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Home > Business > Special

'You make money when you differ with the Street'

Manali Rohinesh, | June 01, 2006

Fund Manager of Fidelity Fund Management, Arun Mehra studied electrical engineering and then did his MBA from the University of Chicago. He then did a stint with Motorolabut wanted to work in the Indian equities market. After all, India is where he sees tremendous growth occurring over a 5-10 years period.

At the University of Chicago, he rubbed shoulders with some eminent minds - it's a school with a fair proportion of Nobel laureates including the monetary economist, Milton Friedman. He credits those years for stoking his interest in how the markets function.

He told CNBC-TV18, "Clearly their (Nobel laureate professors) teaching is perhaps at a very high level for the PhD students. But you have constant lectures and you have a chance to interact. But it's that whole thought process which flows down, in almost every course that you do."

This is exactly the kind of intellectual stimulation that engaged his attention when he chose to check out the equity action in India. He explained, "I started trading and looking at markets when I was in college in Delhi and it was really the intellectual process - that one could uses one's mind and really invest and understand something - and see the value of that growing."

But theories and models learnt in some of the best global business schools remain just that - theories. One such theory that prevails is the myth of the markets being an efficient mechanism. So does he believe in it? He said, I think if markets were efficient, then we wouldn't have a job. I think markets are inefficient and that's where the opportunities come. However, if you think about Chicago and what they talk about is that if you have large enough companies and the information is widely disseminated, then the chances are that everybody knows what that company is about and what it's doing."

"But again, I think in a market where different people have different kinds of thought processes and view things differently, that's where the opportunities come and markets are clearly inefficient and valuations keep swinging to extremes."

The beginning...

The MBA did give him skills apart from textbook knowledge, which he put to use when he began work as an analyst at Fidelity. He recalled, "Coming out of college,it (Fidelity) was clearly the shining light - a brand that you wanted to be associated with, if you wanted to work in this industry."

"The interviewing process is really rigorous. You have several rounds of interviews. You start with 1-2 rounds of interviews where you meet people and based on that, you actually go through the third round, which is a critical round. This is called a prospectus-test round."

He explained, "What you have to do is, you are given a company and you are supposed to work on it, write up something, do some modelling and then come up with an investment thesis. You have to present this report to a committee of fund managers and analysts within the day. After this, is the interactive session."

Mehta obviously made it through those grueling rounds and chose to work in international equities. He chose this specialisation because "I had been in the US and was learning about the markets. I clearly saw that the global market was the place to be. One had to be international. The US market was there but there were a lot more opportunities outside of the US and clearly that is where the inefficiencies were. That is where research was not being done properly. So I really want to look at the entire globe and look at different parts of the world."

He was sent to Hong Kong which was in the midst of the handover to the Chinese and there was concern that onceChina took over, it would be the end of Hong Kong. But that never happened.

He recalled, "But then, there was the Asian crisis. I was coming out of college and getting into this profession, which was hitting the bear market, which is perhaps one of the best experiences you can get. What I had learned is that, a bear market really teaches you all about investing."

"In this scenario, companies disappeared, brokers, dwindled, there was no interest in Asian equities and all you had to do at that point in time was, go out and do research and just spend time visiting companies, understanding whichcompany is going to survive. And, the most critical part was understanding the balance sheet, because the companies that had a balance sheet, had the capability to survive."

His research supported his optimism about the virgin equity markets that was Asia, particularly India. He did see a lot of opportunities that were in favour of the Asian continent, like demographics and the fact that these countries were evolving along the same pattern as the developed countries.

Want to work with Fidelity? See if you can match up!

To start with, there are 1-2 interviews

Then comes a prospectus-test round - where you are given a company on which you write up an investmentanalysis.

Present the analysis to a committee of fund managers and analysts at the end of the day.

Then comes the interactive session.

With regard to India, the market was developing. The trading systems were being put in place. Some clearly emerging sectors were IT and pharmaceuticals and these weren't very well developed then. So as Mehra put it, "clearly at that point, there was no pull but the opportunities were immense."

Having witnessed a bear market in Asia and in Europe, the learning process continued for him. He said, "I think the very fact that at Fidelity, we stick to fundamentals, we stick to numbers and we stick to discipline. That really helped identify a business model that we made money in."

Investing philosophy

So these developments gave him an insight, on which to base his own investing philosophy. He explained, "As far as I am concerned the basic process is clearly the same (as Fidelity's). I focus on companies, on managements and try and understand their business models. But clearly, most of the money is made when you differ with the Street. That's really the way to make a lot of money - when you use your original thinking to do something, which you think is right."

The contrarian investor has to go against the flow, which can be a lonely feeling. He explained, "If you look at the companies and if you think about how investors think, the worst times in a market are when nobody really knows what's going on and it's generally during those times when you have to take the tough call and make a decision, because you see value in the company, in a brand or a franchise, which is just down for no reason."

But he does look at other parameters as well while investing. He said, "We (Fidelity) look at a management's track record and disclosures and their commitment to minority shareholders. We are looking at business models and at franchises. I really want to see the sustainability of the business model. At the end, you come down to valuations and numbers, and then try to put the whole thing together."

"I also spend a lot of time in cross-checking with customers, suppliers, competitors, over and above what the company is saying, to get a holistic picture on the company." He also sets store on diversifying his portfolio but doesn't include too many new companies because he would prefer to keep the risk element low and stick with the consistent performers.

He explained, "When you are buying good companies, then that's really where the overall portfolio performance will come through. However, your bets and the conviction that you have, is really stacked up in those top 10-15 holdings, which give you the data every year."

"In this (equity investing) business, the simpler the business, the easier it is to understand and the more money you can make out of it. So clearly, that is the focus. You have to drill down to the basics, to the key variables that are going to drive earnings and performance."

Mehra's agenda is to have a long-term investment horizon with a record of consistent performance. That's what he emphasises to Fidelity's customers as well. He aims to "spot winners and pick stocks, that will generate value over the long run and that's what we really want to own in the portfolio."

The India story

The demographics, the return on capital and the quality of management are factors in favour of India being a better bet than China. Higher disposable incomes, companies going global and if infrastructure was strengthened, then India will be an unbeatable package!

Mehra has studied over 400 companies but he's learnt not to be complacent because there is always some new company which pops up, which excites his interest. He feels India could become a stock pickers paradise.

But he elaborated, "The main thing is that the Indian companies know how to make money. Indian managements know how to make money. These are not high capital intensive businesses. These are high cash-generative business and services oriented.

There is the mentality of turning out more from an asset. Indians are entrepreneurs but they have been shackled and if you let them free, these companies can grow and make a lot more money. I think that is a big difference between India and China."

He does intend to put his money where his mouth is, and has plans to build a big business In India. He said, "If you look at our overall India exposure today, Fidelity has close to $3 billion invested in India. We are clearly one of the top FIIs. We have raised close to $330 million. I think over time, we want to have a share of the consumers' wallet."

"We clearly have a missing product in cash and in fixed-income but I think over time, we want to build a big business. India is a strategic market for Fidelity and that is really where we are focused. We want do what is right for the investor."

For more on management strategies and learning curve stories click here

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