The Vulture Fund Concept, in brief

I can’t find the link now, but I’d read recently in either one of the newspapers or one of the three billion websites I go through daily that Vulture Funds are looking at opportunities in India. The article made it sound as if this is a bad thing, and I’m not too sure if thats the case.

Here’s what Wikipedia has to say on Vulture Funds:

A vulture fund is a financial organization that specializes in buying securities in distressed environments, such as high-yield bonds in or near default, or equities that are in or near bankruptcy.

As the name suggests, these funds are metaphorically like circling vultures patiently waiting to pick over the remains of a rapidly weakening debtor.

Vulture funds target not only companies but also whole countries. In the recent case of Argentina, for example, vulture funds bought up a large part of the public debt at very low prices (sometimes only 20% of their nominal value), and then attempted to cash them when the Argentine economic crisis exploded in 2002. A single vulture fund run by Kenneth B. Dart, heir to the Dart Container fortune, claimed 700 million USD in a lawsuit against the government of Argentina.

Not all Vulture funds are bad: almost a year ago, I was told about the PATF TEP Fund, which, conceptually, I found very interesting. I think it qualifies as a Vulture Fund, but I could be wrong.

Suppose someone needs to exit an insurance policy: the no-claim bonus is lost and an exit load has to be paid. The insurance company also loses out on a regular, otherwise assured ,investment. The Insurance company informs the PATF TEP Fund, which, for a lower (or no) exit load, offers the customer his money back. The Fund then pays for the entire duration of the policy, and collects the returns and the no-claim bonus. Everyone benefits. The money for paying off the original insurer comes from those who invest in the fund.

On the face of it, returns may not be as attractive as those for mutual funds, but this looks like a less volatile investment, and can be a part of a diversified portfolio. I’m not sure of the risks involved, though, or even if there are other, similar products.

Note: The above post is based on hearsay and hence could be incorrect. I don’t endorse any Vulture Fund or the PATF TEP Fund. Its up to you, in consultation with your financial advisors, to make your decisions; Financial consultancy is not my area of expertise.

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That’s all that the markets are seeing. Partly to blame for this are global cues, and partly the growing strength of the Left parties and that the UPA has made all the wrong noises in the past few weeks:

1. Regulation of sugar prices
2. Regulation of cement prices
3. Regulation of prices of around 200 drugs, as opposed to an earlier proposal of 70.
4. The Left’s demand for the re-introduction of the long term capital gains tax and dividend tax, thus hampering investment in the capital markets
5. Growing uncertainty about the quota system
6. Kamal Nath’s proposal of implementing job quotas in private sector enterprises
7. Impending increase in fuel prices, resulting in an overall increase in cost.

To put it simply, the government is planning to increase overall costs and reduce (and regulate) prices that’ll kill profitability, in line with the Left’s thinking that businesses should all be non-profit, and the government should decide what to do with the return on income. Not to forget Nilotpal Basu stating that there should be no family based succession. They want the bureaucracy will wield greater power, and consequently the ministers and MP’s. A step in the wrong direction.

Perhaps some significance can be accorded to the fact that the UPA government has turned two today. This succession of falls doesn’t augur well for the economy. The morbidly negative could see this as an indication of a deflationary trend, and a fall in consumption demand. The RBI increases liquidity and lowers CRR or Bank rates. With the Left weighing in on the government for the pensioners, that’s also highly unlikely.

I’ve been in the market since it was at 3000 levels a four-five years ago. And 300-500 points here or there don’t bother me – I’m in it for the long haul. I don’t believe in “savings” because they don’t take inflation into account, and are not really profitable. In fact, I’ve been quite happy in bearish markets; my first thought is – what should I buy? Still bullish in the long term, I invested in ITC on Friday because I saw it at 300-400 in the next two to three years. Now, with a 1111 point fall and trading stopped, I’m a little sceptical, but I still see it recovering. But a 1000 points is a 1000 points, and it spooked even me for a bit. For me, I’m close to Rs.20 a share in the red with ITC (40+ at one time), though almost everything else is still in the green over the long term. I’ve only bought into companies that I’m comfortable with. Trading requires too much attention, too much time.

The real problem is – the stock markets move more on emotions than logic. And a lot of people would have gotten scalded, and would be looking to take their money out. As they say in hindi – doodh ka jala, chhaachh ko bhi phook phook kar peeta hain (a hindi version of once bitten, twice shy)

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A quick take on the budget

From the macro perspective, my instantaneous reaction is that this isn’t a negative budget, and a lot of duties have been rationalised. Which means that, as a long term investor, I can expect the impact of this budget to be felt next year. Particularly heartening is the reduction in fiscal deficit, though it remains to be seen whether that can be achieved. I doubt it.

