Prosperity Discovery Fund - Quarterly Update Q4FY22
Updated: Jun 6, 2022
Greetings from Prosperity Wealth Management, I hope you are keeping well and are unfazed by the market volatility.
The fourth quarter has indeed been a challenging one for equity markets worldwide. High inflation, soaring commodity prices, rising interest rates and various geopolitical events seem to be keeping the markets jittery. We do however believe that these are transient issues that will fade in the backdrop of the multi-year investment journey we have embarked upon.
On the bright side, the Indian equity markets have witnessed a notable surge in confidence from domestic buyers (domestic institutions & retail Investors) at these valuations. This sell-off has largely been led by the foreign institutional investors over the last six months. The table below provides the data.
While the selloff by foreign investors may seem excessive, it is important to view this in the context of their long history in India. It is encouraging to note that over the last 20 years, FIIs have been net sellers of Indian equities only 4 times annually.
An attractively valued domestic equity market (Nasdaq -30% & Dow Jones -15% from their all time highs) coupled with rising interest rates and subsequently rising bond yields (for new issues) provides them with ample opportunity in their own countries.
India however, given its relatively small stock market capitalisation of 3 trillion US$ as against the United states with a market capitalisation of 49 trillion US$ will continue to generate great returns for investors (both domestic & foreign) in this decade.
Having touched upon the macroeconomic scenario, let us now review our portfolio in detail.
We have taken this opportunity to finetune our portfolio by sizing (trimming and adding) positions of various stocks. Our portfolio companies are on the verge of commissioning various expansions over the next four to six quarters which should significantly add to their earnings and drive up valuations. The table below provides a brief overview of the same for some of our portfolio companies.
During the quarter, we also have added a well-capitalized Non Banking Financial Company (NBFC) which is largely focused on the gold loan and the home loan segments, with a sizable AUM of roughly Rs.50,000 crores. With a majority of the Covid-related stress behind them and the balance sheet cleanup, the company is looking to increase its disbursements especially in the gold loan division for which it has added 700 new physical branches. Given its current valuations and management’s vision to double its loan book by FY2026 we believe the company is at an upward inflection point.
We have made one key exit in India’s largest diagnostic services provider close to our purchase price. The investment rationale included the company’s established track record for growth, strong brand-recall and the attractive valuations it was available at post the market correction. However with the advent of several venture capital backed startups in the diagnostic space and limited product differentiation possibility for the incumbents, we see the competition intensifying and the margins dropping in the future.
Another key update I would like to share is with regards to our benchmark. We have now shifted to an amalgamated benchmark index which is a more accurate and challenging benchmark for Prosperity Discovery Fund (PDF). PDF being a multicap strategy (investing across market capitalisations) will now be compared to an amalgamated index consisting of all three major Indian indices Nifty50 (34%), Nifty Midcap 100 (33%) and Nifty Smallcap 100 (33%). This would be a more relevant benchmark versus the Nifty500 which holds over 65% of its weight in the first 100 stocks of Nifty alone. Historically the amalgamated index has outperformed Nifty500 as depicted in the data below,
Total return of Nifty 500 since inception: 11.88%
Total return of Amalgamated Index since inception* : 15.22%
[34% Nifty 50, 33% Nifty Midcap, 33% Nifty Smallcap]
Calculated from the data below:
Price return of Nifty 50 since inception: 11.41%
Total return of Nifty Midcap 100 Index since inception: 20.51%
Total return of Nifty Smallcap 100 Index since inception: 14.21%
[Data taken from NSE factsheet, As on 31st May 2021]
Finally, I would like to conclude this quarterly update by saying that while we are cautious of the volatility, we are equally confident of the companies we have invested in, and their ability to compound earnings. We are committed to tracking the developments in the markets closely, and we do continue to see a very bright future for Indian equities in the times to come.
MD, Prosperity Wealth Management.