Investing in India's Huge Future Potential with Anupam Ghose

[00:00:00] Welcome to Excess Returns, where we focus on what works over the long term in the markets.

[00:00:04] Join us as we talk about the strategies and tactics that can help you become a better

[00:00:07] long-term investor. Hi guys, this is Justin. In this episode of Excess Returns, Jack and I sit

[00:00:22] down with Anupam Ghosh, co-founder of System 2 Advisors and sub-advisor to the new Simplify ETF

[00:00:27] that focuses on investing in India. We talk with Anupam about the Indian economy,

[00:00:31] some of the recent political developments there, the growth of India and its attractive demographics.

[00:00:35] We then get into stock picking with him, what he looks for when buying stocks for his concentrated

[00:00:39] portfolio of Indian companies, how he assesses management, his definition of a moat, and much

[00:00:43] more. This conversation uncovers some of the unique things investors should consider

[00:00:47] when investing in emerging markets. As always, thank you for listening. Please enjoy this

[00:00:51] discussion with Anupam Ghosh. Anupam, thank you very much for joining us today. We appreciate it.

[00:00:58] Thank you. Where are you actually sitting? Where are we talking to you from? You're talking to

[00:01:04] me from India. Generally, I'm based out of South New Jersey. I do come to India about

[00:01:13] between three and five times a year. So it just happened that I'm in India and the election

[00:01:20] results, etc., etc. were all during the time. Yeah, that's we're going to get into that. But

[00:01:26] Jack, I think out of the almost 300 podcast episodes we've done, I don't know. This might

[00:01:30] be a first direct speed to India, right? Yeah, I think it is.

[00:01:37] We are going to talk to you about investing in India, the Indian economy, what makes it unique,

[00:01:44] what maybe some of the risks are, and how you go about building portfolios that consist

[00:01:50] exclusively of local stocks in the Indian market. I think for our audience and investors,

[00:02:00] which tend to be mostly US, we all have a very strong home bias in our portfolios.

[00:02:06] I think probably for the last 10 to 15 years that has served many investors very well.

[00:02:12] But I think international diversification and thinking about this type of thing

[00:02:16] and understanding the differences in these countries and the differences

[00:02:20] in how the companies may operate is important to tease out because they are different countries.

[00:02:28] India is a different country, has different growth and demographics,

[00:02:31] stuff we're going to talk about. But I think this is going to be a good discussion

[00:02:35] on investing in India and even at a higher level, international investing and how you

[00:02:40] go about thinking about it given that you've been doing this for most of your career.

[00:02:46] To start, let's start high level with the Indian economy. Can you give us

[00:02:53] the big talking points? How big is it? How fast is it growing? What makes it up?

[00:03:02] The GDP today is about 3.8 trillion dollars. In this financial year,

[00:03:14] it's expected to grow 8.2%. It has grown approximately 6% a year over the last 10 years.

[00:03:24] If you look at estimates for growth, so in the next five years, 10 years, etc.,

[00:03:29] all the estimates vary from about 6.5% to about 7.5%, 8%.

[00:03:35] Now, just in the context of this, if we go back 20, 21 years, the GDP was 500 billion.

[00:03:43] Today, it's 3.8 trillion. It's been compounding at a pretty steady clip, but we believe now

[00:03:50] that because of you mentioned the word demographics, because of the demographics of dividend,

[00:03:56] that growth is going to accelerate and essentially for the next two decades,

[00:04:01] we'll see some pretty impressive growth. In the context of the short and important

[00:04:06] between the last five years, India has overtaken both France and the UK to become the fifth

[00:04:14] largest economy in the world after the US, Japan, I was saying US, China, Japan, Germany,

[00:04:21] and now EU. If you look at the most optimistic estimates for growth for Japan, the most

[00:04:27] pessimistic ones for India, India will overtake both Germany and Japan in the next three to

[00:04:32] five years and become the world's third largest economy.

[00:04:36] So very strong growth. Does the economy tend to have more, I think of the US,

[00:04:43] since World War II, recessions have been less and less as our economy has gotten more mature.

[00:04:50] Is the business cycle in India a little bit quicker than a more established firm,

[00:04:55] like maybe you have an established country like you have in the US or in Europe?

