Inside the mind of a mutual fund manager — Pankaj Tibrewal- EVP -Sr Fund Manager — Kotak AMC

He has been ranked as one of India’s Top 10 Fund Managers by ET-Morning Star (3 years) and Outlook Business for 4 consecutive years from 2016–2019

Q1. A Marvadi from Kolkata who did his masters from Manchester University, UK and then Mutual Funds. How did the 3M’s transform your journey?

Ans: Honestly, there was nothing planned in life and when I reflect back, I think a lot of things came back and I was extremely blessed and fortunate to have great family support, great friends around me and great mentors who kept on mentoring me throughout my journey till now, but if I reflect back on each of the aims you mentioned, firstly, yes I belong to a Marvadi family and very early in life I was interested in how businesses work, how financial markets work and how things work, and as there’s this classic template in Kolkata, students that join St. Xavier’s (about 6–10 a.m. in the morning), the student either goes to boost for a CA/CS or MBA or joins his family business. I chose to join my family business with my brother and my father and honestly those were the honest years of learning where I learnt how businesses are learnt and got the opportunity to see from a very close corner and till date almost 20 years after, that learning still helps me. Very early in life I was taught that profit and loss is not the important statement, what you need to look at is cash flow and balance sheet and I clearly remember my father and grandfather looking at two statement which is Roker Bahikhata, and they hardly used to create PNL and from the balance sheet Bahi khata they used to derive the profits. So those were the years where you saw the early seeding of how businesses are run and look at businesses at a very different angle. Also, one interesting thing was that after six to ten morning college, I used to go to my dad’s business and very early my brother told me one day that these are the bad dates which we have not recovered for many years, it’s a challenge for you, why don’t you go to these companies and collect the money, some were in Cuttack, some were n Bhubaneshwar, some were in Delhi and it was really and experience to go and see how difficult it is to recover money in the Indian context. So I think that part of the family background really helped me in shaping what I am today and a large part of experience early on came in my career from that background which very few are aware of it. It was a classic midsize logistics business and a lot of things were done in conventional manner. In those three years, I tried to bring in some thought in terms of what technology was, how should we automate it, some resistance early on, but I think today when we look and reflect back, I think those decisions when we took that early on are really helping us now. You would be surprised to know that, after my class 12 I enrolled for CA and I cleared the CA foundation and joined Lodha and co. for some time and I went on to audit a couple of very mucky audits for Lodha at that time, one was Paharpur Cooling Towers, very early I realised that it’s a great course but I am not made for that course and my interest was in finance in terms of masters in Business Administration, heard a lot about it from my cousins who had done that and I wanted an international experience, I wanted to get a flavor of how international universities work and that’s how I landed up in Manchester for my masters course and it was a brilliant experience and I urge all the youngsters to at least once in their career have that international flavor. I think it’s very important to get a diverse view across and very different set of people to network along and I think still those relationships are coming very handy in today’s job. So I think that’s where Manchester came in. I was very few Indians in UK at that point of time to get shortlisted by the best of the investment banks in London. Unfortunately 9/11 happened and visas became a very big issue, they wanted to give it to the students out of EU only and they wanted to prove that you must have a extraordinary skill to qualify for the EU visa, so I had to come back to India, came to Bombay and got a job at Global Trade Finance for 3000 Rs. It was a short stint but I took it. I parked myself in few of my friends place fore few days. Then one day I got a call from a person who hired me, his name is Binay Chandgothia and he said there is an opening under him as a fixed income credit analyst. Immediately I said yes, why not. That’s where the mutual fund journey started off. This person early in my career had a great influence and still whatever I am today, I owe a majority part to that person. He has been my mentor all throughout. I started myself as a fixed income credit analyst and later on moved on to the equity site tracking few sectors and then I took up a challenge of managing a small portfolio which was called MIP, it was about 15–20 crore portfolio. I just requested my boss that along with the senior PM’s, give me an opportunity to manage it and that’s where the fund management journey started off from. So nothing was planned, I just took it as it came and honestly I have been very blessed and fortunate till now.

Q2. What’s your template in terms of stock selection?

