I'm a patient investor, says ICICI Prudential AMC's Anish Tawakley

Steering clear of mediocre companies, even when available at a discount, has yielded rich dividends for Anish Tawakley

A truism in tennis is that the winners are often the ones who make the least unforced errors. Most players lose points to the mistakes they make themselves rather than their opponents. ICICI Prudential Asset Management Company fund manager Anish Tawakley’s investment philosophy seems to mirror this sentiment.

An investor can do very well by avoiding the bottom one-third of stocks by performance even if he or she doesn’t necessarily hold the top 10 per cent, says the fund manager for the ICICI Prudential Bluechip Fund. His stewardship won him the Business Standard Fund Manager of the Year award for the Large-Cap category in a difficult pandemic year. He did this while investing for a fund whose average assets under management was Rs 27,097 crore in the one-year period ending September 30, 2021.

“I am not saying that I do not try to pick the companies that will end up in the top 10...(per cent). I do try to do that. The point is that among the many strong companies that exist, it is difficult to predict which ones will end up near the top in any given period,” he says.

“However, one can identify weaker companies or companies that are delivering unsustainably strong performance with a greater degree of confidence. And avoiding these companies can make a significant contribution to fund performance. Eventually, the weaker companies are exposed — all one needs to do is be patient,” adds Tawakley.

Some of his patience is reflected in his turnover ratio of 0.19 as of September 2021. This means that only Rs 19 out of every Rs 100 in investments are traded during the year. Put another way, the average holding period of his portfolio would be around five years. Some of this is based on making conviction bets on winners.

Tawakley doesn’t believe in the investment strategy of finding growth at a reasonable price (GARP). He looks for a demonstrated track record of profitability, a top three market position and future compounding ability in picking his stocks. Going for the GARP approach often excludes the top two or three companies because of high valuations. One is left with middling companies, which one buys only because they offer a more reasonable valuation. This also often translates into mediocre returns, he suggests.

A business that has grown large enough to get listed is one in which scale matters. It makes sense, therefore, to invest in scale; rather than smaller companies only because they are available at a slight discount. If the companies are too expensive, then it may make sense to skip the sector entirely than buy the laggards at discount, according to him.

Tawakley’s latest buys include a big bet on the banking sector. It accounted for 25.6 per cent of his portfolio in September 2021, compared to 6.24 per cent a year ago. The idea is that banking growth will mirror the country’s economic resurgence. Banks may not have been as valuable when liquidity was ample. This situation will not persist indefinitely. Banks that have a lot of money deposited with them will find the situation easier when there isn’t as much money floating around as is the case currently. Deposit franchises become more valuable as liquidity tightens.

The pandemic was a challenging time for picking stocks when businesses were affected across the board. Many companies weren’t making money. The way to distinguish between businesses was to look at which of them had managed their debt, other liabilities and assets well enough to survive Covid-19. Balance sheet strength became more important when there was little visibility on earnings, says the fund manager who started out as a consultant in the 1990s, advising large groups on the businesses they should retain and the sub-scale ones they should exit in a liberalised economy.  

His advice to investors is to expect moderate returns in the days ahead.

“However, we expect a significant divergence across the market. Some of the cyclical sectors — financials, capital goods...should see good earnings growth in a recovering economy,” he says.