[00:05:00] Just a quick question for me to answer. The reason why it's difficult to answer the question

[00:05:08] directly is that India still has, but till recently there was a massive parallel economy,

[00:05:17] or a cash economy, which effectively made a lot of economic statistics very difficult

[00:05:25] to gauge, et cetera. So you could have stuff going on in the formal economy,

[00:05:32] which is not reflected in the cash economy and vice versa. And again, a lot of the

[00:05:38] numbers regarding the secular were very, very sketchy. It's only in the last, I'd say

[00:05:43] about 10 years that statistics have become much better and with all the reforms that

[00:05:50] the government put in, where India is largely a cashless economy. And you'll never feel that

[00:05:57] till you take a ride on a truck on the streets of Bombay and you can't pay cash,

[00:06:02] you stick out your mobile phone, he has a QR code and the money changes hands.

[00:06:07] And street vendors appeared that way, et cetera. I mean there's still cash,

[00:06:12] it goes around, but the digital infrastructure calls for a cashless economy. So a lot of

[00:06:18] the economy now is normalized and we've just seen good growth now for the last 10 plus years.

[00:06:24] So last 10 years we didn't see anything which resembled the type of business cycles that we've

[00:06:30] seen in other parts of the world. And what in your opinion is driving that growth? I'm

[00:06:37] thinking there may be some demographic differences between India and the U.S. and other

[00:06:43] things that make you positive on India.

[00:06:44] So, Justin, as I said, I left India to do a PhD in economics,

[00:06:51] boredom university in the Bronx, you know, love the place,

[00:06:56] enrolled in the PhD program in 1999. My wife, who I met in India, was the only one

[00:07:01] of the class of 1999, she actually got a PhD. But while the private sector is double

[00:07:07] balance, and while economists have a very European sort of, you know,

[00:07:14] jargon-y type of definition for exactly what the demographic difference is,

[00:07:19] to do with dependency ratios and things like that, I have a much simpler and more

[00:07:24] pedestrian way of looking at what the demographic difference is. Which is pretty much

[00:07:30] when you have an economy where the per capita GDP crosses a fairly low threshold,

[00:07:36] like $2,000. So basic human needs, calorific needs are met, and discretionary consumption

[00:07:45] sets in. You demand a $500 phone, $1,000 TV, $10,000 car, that sets off discretion,

[00:07:53] you know, consumption. That essentially takes per capita GDP from $2,000 to $6,000 in a

[00:08:03] straight line. Translates to two decades of 10% growth. The last time we've seen this movie is

[00:08:10] in China, 1995 to 2016. It's just a fact of, you know, that the economics and fact of,

[00:08:19] you know, democracy. The average age in India is 27 years old. 27 years is the average.

[00:08:26] You've got half the country below the age of 24. So, I mean, here the dependency ratios make

[00:08:35] a lot of sense. If you look at the average age of China, it's 10 years older, 37.

[00:08:41] If you look at the average age of Japan, which is actually the best case as far as demographic

[00:08:45] goes, it's 47 years old. Now, to think in an advanced country like Japan, one of the most

[00:08:53] beautiful places on the earth, I had the pleasure of spending three weeks in the summer with my

[00:08:57] family then last year on vacation. I've been there in business plenty of times with first

[00:09:00] year on vacation. To think that a quarter of the profanities were disappeared over the next 10

[00:09:05] to 25 years. It's just amazing. But what the one child policy in China is going to do to

[00:09:14] its demographics is going to make Japan look good. They're going to have a lot of very

[00:09:21] old people very quickly without any young people supporting them. In the United States,

[00:09:27] we are sort of fortunate because of migration to the United States that keeps the country young.

[00:09:33] If you look at the social security system and I see all three of us,

[00:09:38] probably in the second half of our lives.

[00:09:43] Now, I've been paying for the social security system just like you guys have been

[00:09:47] since I started working in 1994. Now, the social security system here, the social security in the

[00:09:53] U.S. is a Ponzi scheme. We need young people to come and start working contributing to it so

[00:09:58] that older people don't get paid. Problems come when you don't have enough young people

[00:10:04] contributing for the older people to get paid. Problems happen. So in the United States,

[00:10:10] because of migration, we are extraordinarily fortunate that the demographics remain in favor

[00:10:18] of the country unlike most zero-fibre countries like Japan or European countries or other

[00:10:26] countries where the demographics are poor, including places like Russia, etc.