Ans: I think this is very important for anybody over a period of time to succeed in market. I firmly believe that investing success is an outcome of making good decisions consistently over a longer period of time. It should not be a one-off and to do that consistently over a longer period of time, you need a framework or a template and a philosophy behind it. We follow the philosophy of BMV which is Business Management Valuation. The first is business, when you look at any company the first question you ask is what’s the substantial mode of competitive edge for this company, what’s the right to win for this company, it may be in terms of product, it may be in terms of technology, in terms of distribution or it may be the low-cost production cost, what is the competitive edge of this company to survive over longer periods of time. The second question you ask when you evaluate business, is it a small fish in a large pond or a large fish in a small pond, what it means it that, is the company sectors where there is a larger opportunity to grow over longer periods of time or the category is saturated, he’s already a leader and the best he can grow is 3–5% per annum because the category per se is saturated and he is already a large market share. The third and the important thing which you look at is the capital allocation, I think that’s one of the most important drivers over longer periods in terms of companies which caterpulate into larger sizes, is how efficiently the company is utilizing it’s capital and that can be reflected in return on capital and return on equity over a period of time, and by evaluating these parts of business, I think it’s very important to get a sense on what ecosystem the company is operating and what’s the business ecosystem around it. The second most important part which I think is a little subjective, but we are trying to bring the institutional framework along it is evaluation of management and I think the break or make of any company I firmly believe is the management teams who run it and we have seen that even if it is in a mediocre business, great managements make it look and run it over period of time very efficiently and make it a star and we have seen that in dishonest managements, even if they are in the best of the sectors, they make the company go down, so I think management teams are very important and we all acknowledge the fact that when we own a piece of shareholding of our own business, we are not going to run the business, it’s the promoters, management teams who are going to run the business and it’s very important that they are passionate, they are honest and hardworking. I think a couple of things we look into because it’s very difficult to project or predict this part in the future, but you can go back in the past and see how fair or unfair they have been to the minority shareholders, what is the gap they kind of say and execute and that always come by experience and your analysis of the past rather than the future. Also, how efficiently they have been using their capital is very important to understand because that gives you some character of the management. If you look at today’s situation, COVID crisis is going on all across the world and it’s very important that in crisis you look at what are the opportunities you will be coming along, and for example, we did a template and went back to the previous crisis and saw that how many investing companies in a portfolio have the same management teams which were there in the previous crisis, and how did they navigate the previous crisis well 3–5 years out of the crisis, how did they grow their topline, bottom line and without diluting balance sheet and cash flow, so I think it’s very important to evaluate management and I do a lot of groundwork. To be honest with you, I have a great network of CAs all along though I am not a CA, and you try to speak to the ecosystem, their suppliers, their vendors, their distributors, their employees, their ex-employees, and you get a lot of sense on the quality of the management for sure. Another important part is the cash flow and balance sheet. As I said, very early in my life I figured out that profit and loss is not the important statement, it’s cash flow and balance sheet and that’s really coming handy today also. We avoided a lot of mistakes in the past by only looking at cash flows and balance sheet, not so much on PNL and to me I think this classic statement always is there as a guiding principle that topline is vanity, bottom line is sanity and cash and bank is reality. There is no point in looking at companies which are just chasing topline if it doesn’t convert into profit. There is no meaning of accounting profit if it doesn’t convert into cash flow, and that is another very important guiding principle which helps us in picking stocks. The fourth point is I think the price you pay, the value you pay and I firmly believe that the margin of safety is very important and the price what you pay is the determinant of the return of what you make in the future. We believe that there is no company which is always great, there are cycles for every company and you need to make sure that you are not overpaying for a company. So, though we are growth-oriented in our approach, but we believe that growth at any price is not our philosophy, growth at a reasonable price is our philosophy. So these are some of the quantitative template which we use. At every point of time you would like that most of the parameters have a tick mark but it seldom happens that you go through every parameter and that marks your tick mark, many times it doesn’t happen. So you see the relative weightage of these things and try to make sure which has a higher weightage at that point of time. Also, few things I would like to talk about that these are things which you can quantify, but there are a lot of things in this journey of picking stocks which probably are not quantified. Our philosophy is to run a diversified portfolio, own 50–60 good quality businesses which pass through most of these parameters, the part of template. On the hindsight, we will know which was a multi-bagger. At the time when you are picking up stock you know these are good businesses, these may be compounders run by efficient and honest managements but at that point of time honestly speaking, no body knows that this is going to be a multi-bagger in the future, and you keep evaluating your thesis time and again, but we have seen in the lifecycle of a company they are never in a straight line, there are always ups and downs and it’s very important to be patient along that journey. These are some of the important things which probably one needs to understand that we all read about greed and fear in the theory textbook. The situation is always there that in a time of crisis everything looks bad, the future looks hazy, you are in the tunnel which is dark, so at some point of time you need to fight them and travel that emotion cycle within yourself and from a company’s perspective also. That’s how you try and develop that habit of cutting out noise. I think that is very important because in today’s world there is so much of overload of noise and news that over a period of time you need to make sure that you cut a lot of noise, focus on what your companies are doing and make sure that you don’t lose the larger picture of that company and just ask yourself during adversity is this company going to survive the crisis and if yes, over the next 3–5 years how much will be the profit pull of this company. So focus complete bottom-up and these are qualitative stuff, they are lot written in books, lot written by practitioners but when you actually face it in the actual marketplace, is the real test. Also we believe that time is a great friend, a friend for great company but enemy of a mediocre one, so we keep evaluating our thesis on businesses from time to time. I think these are some of the way we are going about and obviously I believe that as a practitioner that all of us focus on where we can make the next 200% 300%, in which stocks over the 6–12 months, but we always kind of invert the situation and ask ourselves where you can’t lose over the next few years. I think the later is often the times where you will find the next multi-baggers. It’s a reality that the less mistakes you make, the less stupidity you do, you will be surprised to see how good things happen in your portfolio. So don’t try and chase multi-baggers but invert the situation and ask which are the stocks where I can lose and where is the margin of safety which is not there. I think there where you can do it consistently over a period of time you will make less mistakes and if you make less mistakes good things and multi-baggers and compounders will be a part of your portfolios. I will be humble in my admission that if you do a scale of one to ten, probably I will be at one or one and a half. There’s a long journey we all students of the market and we all have to be humble in our approach. We will make mistakes but we have to learn from that mistakes. Somebody who is starting new, if they have this kind of a framework both qualitative and quantitative, I think over a period of time they will be far more successful than without a framework.

