Greetings from Prosperity Wealth Management. We wish you a joyous and healthy new year 2024!
As our relationship strengthens with time, we take a moment to cherish your continued trust in Prosperity. We stand firm on our commitment to deliver our very best, and adhere to our guiding principles of integrity, process orientation & performance.
On the portfolio front we are very pleased to inform our investors that the preceding six months have been spectacular for Prosperity Discovery Fund in terms of having generated returns that have far outperformed our benchmarks. Since our inception in December 2020, our absolute returns on a fund level now stand at 109.97% at a of CAGR 27.37% net of fees and charges! This has been possible by carefully studying and investing in companies which have delivered results / returns par excellence.
What makes the performance even more special is the fact that we have achieved the same while maintaining a high margin of safety to the capital deployed via a diversified portfolio holding 20-25 companies with no single company accounting for over 7% of our total portfolio. Our portfolio level sharpe ratio (returns generated per unit of risk (volatility)) over the last 6 months stands at 5.63, one of the best in the industry.
Our outlook moving forward remains cautiously optimistic in the medium term. We have brought down our total exposure to small and midcap companies by 19.3% from 69.25% to 49.95% over the last six months considering the quick rally in stock prices. We have retained selective companies in the small and mid cap space which we believe will continue to do well under the ‘make in India initiative’. This allocation now forms the smaller satellite portion of our portfolio. The core portfolio now consists of larger blue chip companies which are better placed to weather market volatility.
On the macro-economic front, the landscape is such where resilience and challenges seem to coexist. Technology we believe will be a game changer in boosting output, driving efficiency and leading radical innovations which will create entirely new industries worth billions if not trillions of dollars. We remain watchful to capitalise on any opportunities that would be a part of this mega-trend.
Globally, despite the headwinds of sustained inflation, increased interest rates, and geopolitical tensions, the economy seems to be showing some signs of recovery in the aftermath of Covid, and amidst the Russia-Ukraine war.
National debt of two of the largest economies continues to remain very high in absolute terms, with the US debt at over $33 trillion and Chinese debt at over $12 trillion. Significant risks may originate from here in the distant future especially if the reserve currency status of the US$ is challenged significantly, or if the credit growth / NPA situation continues to grow unchecked in China. US / Global - China relations, will yield considerable influence over trade and investment policies / inflows into emerging economies such as India, Vietnam, Indonesia, Thailand and Mexico. It is now up to India to initiate favorable policies to make the most of these opportunities and foreign investments.
In the United Kingdom, inflation has eased above expectations in Q3, driven by a decrease in household energy costs. Annual consumer price inflation fell to 4.6%, a significant drop from September's 6.7%.
Japan's economy contracted in the third quarter of 2023, ending two consecutive quarters of growth. GDP fell by 2.1%, surpassing the predicted 0.6% decline. This contraction underscores the impact of elevated prices on consumer spending and the challenges faced by businesses, particularly amid reduced demand from China. Japan also experienced a significant drop in export growth in October, driven by declining semiconductor and steel exports to China.
India remains firmly entrenched on a trajectory of robust growth, having witnessed a 7.2% GDP expansion in 2022-23, this upward trajectory will persist into the foreseeable future.
Key economic indicators, including PMI surveys, steel production, and vehicle sales, are on the rise. Consumer goods production is however slower with Inflation emerging as a key concern, RBI is raising its CPI inflation projection for 2023-24 to 5.4%.
Coming to our portfolio companies, we have taken a strategic decision to exit our position in Ramkrishna Forgings, realizing a remarkable gain of over one hundred percent. Our rationale for this stems from the recent surge in the stock's price which appears to have outpaced the underlying fundamentals. We anticipate that the fundamentals will grow to align with the valuations in the medium term, or the valuations will adjust downwards to match the fundamentals in the short run. In either of the scenarios, time is of the essence and until then we believe the funds may better be invested in other companies.
We have also exited our position in IDFC First Bank with an absolute gain of over sixty percent, while the bank continues to demonstrate good growth and low levels of NPAs, its cost to income ratio remains relatively high compared to other private banks with notably lower valuations which would make better investments as per our assessment.
We have made an exit in IIFL Finance with an impressive gain of over one hundred percent to reinvest in other HFC’s (Housing finance Companies) with lower valuations and higher growth rates on a smaller base. The HFC space continues to remain attractive for investing with the recent news of the government proposing to increase its interest subsidies on property values up to rupees 50 lakhs under its Pradhan Mantri Awas Yojana.
We have added one of India’s largest Chlor-Alkali manufacturers to our portfolio. The investment rationale is underpinned by multiple factors including the company’s low valuation, bottoming out of the overall speciality chemical demand cycle and the company’s entry into multiple import substitute products such are titanium dioxide, epichlorohydrin, chlorinated poly-vinyl chloride which command high margins.
We have also included a leading player in the packaging board and paper manufacturing segment who will cater to the growing e-commerce segment in India. The company’s expanded capacity equals one third of India’s largest paper manufacturing company while the market capitilisation is ten times lower in comparison. This makes the company a prime candidate for getting re-rated upwards by the market.
With a vision to become a 10 trillion dollar economy, India continues to hold immense potential for investors for the decades to come. Becoming the world's 5th largest economy to witnessing an impressive stock market rally with the Nifty 50 index surpassing 20,000 points are key milestones along this journey. As we navigate through India's growth story, we remain confident and optimistic in our ability to spot emerging trends and continue creating wealth for our investors. We once again thank our investors for their continued trust in Prosperity.
MD, Prosperity Wealth Management.