[00:10:31] So in India, average age of 27, very young population, working age population.

[00:10:38] And my version of the demographic given that I gave you is probably what's going to take

[00:10:45] the country forward for the next 20 years. There are a couple of other things which are

[00:10:51] quite important. The digital infrastructure that the country has between the system that was

[00:11:01] implemented probably about eight or nine years ago, there has been the works for a while where

[00:11:08] using a single method of KYC AML, using a retina scan, a digit number and a thumb print,

[00:11:19] everything is digitized. You can open the bank account instantly. Now, the reason why

[00:11:25] Modi's as popular as he did when he got into power in 2014, using the digital

[00:11:34] infrastructure, he got 500 million bank accounts. And the reason was that, in reality,

[00:11:44] India is a welfare state where the poor have to be supported because they vote for the

[00:11:50] government. But not unlike the U.S., where you have all these transfer payments and

[00:11:58] subsidized print and all kinds of subsidies, but most of us get siphoned away by the

[00:12:03] renter class. What Modi said was, if I give, instead of giving someone rice at this price,

[00:12:12] if I give them the cash, I can't see how they're going to be cheated on half the

[00:12:18] race. Let them go special money how they want. If you look at the amount that the U.S.

[00:12:26] government spends on poverty alleviation, the average per family that's spent is 40,000

[00:12:34] dollars. Section 8 housing, TNAP, Medicaid, all the other good stuff. It's about 40,000

[00:12:42] dollars per family that's spent by the government on poverty alleviation. If you

[00:12:46] give them the 40,000 dollars, they'll have a property line. However, you got the renter

[00:12:54] class, section 8 housing owners and all the other people that support the different parties

[00:13:00] who need them on a snatch. What Modi did with digital infrastructure was completely

[00:13:06] modernizing where all the payments are electronic and supported by the uniform

[00:13:14] payment interface which is built by the government for the people. I think I forgot

[00:13:22] the exact number of how many transactions happen every day, but unlike the U.S. or

[00:13:26] in most of the world where the payment networks are Visa, MasterCard, American Express,

[00:13:31] with either none of that exists. They exist in India, but all the payments are electronic.

[00:13:39] Completely free of cost. Besides the demographics, the digital infrastructure is

[00:13:45] extraordinarily important. You can apply for a credit card and virtually get a credit card

[00:13:50] and start using it within the hour. It's interesting. In many ways, they're ahead of us

[00:13:59] on a lot of these things. They're ahead of the U.S. In certain ways, yes. In certain ways, yes.

[00:14:05] And then you've got, it's a democracy. And while we always say that democracy is

[00:14:12] always messy, always problematic, etc., etc., it's still ahead of most other forms of

[00:14:18] government. Never. Revenable. And the reason why I say that is that probably dictatorships

[00:14:25] are better where economic growth and democracies are, but in democracies you need to have,

[00:14:33] at least the appearance or distribution of wealth. Because if not, you're going to

[00:14:39] have to have a lot of money. So you do see enough transfers happening that

[00:14:47] at least leads to a certain amount of distribution of wealth in India. Even though

[00:14:52] in the last, I'd say, 10 years, the income and quality has absolutely ballooned. But

[00:14:59] you've got 138 people on the billionaires list. That's because the economy is booming,

[00:15:06] markets are booming, and you are producing billionaires. So between the digital

[00:15:14] infrastructure, the demographic division, and democracy, these are the pillars on which

[00:15:19] the economy is moving forward. We're going to get into the Indian stock market in a second,

[00:15:24] but we were recording on June 5th and the Indian election just happened, as you mentioned.