Q3. 1.5 billion dollars that you manage, so much trust is disposed and this would include like a 5000 Rs per month SIP which someone has done in your fund for his daughter’s marriage, children’s education, so there must be a lot of responsibility on your shoulder from a moral standpoint as well, apart from the numbers going here and there, so please tell us about that.

Ans: it’s a very emotional question for me as well. What gets me every day when I wake up in the morning is the trust of millions of people who have disposed on us as an institution that these are the guys who will manage my money nicely over a period of time and when you go to investors meet, trust me, there are people with 1000, 2000, 5000, 10000 rupees of monthly SIP going in the fund and they come and come and ask, maybe a 60–70 year old person, if their money is alright or not. That line and accountability and responsibility is something which keeps you awake all night as a fiduciary responsibility and I think that’s a very big responsibility for all of us who are managing public money that our conduct, our way of approaching things as I went through the template should be such that we make less mistakes. Nobody can be perfect but at the end of the day if you make out of 10 calls 3 mistakes then it’s perfectly fine because you will come out much better beating your benchmark and on a relative basis but if you make far more mistakes than right calls, I think that’s where the problem is. I think it’s a huge amount of burden of expectations, burden of responsibility, accountability and life of a fund manager is measured every day. The companies report earnings on a quarterly basis, people are evaluated on a yearly basis, but fund managers anybody can go across the world can go to any site at the end of the day and see how the fund manager has done. So I think the responsibility is something which is very high and that keeps us going every day that how we can add value to the investor who has invested in us. I am sure they have invested with certain goals in mind that after 10 years I want to have my kids’ education, after 15–20 years some marriage or house proposal and there’s a large part of expectations those guys are running with us and it’s our responsibility and accountability and answerable to them and that’s a very big one.

Q4. What are the underrated factors in the success of a fund manager?

Ans: I personally believe that the role of luck, karma, courage, hard work, are the most underrated things in fund management. I think luck also plays a very important role, karma I think what you have done in the past I believe it comes around circle to you, so keep doing the right things, keep helping people, keep help them build their financial independence over a period of time and somewhere I think courage is also very important because you need courage at the right time to execute your thought process, you need the courage to do it rightly, and all that thing also comes from hard work. I believe that at times of crisis the difference between one person and another person is the insight that person is having on the sector and the stocks which they own. I think you have a decisive insight on many sectors and stocks which you own will give you that courage and that comes from your hard work which you have done over many years on the stock and invested company. So I think that these are the four most underrated things in the life of a fund management, we should give due credit to all four of them.

Q5. What is the portfolio allocation that you would recommend to a viewer from a thematic perspective?

Ans: It would differ from person to person. A young guy who is starting earlier on in the career and probably have 25–30 years of working life, I would suggest that develop into the culture of saving very early on in life and if you save a part of your salary or income, you will develop a very big kitty and that could happen by investing in asset class call equities because I am a great believer in this asset class call equities and I believe that the compounding which can happen in this asset class, probably will not happen in any other one. If you are a young guy maybe 50–60% could be a mid-cap out of 100 Rs of equity, if you are a slightly aged person, I don’t think you should have mid-cap because inherently they come with their own volatility, you should mainly be in asset allocation products, fixed income or a large part in multi-cap or large cap, but if you are in your early age, mid 30s, mid 40s, a good portion of your asset allocation and equities should be in mid and small cap maybe 50–60%.

Q6. For a mutual fund aspirant, what is the typical career path?

