Interview with Rushabh Sheth, Director, Antara Asset Management Company Ltd
Antara AMC, formed in February 2007, is the investment manager of Antara India Evergreen Fund (AIEF), an India dedicated long/short fund. Antara is regulated by FSC in Mauritius. AIEF targets an absolute return of over 20% with a volatility of approximately 12%. Since its launch in November 2007, Antara India Evergreen Fund has outperformed Nifty Index by over 17%. The fund has a current AUM of US$15 million.
* All returns are US$ adjusted
Karma Capital Advisors Private Ltd, a Mumbai-based firm, is advisor to the fund. Rushabh Sheth and Nikhil Desai, both with over 15 years of rich experience in fund management business in India, are principals of Karma Capital Advisors. Karma Capital Advisors is registered and regulated by the Securities and Exchange Board of India (SEBI).
Indian markets and hedge funds allocating to the country started the year 2008 on a rather rough note. The Eurekahedge India Hedge Fund Index declined 21% over the first quarter, against a fall of 23% in the countryís benchmark index Ė the BSE Sensex. How have you coped with this notable decline across equities?
The fund has notably outperformed the Nifty benchmark index by over 17% during the first four months of 2008, which has been a testing time for financial markets worldwide, including India. The Indian equity markets have witnessed unprecedented volatility during the beginning of 2008 with the first quarter being the worst ever for the markets. This has had an impact on the fund too. However, what has helped us during these volatile months is our approach to portfolio construction which in significant parts has been different from street consensus. We have also strategically shifted our net exposure based on our view of the markets.
Your strategy description states that the Antara India Evergreen Fund invests in large- and mid-cap stocks. On what basis do you determine your fundís exposure to each of the market caps?
Our portfolio composition emanates from our long/short strategy. Currently in the India markets, you can short only in the F&O segment with the present universe comprising of about 225 odd companies, of which most are large caps. Thus if you want to run a true long/short strategy, your portfolio composition has to be skewed towards large caps as most of the short side is reflected predominantly in large-cap stocks. Having said that, there are some very interesting investment opportunities in mid-cap stocks which we would not like to ignore. At the moment the fund is more skewed towards large caps but we retain the flexibility to increase our mid-cap exposure in case we are able to hedge the same.
Do you have a pre-determined sectoral breakdown in mind for your fundís investments? How many sectors would you be diversifying its portfolio across?
Our investment process is based on a bottom-up research approach with a top-down macro overlay while constructing the portfolio. We donít have any pre-determined sectoral breakdown in mind for the fund. Typically, we like to look for the best investment ideas across sectors and hence at any given point of time, we would have at least between six to seven sectors in the portfolio. We have strict exposure management guidelines in place for maximum exposure in each individual position and sectors.
How many stocks does your portfolio usually comprise of, and what is the usual holding period that you observe?
We run a somewhat concentrated portfolio with approximately 30-35 positions including the long and short sides. Typically our holding period would vary between 6 and 18 months on the long side and about 2-3 months on the short side (due to the present market constraints on the short side).
What kind of research and scrutiny do sectors, stocks and companies undergo before you get around investing in them?
Our concentrated portfolio and bottom-up approach imply a very intense scrutiny process for all our investment ideas. Most of our idea generation is through our own research based on an active company visitation programme to get a first-hand assessment of the management and business environment. We have a clearly defined stock universe which we track over long periods of time to build an in-depth knowledge about them. Our qualitative analysis focuses on assessing management, competitive environment, growth prospects and financial conditions. Our own research allows us to build views both on the long and short sides as it permits us to assess the underlying value of the business independent of consensus market opinions and allows us to take contrarian views.
Do you rely on leverage to enhance your fundís return? If so, to what extent? Also, what is the usual ratio of long to short positions that you maintain?
We have not used any leverage in the fund till now. Typically we are not inclined to use leverage but the fund retains the flexibility to leverage. We may opportunistically use leverage up to a maximum of 1.5x.
There is no set ratio of long and short positions that we maintain. We use the short side to both hedge our positions and create alpha.
What class of investors do you aim to cater to with this fund?
AIEF would like to cater to all investors who have a medium- to long-term investment horizon for their India exposure. This includes endowment/pension funds, family offices, funds of funds, financial institutions etc.
Despite the corrections and volatility across the domestic equity markets, your fund has outperformed an average Indian long/short equity hedge fund by over 10%. Could you explain this outperformance?
As mentioned earlier, our portfolio has had a contrarian bent as compared to street consensus. Our belief is that sectors/segments of the markets that will do well going forward will be very different from those that have done well over the past few years; hence our focus on healthcare, consumer staples, agri-related sectors and companies that will benefit from higher consumer spends (more non-discretionary in nature). While we have very little exposure to sectors linked to infrastructure (like construction, engineering etc) and utilities, where we believe that even though the growth might continue, markets are discounting most of the growth over the next few years. Our focus has been on companies with high cash flow visibility, low capital intensity and attractive valuations. On the short side, we have focused on companies where the valuations clearly looked stretched and had limited cash flow visibility, high capital intensity requiring regular cash infusions and large institutional ownership.
Would the Indian market regulatorís move of re-allowing investors to go short in the cash market work in your favour? And, do you think this move would have any direct impact on the market?
SEBI has recently allowed all investors including the FIIs to short in the cash market. We believe that the current guidelines have lots of constraints and limited practical use but it is a first tentative step in the right direction. Hopefully over time as the regulator gets more comfortable with the system, the initial guidelines would be modified to include longer tenure contracts with greater flexibility in terms of lending and borrowing stock. Allowing shorting in the cash market will be extremely favourable for the market as a whole and especially to funds like ours.
And lastly, could you give us your take on the present state of the equity markets in India? Do you reckon we might see any more significant declines in the coming months?
The consolidation in the markets will continue for sometime as the key drivers Ė rising profit growth and declining risk premium Ė of momentum-driven markets are reversing. This will lead to a more rationale assessment of risk over the next 12-18 months. The corporate earning growth will slow down with change in complexion of growth from investment-led to consumption-led. Considerable valuation dispersion built up over the past couple of years should come down as growth moderates and becomes more equitable. Any major decline in Indian markets from here would have to be caused by global event/development; otherwise markets would remain range bound. General Elections in the first half of 2009 will be the next big trigger for the markets.