Prosperity Discovery Fund - Quarterly Update Q2FY23
It is a pleasure writing to you all once again. At the outset, we wish you all a very happy, healthy and prosperous new year ahead on behalf of Prosperity.
With this new year, Prosperity completes two years of its Prosperity Discovery Fund (PDF).
It has certainly been an exciting journey for us with new learnings and opportunities to embark upon at every turn. The new year also beckons upon us to reflect on the journey we have had so far as fund managers. To celebrate our victories and reflect upon the areas of improvement.
To begin with, we are happy to share that PDF has delivered 44.97% absolute returns and 20.42% annualised returns (net of fees) since our inception in January 2021, versus Nifty’s 13.66% and our benchmarks 18.01% annualised returns.
Graph depicting Prosperity Discovery Funds Performance since its inception in January 2021.
April 2021 was the fund’s best month, with the fund delivering 10.80% returns vs the benchmarks 2.40%. The outperformance was a result of investing in the companies with robust fundamentals that were under researched by the market at large. The value unlocking and discovery process were then a result of sectoral tail winds which saw profits grow significantly, subsequently driving up the share price. A careful stock selection process, involving investing in undervalued mid and small market cap companies (typically < 5000 Crores (500Mn US$ approx)) with forthcoming sectoral tail winds has been a key strategy that has worked well for PDF.
August 2022 was a period of reflection as PDF delivered 0.08% returns vs the benchmarks 4.87%. Our key learnings over this period enhanced our knowledge on the importance of sectoral diversification, asset allocation and position sizing. We also gained insights on the opportunity cost of holding deeply discounted stocks (providing a high margin of safety) at the cost of portfolio growth. We learned to create a better portfolio with the right blend of growth and value stocks.
As we continue on this journey, we are certain that our approach to continuous learning and improvement will serve us and our investors well over the years to come.
On the macroeconomic front, while 2022 has been a challenging year for the equity markets all across the world, for reasons well known, we are cautiously optimistic for the year 2023.
With inflation peaking out and the central banks gradually easing the pedal on monetary tightening, we foresee the equity markets becoming more buoyant this year (more towards the second half.)
The Indian equity markets have demonstrated outstanding resilience in 2022 in the face of global adversity, and we would bet on this trend of outperformance continuing for the years to come.
While FII’s have remained net sellers this year, understandably so, as their domestic markets offer attractive opportunities to invest in, the Indian institutions remain firmly bullish on the market prospectus, as shown in the table below.
On the portfolio front we have taken a selective approach to investing in sectors and companies that will directly benefit from India’s growth story and the rising disposable incomes of a large demographic of the population.
The Indian FMCG sector has been growing at a healthy pace as a result of rising disposable income & increasing brand awareness. To capitalise on this opportunity large conglomerates such as Reliance (Jio Mart), Adani (Wilmar), Tata (Tata Consumer Products) have forayed into the FMCG space which is presently dominated by incumbents such as Nestle, ITC, Hindustan Unilever, Dabur and Patanjali. Branding and packaging would play a key role in differentiating products and ensuring a quick recall in the minds of the consumers. Parksons, one of India’s largest branding & packaging player was recently acquired at a 14x EBITDA multiple by the private equity firm Warburg Pincus. We have also invested in a Mumbai based branding and packaging organisation of a similar size (1,300 crore market cap) at an 8x EBITDA multiple. The company has announced significant expansions in sustainable and flexible packaging which should drive earnings going forward.
(Our company’s clientele)
We are also bullish on the Indian healthcare sector which is estimated to grow between 15%-17% between FY22 and FY25. Increased awareness of one’s health and lifestyle, higher penetration of insurance and related schemes, various Government initiatives such as “Heal in India” which aims to boost medical tourism will contribute to the growth of the Healthcare industry. We have added one of India's leading integrated private healthcare service providers to our portfolio which offers comprehensive healthcare services across multiple specialties.
We have also added one of the largest arthroplasty healthcare service providers with a 15% market share in India to our portfolio. The service provider aims to open 50 franchises under its own name within the next 3 years, to capitalize on its expertise in joint replacement surgeries. Joint replacement surgeries are expected to cross 1.5 million annually in India over the next few years. The company has also recently acquired an implant manufacturing facility in the US, which is fully synergistic with its core hospital and arthroplasty business.
It is estimated that the Indian real estate market will reach one trillion dollars by 2030 (IBEF, GoI). Demand for residential housing has surged given the increased urbanisation and nuclearisation of families. India is also one amongst the top 10 appreciating housing markets internationally. As per data available 80% of the US, 86% of Brazil, and 59% of China live in urban centers compared to 34% in India. An additional 6% of Indians will move to urban and semi urban India by 2030, creating a demand for 2.5 Cr housing units. Our recent portfolio addition includes an NBFC that offers housing finance and has guided to grow their loan book from INR 50,000 Crores to INR 1,00,000 Crores at a CAGR of 26% within a span of three years.
Overall India is well poised to perform exceedingly well in terms of growing its GDP, per capita income and infrastructure in the coming years. At this point it is important to understand that equity markets seldom move in a linear fashion, while a trend may not be immediately apparent, it has been established time and again that the Indian markets make higher highs and lower lows in due course in line with the overall economy. Our fund is well diversified across market capitalisations, sectors and is a blend of both value and growth investment styles.
As always we remain optimistic on the India economy, and confident in our ability to generate wealth.
MD, Prosperity Wealth Management.