Ans: There are few things from a overall career path and I think one of the things which you probably should know that before managing public money, it’s very important that you invest your own money in the markets and learn from it and I think it’s a huge responsibility and accountability as we discuss managing public money. So first you should know how successfully you have been managing your own money as well in the market and you will learn a lot by making mistakes, by managing your own money before you move to the public arena. Second I think is that you have to read a lot, read anything under the sun, any big ideas from the key discipline and it will teach you a lot. What I come across is many youngsters today don’t read a lot, they just try going through some videos and all that but I think reading a lot across disciplines helps a lot. Every key discipline will come with it’s own learning and later on in your life in fund management when you are practicing investing, I think you will realise that many of these key disciplines, application helped you in the past. So I think it’s very important. The third is, you need to understand that you need to be passionate about this job. I think in this job there will be a lot of pressure, you will go through highs and lows and I think it’s very important to make sure that you are passionate enough to continue this for a longer period of time as a career. Fourth, this market gives you high very shortly and very fast so you need to be humble, you need to acknowledge the fact that you have a limited role to play and a lot of part which happens is just happening not because you are great but because circumstances have been favorable to you. So you need to be humble enough and make sure that every day you treat yourself as a student of the market. I still get fascinated when I look at the two greatest investors of all times, Mr. Warren Buffett and Mr. Charlie Munger, still in their 90s every year coming to the AGM answering hundreds of questions across media analysts and still accepting the fact that we don’t know. It’s very important to maintain that humbleness and the approach that you are always a student of the market.

Q7. What is the advice Mr. Pankaj at the age of 42 would give to Mr. Pankaj at the age of 20?

Ans: Very early on as I said, you have to start saving and you have to believe in the equities as an asset class. We have seen over the 30–40 years if you leave out dividends, this asset class has given you 15–16% compounded return and if you add 1 or 2% more of dividends, it’s 17–18% of compounded returns in the asset class for a longer period of time. To be in the asset class and to make sure you make wealth over a period of time you need to be optimist. You need to make and believe that the future is always better than the present and for that you need to make sure that the early on savings which you do are properly invested in this asset class. Second thing I would always say that be passionate about whatever you are doing.

Q8. You are known as the Chief Happiness Officer at Kotak, so what’s your mantra to make yourself relaxed?

Ans: That’s true, we believe that the outcome what you see in any organisation is the culture of that organisation and I think we always go by quantitative templates but I think a very important softer aspect for any organisation is the culture and the way employees think about themselves, are they happy or not. It’s a very important and a softer aspect for success of any organisation and I would like to say that today as a team, when we reflect back, we are a very happy team, we keep on organizing team bonding along with family as well from time to time and make sure that everybody is relaxed. We will have our ups and downs but whether we are together as a happy team will make sure that we can pass any obstacle that comes in our way. So I think happiness is very important and for ourselves as well, you need to relaxed because we are in a very high pressure job and I make sure that I do my daily meditations, daily yoga, daily chanting which I do and playing with my kid is the biggest stress-buster, so you need to develop certain kinds of hobbies along with it which destresses you and relieves you from the high pressure job which we are in. So I think from a happiness perspective we keep on doing team member bonding as well as family bonding and that has come a long way in making sure that we are a happy team and the outcome clearly suggests that.

Q9. One book that you are currently reading.

Ans: One book which I recently completed was “All I want to know where I am going to die so I never go there”. It’s a wonderful book and again it comes to our same philosophy that don’t chase multi-baggers but invert the question and ask that what are the mistakes you will not make, what are the stocks which you probably will not chose and the book is all about that. I give this cricket analogy that as a batsman, you don’t need to hit every ball out for a six and a four, you need to make sure that at a time of crisis, you are there on the pitch and you are not out. If you are not out there will be a lot of opportunities for you to make and create well, but if you are out, you can go into the pavilion and give all kinds of knowledge but you are already out. For example, Don Bradman, one of the greatest cricketers of all time and you will be surprised to know that in his career of 80 test cricket matches, he just scored 6 sixes. So as a batsman, you need to know which ball to leave, which ball to hit and as a fund manager also, you need to make sure that you make less and less mistakes and as a result, probably the portfolio outcome will be very good.

Q10. What is you favourite song and favourite movie?

Ans: The favourite movie clearly is ‘The 3 Idiots’. I think there’s a lot of message in that movie and I personally relate with that movie a lot, I have watched it many times, and the first message is don’t run after success, achieve excellence in whatever you do and success will automatically come and whatever you do, do it with so much of passion and fun that you love what you are doing and trust me you can achieve greater heights with ease. This movie has a lot of message and so it has to be one of my favourite movies.

“Rukh jana nahi tu kabhi harke”, this song sums for all of us that adversity will always be there, highs and lows will be there but make sure that you face them with courage and conviction and always make sure that you are an optimist in life and you look forward for a great life where you can contribute to the larger aspect of the society and if you believe you have the courage and conviction to face adversities, I think good will happen in your life. Therefore, this is my favourite song.