Page 34 - DIY Investor Magazine | Issue 38

STILL GETTING IT
Aug 2023 34
DIY Investor Magazine ·
Earnings at many of AIE’s holdings remain strong...by David Kimberley
The seemingly endless turmoil the world has seen over the past few years has made it very hard not to engage in macroeconomic predictions.
Two years ago it was what the impact of Covid lockdowns would be. Today investors are more focused on inflation and how far central banks will go in hiking interest rates.
It is easy to understand why investors like to partake in this sort of behaviour. Take interest rate hikes as an example. Leaving aside how they are used as an input for valuing assets, rate hikes may lead to an economic slowdown, which would in turn lead to many companies performing poorly.
However, attempting to make macroeconomic calls like this is extremely difficult and you can end up a bit like the inhabitants of Laputa from Gulliver’s Travels, engaging in an activity that seems deeply logical but is ultimately closer to pseudoscience. This is part of the reason that the analysts and managers of Ashoka India Equity (AIE) avoid making such calls.
The managers views on doing so are captured succinctly by a letter they wrote to shareholders in 2021, where they noted that “decisions that are bereft of bottom-up fundamental analysis and are instead driven by macro considerations, are fraught with high risk of substantial absolute and relative losses.”
It is worth noting that this does not mean macroeconomics is irrelevant. That something is hard to predict is not the same as saying it has no impact. But to try and make precise predictions to the detriment of actually analysing the companies you’re investing in is not likely to end well.
‘DOING PROPER DUE DILIGENCE ON THE COMPANIES YOU’RE INVESTING IN CAN OFTEN NEGATE THE NEGATIVE IMPACT A FUTURE EVENT’
Perhaps more importantly, doing proper due diligence on the companies you’re investing in can often negate the negative impact a future event you’re concerned about may have.
AIE’s portfolio arguably illustrates this. The managers have developed an in-house cash flow analysis system and also spend a significant amount of time undertaking due diligence efforts on prospective investments.
They also avoid companies whose success is more driven by cyclical factors, as well as those that are more at risk of being beholden to a small group of stakeholders, like a family owner.
It is still early days and we may indeed see more of an impact if we do head into an economic downturn. However, even after a period of inflation, rate hikes and perpetual uncertainty, we can see that companies in the AIE portfolio continue to perform well. For example, Titan Co is one of the trust’s largest holdings.
The company sells watches, jewellery, eyewear and clothing, via its own brands and third-party companies. Although it has begun expanding abroad, the bulk of the company’s revenue is derived from India.
‘COMPANIES IN THE AIE PORTFOLIO CONTINUE TO PERFORM WELL’