Excise has been reduced and sales tax has been increased, which means that some commodities will remain evenly priced or slightly cheaper.

I didn’t expect any labour reform, with the left parties constantly at the government. Nothing in it for me as an investor in Ranbaxy.

The stock markets have been taxed further with an increase in transaction tax (I think). I’ll have to read about MAT tomorrow and figure that out.

By the looks of it, this looks like a budget that has maintained the status quo. Will read the fineprint tomorrow.

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Well, Ranbaxy’s up 20.27% since I bought it (and spoke about contrarian investing), in less than two months. All my calls, but one, have worked out for me. More to be added to this post tomorrow. Haven’t felt this sleepy in ages.

In the morning

Pardon the slightly inebriated ‘Yippee!’ above. Here are some random thoughts on the current investing scene:

1. If you like something, the best time to invest in it is NOW: I’ve wanted to invest in Tata Motors for the last two and a half years, after I read about certain financial restructuring, an acquisition and a little about their future plans. The 1 lakh car doesn’t inspire any confidence, though. Tata Motors has been consistently going up, and as usual, the poacher in me is lying in wait for a deep fall that will probably never come. If the business plan of the company seems sound and you have faith in the management, best to take a long term call and invest forever. The only thing that can adversely affect Tata Motors, perhaps, is a marked increase in raw material cost.

2. IPO’s are shots in the dark: and I invested in the one barely gained when it opened. From what I’ve seen, private sector IPO’s give better immediate gains. Also the stock market looked stretched on the day that the IPO listed, so the jitters of being around the 10k mark could have kept investors from investing. Most people approach IPO’s without exercising due caution, so from, here are some factors to consider when investing in an IPO. Here’s a listing of IPO’s since 2005, and their relative performance. Do you see a trend?

The IPO’s coming next up are here.

Notable losers are HT Media and Jet Airways. HT, I believe, will improve from current levels over the next couple of years. Jet Airways is the most systematic of airlines with very sensible spending unlike one of its competitors, which is spending a lot of money on brand building and taxing its staff- not realising that the Indian consumer is fickle and will not hang around once your booze advertising budget stops funding the frills on your low cost airlines. The other, more sensible competitor is hindered by lack of sufficient Airbus aircrafts, so cannot make up for delays using replacement aircrafts. In fact, their metro business doesn’t seem to be profit-making, and is hurting their brand equity.

3. Why sell? I think I’ve spoken about this before. It was suggested that book profits at…4000, 4500, 5000, 6000, 7000, 8000, 9000 levels. The same has been suggested at 10000. My point is quite simple – I’m a part owner in their business. If like the economics of their business, and have faith in their management – I’m not going to sell my stake and lose out on future gains. Sure, had I the time for buying-selling-buying-selling, I would have gone for businesses I didn’t know about and taken more risks. Why should I not make 20% a year without much hassle? If the market is going to collapse, and really collapse, I’ll at least recover my cost. I’m willing to take the risk with the rest, cause I don’t think the Sensex will tank to 2800 levels from here.

4. To PSU or not to PSU?
I’d say that one should stay away from PSU’s. Their decisions are not entirely independent, so profitability is only one of their concerns. Welfare related decisions are forced upon them, even if they cannot afford them. And different companies have different goals: MTNL has justified their One India plan saying that they want to become the largest communications company in Asia. You know what they say – the bigger they are… It’s not really a sound policy (heh) because it impacts their margins. Sure it prevents churning, but it adversely affects their margins and bottom line. I paid my tution fees to the market by buying into MTNL during the Ketan Parekh days, and lost money on it. I’m wary of PSU’s, unless they are in a monopoly situation.


I also work on a hunch, and go with my gut feeling. I had a gut feeling about Ranbaxy, over and above the contrarian opportunity I saw. To invest in the Andhra Bank, I sold some of my loss making short term investments (I’m terrible at short term) to invest in a couple of IPO’s (that didn’t work out either). What I did do right was to not exit a sugar stock because sugar stocks had tanked on that day. Since then, they’ve rebounded dramatically.

Major disappointment with the IPO’s recently, though.