[00:15:28] And I want to ask a little bit about that because it seems like the results were a

[00:15:31] little bit unexpected. I believe the Indian market had its biggest decline since 2020. I

[00:15:36] believe it was down 6% on this. I just want to get your overall take. Can you just talk about

[00:15:41] what happened in the election and why the market reacted like that? So, Jack,

[00:15:49] once the polling was done, which finished on Sunday, last Sunday, which was the

[00:15:59] on the second, polling was done. On the day after polling, the official, not official,

[00:16:06] the various exit polls came out, which suggested that the Modi government would have a comfortable

[00:16:13] majority. That's what the polling numbers suggested. When the actual results were tabulated

[00:16:22] yesterday and as the vote count is, you can see it almost lying, the key thing was that

[00:16:34] the Modi government and the alliance that heads up, there are three or four other parties

[00:16:40] involved with the alliance. They have a comfortable enough majority. The lower house

[00:16:46] of parliament is 543 seats. You need 270 to rule, to form the government. The alliance

[00:16:54] got about 292 seats. Now, this is in stark contrast to the 400 seats that Modi was

[00:17:04] doubting that he was going to win or the alliance was going to win. All the polls basically

[00:17:09] suggested anywhere from 310 to 330 seats and they came out today. But Jack, the major issue

[00:17:17] was Modi's party, which is the Bharatiya Chantra Party, BJP, which he belongs to,

[00:17:24] the last two elections had 280 plus seats. So they could be a majority by themselves.

[00:17:32] In the current election, they got 240 seats. So they need the alliance partners to basically

[00:17:41] pull in with them to form the government. That leads to horse trading and what sort of

[00:17:51] ministries are going to be given over to their two key parties that need to be now a beast.

[00:17:58] The question now is how much of the very impressive agenda that Modi had is going to

[00:18:06] basically be tempered down. That's why on Monday, when the exit polls were out,

[00:18:13] the market was up quite a bit. I think it was up about 60%. Yesterday when the polling

[00:18:19] actual poll results started, it fell about 60%. Today it's up about

[00:18:24] about 2% or 3%. It bounced back today because the fear yesterday was that some of these key

[00:18:32] alliance partners could be lured away by other people to transform the government and leave Modi

[00:18:39] out. But by the end of yesterday, both the key alliance partners pledged their allegiance

[00:18:46] to Modi and said we're not entertaining any other offers. We're going to stay with their nasty.

[00:18:52] Let's shift to the Indian stock market. I have to admit, I don't know a lot about

[00:18:55] the Indian stock market. Those of us in the US, we know the S&P 500, we know how it breaks

[00:18:59] down, we know the NASDAQ, we know all that stuff. But I don't know a lot about

[00:19:03] the Indian market, what the indexes are. I've heard about the NIFTY.

[00:19:06] Can you just talk at a high level about the Indian stock market, how big it is,

[00:19:09] the major indexes, like the high level things people need to know?

[00:19:12] Sure. Jack, not a small market. The market capitalization of the Indian stock

[00:19:21] exchange or the stock market is in the region of $5 trillion. I believe that makes it the

[00:19:28] fifth largest or the fourth largest somewhere there. Hong Kong is pretty big. It keeps on

[00:19:34] shifting in Hong Kong and India. But what's $500? The major indices of the NIFTY,

[00:19:42] which is a capitalization rate index like the S&P 500. However, there is an older price

[00:19:51] rated index like the Dow or the Sensex. And the Sensex has been around forever.

[00:19:58] The NIFTY came in much, much, much later. The total number of listed companies are 5,400

[00:20:05] companies which are in the... The top 10 companies in India by market capitalization

[00:20:11] make up about 20% of the total market gap. Now, why that's important is the top 10

[00:20:18] companies in the United States come with 31% of the S&P 500. So the concentration

[00:20:25] in the US is much larger. Now, if you look at it sector wise, in the US, 30.5% of MSCI US,

[00:20:36] just to make comparisons between MSCI India and MSCI US, which is the right way because

[00:20:43] methodology is the same set. 30.5% of the companies in the US in the IT sector

[00:20:51] compared to 10.6% in India. In India, the biggest sector by market capitalization

[00:20:57] are financials which is 24.7% compared to 12.8% in the US. Financials dominate

[00:21:05] the Indian market. Otherwise, just to walk you through what the others are,

[00:21:11] the consumer discretion 13% compared to 9.9% in the US, energy 10.7% with 3.9% in the US,

[00:21:19] industrial 10.4%, gas 8.8% in the US. It's pretty evenly distributed after that. Materials are 8.4%,

[00:21:31] versus 2.4% in the US, because the US table is 7.6%. Again, it's a fairly diversified stock

[00:21:38] market compared to a lot of other countries, including China, which is very, very sector

[00:21:48] concentrated compared to the broader sector. At a high level, how do valuations look in India?

