Money Masters | In conversation with Kenneth Andrade

Dhirendra Kumar: Welcome to Money Masters. I'm here with another master, Kenneth Andrade, whom I've known for 21 years. He has been managing funds in some form or another. And right now, he runs a portfolio management company and is about to get a mutual fund licence. So, soon, you will have an Old Bridge Mutual Fund available to you. Kenneth Andrade: Thank you, Dhirendra. Thanks for having me on the show. Dhirendra Kumar: Welcome, Kenneth. And I have a long list of questions for you, though. Some of the answers I know! But I thought of asking them all over again so that your answers are all in one place. So, tell us about your beginnings in the world of investments. Kenneth Andrade: I've been around since 1990. My formal fund management experience has been around since 2002. That's when I first joined Kotak, and subsequently, it's been quite an incredible journey up to Old Bridge, which is 21 years of fund management experience and almost 30 years of capital market experience. Hopefully, all of this experience culminates in the next leg of the journey, our asset management/mutual fund, which hopefully should be launched by the end of this calendar year. Dhirendra Kumar: What got you interested in this? In the 90s, when things were, you know, pretty crude. It was before Harshad Mehta - The Great Indian Scam! Kenneth Andrade: A little bit, and then greed takes over us. Right? We are in the business of managing money or trying to deliver a higher return on investment over longer-term periods. And that inquisitiveness and how companies demonstrate their ability to make more profits and survive. Put them both together and that creates great companies over the long term. I think that's what the most interesting part of it is. The only way you can participate in the journey as an individual is to participate with those companies. India has seen a great number of companies that have come through. So I think that's what got me started, and that's how I found that sweet spot of how to choose some of these businesses. And here I am today. So it's just an inquisitiveness that turned into a hobby, which just turned into a profession, and now it turns into entrepreneurship. Dhirendra Kumar: So being curious actually has taken you in all these directions? Kenneth Andrade: Yes. I love what I do. Dhirendra Kumar: Was there anybody who influenced you? Kenneth Andrade: I think right through the journey, there've been a number of individuals who put pieces of this puzzle together. It's my initial association with Capital Market - the journal, and that was my first job. Dhirendra Kumar: Capital Market, the magazine. Kenneth Andrade: Yes, the magazine. They used to run this large scoreboard, as they used to call it, with financial parameters of over 500 companies dissected by sector. And that was the only place to get all the financial numbers. And I think that was the best part of learning. Dhirendra Kumar: So you started as a publisher or working in a publishing game? Kenneth Andrade: Yes, I started working in a publishing company. That was the phase of accumulating data. So you looked at companies - you had an IPO boom, you had a bust, and you accumulated a lot of data. The next assignment was how to utilise that data. And that, I think, started off in the late 90s all the way to 2002-2003, and then the portfolio management experience. So, there's a gentleman who used to work as a manager in SRF, and I used to track SRF, and it was Rs 17 of stock price. His name was Sanjeev Pandiya, and he was also associated with you. Dhirendra Kumar: Yeah, he has been writing for our magazine since its beginning. Kenneth Andrade: And he introduced me to the fundamentals of how companies survive through a down cycle. We always used to have very long debates about how the sugar cycle would last, how Bata would come through, and the reasons why. Dhirendra Kumar: When was this? Kenneth Andrade: It was the late 1990s. Then, through the 2000s, I met a gentleman who also became a boss and now a good friend of mine, Vetri Subramaniam. He actually helped me practice what I did. So, I moved from theory, data collection, and theory to the interpretation of all that data. Dhirendra Kumar: As a portfolio manager? Kenneth Andrade: Yes, as a portfolio manager since 2003. And that was when Kotak Mutual Fund happened. Now, a significant aspect of those small three years spent with Kotak Mutual Fund was that I was given a fund called Kotak MNC to manage. The stock universe was 51 companies. Dhirendra Kumar: Multinational company, that itself was an attribute. And maybe in India, it was being considered a quality filter at that time. Kenneth Andrade: Yes, but the universe was 51 companies, and you had to create a portfolio out of that. You couldn't work outside the box. You had to work inside the box of 51 companies. That helped me optimise the box. That was the process that started. Dhirendra Kumar: Just for the sake of, you know, understanding the context at that time. Kenneth Andrade: It's a small fund. I don't think liquidity was such a big challenge. The second thing is that it cleared, or kind of cleared, corporate governance. It ticks the boxes in terms of governance. The third was market share, market dominance and performance. Now, you had to choose, and every business went through multiple cycles. So I used my little bit of experience with cycles and then tried to optimise: Out of 50 companies, how many do you run? If I remember correctly, I would be running 15 companies in that product. And that's how the concentration of the portfolio set in. And with 15 companies, I think we did fairly well. If I'm not mistaken, we were pretty much in the top quartile amongst all diversified funds in the entire industry. That's how the optimisation got through. So, in a learning cycle, data collection and learning how to pick survivors in this cycle