
Over the past year I’ve also been testing out a sector focused approach in my personal portfolio with real capital. I intend to do this for two more years before I consider using this approach in the external capital I manage. All experiments will be with personal capital until it is proven to work, there will be no exceptions to this ground rule.
This approach has resulted in an absolute return of ~20% in FY23, much better than what the medium term oriented, balanced, buy and hold portfolio delivered. Pretty encouraging though one shouldn’t jump to too many conclusions based on 1 year alone. This needs to see a 3 year cycle and some fine tuning yet.
Which are the learnings got reiterated in FY23?
That we should have a list of alternatives stocks handy all the time. One needs to keep doing the research without expecting any immediate outcomes from it. Research, build your view about the sector and business; be ready to execute when you believe the time is opportune. If Elvis were an investor, he’d probably sing “A little less investment philosophy, a little more equity research”
That the market is way smarter than we give it credit for. The price moves first, fundamentals become clear only later. Sometimes one needs to trust the price trend and take calculated gambles even if the fundamental view on short term earnings isn’t very clear to you. There are other seasoned investors who have a much higher degree of clarity, they are the ones voting with their money. And they are the ones creating the patterns that we wake up to with a lag
That valuation matters big time and so does a good understanding of history. Experienced investors with skin in the game give rate hike cycles the respect they deserve and we should too. Every time the US Fed went on a steep rate hike cycle it has broken something, this time was no different. Speculative asset classes, long duration bonds and ultra PE stocks take the brunt of the hit in such cycles
That being overweight on a hot sector is the easiest way of delivering alpha over a 1 year timeframe. Just that we need to actively manage risk limits and leave some money on the table to ensure the ensuing down cycle doesn’t dent the portfolio
That the market cares about value, even when it looks like it doesn’t. In FY23 value became momentum. Up to FY22 high quality was momentum, until it wasn’t.
That the market will not send you a notice to inform you when the texture changes. Focus in and gaze out alternatively from time to time, do not miss the forest for the trees. Don’t get taken in by stories, don’t fall for people who communicate with an air of superiority as if they have it all figured out. The two grand 90 year old’s have seen it all, yet display intellectual integrity and humility.