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Contrarian Investing

Contrarian investing means that you buy a share when nothing seems to be going right and everyone else is selling and hammering the price down. It defies most common investment reasoning – who wants to hold on to a share that not many are willing to buy? Why should I buy shares of a company that is doing badly? This is a short term perspective – a large majority of those who try the stock markets are traders, and invest for the short term. Most others are medium term investors, whose plans are for a great rise over three to six months. The contrarian strategy has worked for me once, and I’m trying it again:

1. Reliance:
This will probably go down in history as one of the biggest opportunities of them all, which a lot of people missed. The market was moving upwards, with Reliance, one of the heavyweights, being battered down after rumours of the split. The media war lasted well over six months, and in that time, while the market neared 7000, Reliance tanked down to a lowly 480-530 range. In fact, with the rest of the market doing so well, had Reliance kept pace, the market would have been at 9000 then � Reliance�s recovery to the 850+ levels has pushed the market up beyond 9000. Everyone was following the news about the split, and the share price was extremely volatile, but still within a Rs.30 range on a day-to-day basis.

I took the risk of purchasing the stock just before the market factored in the news of a board meeting called by Mukesh Ambani to consider a share buyback in early December. Businesswise, to me, Reliance seemed fairly safe � they have always been in the business of making money, and the share was still operating on a low PE (Share Price/Earnings per share) of around 11, as opposed to a market PE of around 18. It could only rise from there, and there were no management problems- only the question of uncertainty of leadership. In any case, if one looked at it from a three year perspective, things could only improve. So, I bought at Rs. 480, and a year on, at this very minute, it is at Rs. 857 � that�s an increase of 78.54% but I�m not selling. More on selling later in this post.

2. Ranbaxy
has been battered down by terrible news of losing two patent cases in the recent past. Everyone (I�ve read a few reports) is advocating a sell, and the share price has been battered down from around Rs.650 to Rs.360 � a fall of around 45%, 32% since October. This is primarily because earnings estimates, which had been factored into the price earlier, have now been lowered. The estimated PE for 2005 is as high as 54, which is crazy, but this has been a bad year. Given Ranbaxy�s management, and the impact of possible successes in patent cases, expected PE�s will lower over the next few years. Ranbaxy has 43 drugs pending approval in the US, and expects to file 15-17 ANDAs next year. It�s a major risk, perhaps a bigger one than Reliance was, but if you don�t dare big, you won�t win big. Day trading is much riskier, and requires a lot more work. At 360, Ranbaxy has a PE of 54. If the PE goes down to 25, that’ll mean an improvement by around 55%- a similar increase in Ranbaxy�s price will see it at Rs.550. It�s risky, however, to predict a bottom for this stock � I�ll be picking up stocks as it moves downwards.

Hit and trial method of buying IPO�s
My dad did this fifteen years ago, when he started investing � he would put in 3-4k into some select IPO�s and just forget about those shares. For all the companies that went bust, a few survived and did extremely well, and have more than paid off for all those that failed. I�m not sure if this is advisable now, though � IPO�s are aggressively priced in bull markets. If Maruti were to launch an IPO today, they would probably price it at Rs. 430- Rs. 440, instead of the measly Rs.120 when the market was at around 3500 levels. And again, you’ll have to wait for a long time for such returns.

On selling shares
The New Buffetology by Mary Buffett states an interesting analogy � if you buy a drugstore and it makes good money � would you sell it when things improve by, say 20% or 30%? It�s the same with shares � you�re buying part ownership into the company, and if it the business grows and earnings improve, even if it doesn�t give a dividend, why not just stay invested? In fact, if it doesn�t give a dividend and earnings are retained for investment � that makes it even better since your earnings are being compounded. Short term is more risky and takes a lot of work to keep tabs on consistently. We made the mistake of selling stake in a company that my dad bought into 12 years ago. We sold it a couple of years ago, albeit at around 175 times the cost.

It has more than doubled since, and we feel that we should have stayed invested. If a company is good, there is no sense in selling your stake, unless you need the money. Nestle, for example, was around Rs. 300 four years ago. It�s now at around Rs.930. Markets are quick to factor in news, and slow to factor in the valuation; not many people make a call based on cash flow predictions. However, markets do factor in business growth into the share price, even if the company doesn’t give a dividend – Microsoft and have never given a dividend.

A caveat applies to all that I�ve said � investing in stocks markets is fraught with risk and you should make your own decisions based on your understanding, and perhaps your brokers advice. I�m not responsible if you take the risks that I am, based on what I�ve stated here. Oh, and I�ve no degrees in finance, so just about everything I’ve said is a laypersons opinion�

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