and then implementing, all of that led through in 2003. And if it weren't for Vetri, I probably wouldn't get the chance to do what I do today. Dhirendra Kumar: How do you judge value in a business and how difficult it has been to find value and quality together all these years? Kenneth Andrade: Quality is often understood as a company with a ROE of 15 per cent or more. But when you go down that path of an established business around for a long time, you usually get it at an extremely exorbitant price. So you have to shell out a lot of money to buy great businesses, right? What if I just step back for a minute and try to address how to buy quality at a price? Take an industry that is going through a down cycle and buy the largest. In all probability, you'll get it free of cost. When I say free of cost, you'll get it at pennies to the dollar. So what happens in a down cycle? Today, the biggest story in the marketplace is capital goods because everyone's talking about the expansion of infrastructure and capex actually taking place. But none of this was there between 2015 to 2019 or 2020. And how many of these companies were trading below the book. Half or more were trading below the book. Now, it's a patience game. Everyone wants growth, but you have to pay the price for growth. But if you have to pay the price for value, you're getting it for pennies to the dollar. That's the space that we try to optimise. So, when we choose a business which is out of favour, we usually buy the best company in that entire sector. Dhirendra Kumar: Ahead of the curve while it is still depressed? Kenneth Andrade: Way ahead of the curve and probably participate every time because that's the only time you get a high-quality business at a price that you want it to be. And then you ride the cycle with it. Now, it may be a patience game, but if I just step back into my career and some of the businesses that we bought in 2006-2009, a lot of them were in the consumer franchise business. You take Bata, GlaxoSmithkline Consumer, Asian Paints, Page Industries. The names of them all were similar, and then all of them were available at a 10 per cent cash flow yield. That's value. Today, they're all available at 50 times, 100 times earnings. That's growth. So, the market shifted from value to growth with the same names. Today, all the names, which in 2015-2020 or some time back also, were all capital good names. If you go back to 2019, the CAGR on Larsen & Toubro is 1 per cent. Over the decade, it was 1 per cent! And that wasn't true for the last three years. Okay, so that's all you try to do. You try to anticipate it. And if you have anticipated that and try to pick the cycle right, in probably all formats, you really get a great business, and at a price. At different points in time, even today, you have a business hitting a 52-week low. A good quality large business hitting a 52-week low. That's where the focus and attention has to go. To value being valued, look for 52-week lows. Dhirendra Kumar: Okay. So the time you buy is the most important. Kenneth Andrade: Yes. Dhirendra Kumar: That is the critical thing? Kenneth Andrade: It's always the price. Dhirendra Kumar: Okay. So you buy it at your price? And how do you arrive at this price? Kenneth Andrade: So, my job, and I transition this down to my team. Our job is to buy high capital efficiency at a price. And that's the way we do it. So, if I have to look at it, buy a business which has got low margins. Buy a business which has low ROEs. Exit the businesses which have high ROEs. Dhirendra Kumar: Okay. Those companies themselves will actually move the path. Kenneth Andrade: Take a large business at a low ROE. Either the business closes down, the industry closes down, or it revives itself. Dhirendra Kumar: How often have you been wrong with this? Kenneth Andrade: A couple of times, but I wouldn't say I was wrong with it. I was very early into the cycle. Dhirendra Kumar: So, it didn't work out at all? Kenneth Andrade: It didn't work out... I wouldn't say it never worked. I probably missed the opportunity to wait for the right price. So, as it corrects, I just waited a little too long, and then you don't get it right. Dhirendra Kumar: Hmm, That's the justification. So, all your ideas don't come from any screening or any such thing or of another fund manager's portfolio? You have your own universe, and you have your own watch list. Kenneth Andrade: We have our watch list, and it's fairly easy to put it together. But I think formal portfolio management or formal funds management, after three decades of doing the same thing again, you learn to make fewer mistakes. So you just wait for the price. And our job is to buy low and sell high. So, where do you look for businesses which are at the lower end of their industrial cycle or their business cycle and wait for the time you will get it right? Dhirendra Kumar: So, you know, in this whole investment decision, is it all a logical number or is there even some gut feeling or instinct that plays a role here? Kenneth Andrade: I think experience drives the gut. Dhirendra Kumar: Okay, okay. But if numbers are not supporting it, you'll be off it completely? Are there any such exceptions that come to you? Kenneth Andrade: No! So, if you had asked me this question 15 years ago, I would have said the gut plays a big role in it. Simply because there was not as much experience to establish what you did wrong at that point in time. But today, I think we've been through multiple cycles and multiple market cycles. From a valuation cycle to an industrial cycle, you've got 2008, you had 2019-20, and you had 2013. 2013 was a blinder. At the beginning of this financial year and at the end of last financial year, 700 companies were making 52-week lows. This year was a no-brainer! So, there was science. This is all established science. Basically,

This article was originally published on October 07, 2023.