Manish Bhandari at Vallum Capital writes some very interesting points on equity investing in his annual Letter
“I must bring an interesting observation I have been having for some time to your notice. India is likely to witness shortage of quality investable companies in the future. The seeds were sown few years back with the scrapping of press note, allowance of 100% FDI in most of the sectors, buy back by listed MNCs and regulatory arbitrage available to do buy back rather than paying dividend. Moreover, in many cases Initial Public Offers are from companies that have been, private equity funded leaving less room for upside for secondary market players. All these factors are compounding the valuation for high quality companies to stratospheric height, leaving less room for error, if forecasted earnings are not met. Moreover, my observation is that in many areas, MNC with technological edge, global relationship, brand, superior business processes have an edge, emerging as leaders or have gained dominant markets share in respective field. Many such, not represented in the listed equity universe of India.
This also reminds me of sharing with you how fast the sources of alpha generation are waning away with each passing decade in our markets, and how we are challenged to find newer sources. The first decade of evolution of market Year 1992-2002 were dominated by insiders, assets managers flashing management access and making a living out of it. With no material detail available in Annual report to dissect for analysis by ordinary soul, and make an informed judgment on the business. This waned in the decade starting Year 2004-2014, with improving regulatory supervision, publishing of quarterly earnings coupled with superior disclosures in the annual reports. We should call this phase democratization of information. To stay afloat and succeed in investing, one is required to have a finer framework of business evaluation and solid framework of valuation.
The coming decade will demand deeper understanding of global macroeconomics coupled with superior skill of business evaluation due to disruption dots impacting literally every industry.
The democratization of information will pose a serious challenge to money management business. Recently, my team brought to my notice that in the Dec 2016 quarter, there were more than 450 conference calls held by corporate bodies discussing quarterly results, with discussion note available while I remember less than 50 per quarter a decade ago. Institutional Investors with their superior management access will not offer any distinction in investment performance though may suffer from their herd behavior. The sorry state of mutual fund industry in the US is a prime example in front of us.
Full letter below
https://connectvallum.wordpress.com/2017/04/11/vallum-capital-annual-letter-2016-17/