[00:21:55] In the US, everybody's talking about how overvalued the market is and particularly

[00:21:58] the market cap weighted indexes. Do you have any feel for what the valuations look like in

[00:22:02] India relative to history? So, hindered trade on the NIFTC on one year hold earnings 18.9%

[00:22:12] times, which compares to in the US 20.7% on the SMT 500. MSCI India, which is a broader index,

[00:22:23] the problem with NIFTC is that it's 50 companies, market capitalization rate

[00:22:27] have, it's got a lot of very highly concentrated market heavy weights. But MSCI India,

[00:22:35] which is about 140 days, that trade has a lot of the smaller or the consumer

[00:22:42] dominating companies, that did 23.1 times earnings. No, 23.1 times earnings is at

[00:22:54] a significant premium to other emerging markets. Most other emerging markets are 10%, 12%, 13%.

[00:23:02] India always traded at a very significant premium to other emerging markets and

[00:23:10] other emerging markets. And that is sort of, you know, as money is poured in the country

[00:23:17] that has for the exasperator. Now, just to give you some sense there, that if you look at

[00:23:25] India's share of the EM basket, you know, in the MSCI act we sort of pounced out,

[00:23:32] you know, that has gone up very steadily from what 5% about 15 years back, I believe,

[00:23:38] or 20 years back, almost 20% today. So if you look at India's, I mean,

[00:23:45] weight of the EM basket against China, you know, they're not too dissimilar,

[00:23:51] where China's economy is approximately four to five times larger than back in the past.

[00:23:57] So, you know, those are some of the reasons why, you know, it trades appears very

[00:24:03] extensive. Now, consumer companies, etc., etc., look very, very, very expensive

[00:24:11] only because people are betting on consumer growth or the consumer driven companies are

[00:24:17] for really expensive, P-wise. Now, the other comment I make is very simply this, that

[00:24:27] everything we're talking about is more classical Western methodologies or, you know, discounted

[00:24:34] different sort type modeling in the West Indies. And it's typically, you know, five years of,

[00:24:40] you know, forward looking earnings and then some total value being assigned and that continuing

[00:24:47] at that. Now, in India, the companies have got clear growth paths for the next 20 years.

[00:24:55] Now if you apply just what are traditional, traditional Western methodologies or

[00:25:02] different discovered type models to some of the Indian companies, not all some of them,

[00:25:07] you know, you get extremely expensive rates. Why? If you see that they can grow for the

[00:25:12] next 20 years because of various reasons. I'll give you an example, Stalklet's and Apple

[00:25:18] Portio. Now, as soon as the consumers began to dominate the conversation,

[00:25:27] every major consumer brand is in India, every major one, every major one. In fact,

[00:25:33] I was quite surprised almost seven or eight years back that this second-drawn

[00:25:38] store in the world was in New Delhi after the one in New York, I believe,

[00:25:42] which kind of surprised me. But if you look at all the major sneaker manufacturers,

[00:25:50] every major brand is in India, whether it's an Aridas or Puma or Nike or you name it,

[00:25:56] they're all here. The prices for these sneakers are global prices, around $70 per break.

[00:26:05] The average. Now only about 30 million people can afford them at $70. There's an Indian

[00:26:13] sneaker company called Tampa Shoes, which produces sort of, you know,

[00:26:20] their own branded sneakers, which we believe are not maybe as good, good enough, but they're

[00:26:26] sold at $10 to $12. Now if you just look at poverty alleviation in India and sort of

[00:26:36] the number of consumers that are entering the lower-budget class, etc., etc., no. This company

[00:26:43] probably has quotes for the next 20 years. If you apply the traditional five-year dividend

[00:26:50] discount model and some total value, you get earnings which are, you know, you get these

[00:26:55] which are in the hundreds for it. But if you look at it over a 20-year period, you know,

[00:27:01] you say, let me say in all that it's best. Now, you know, the example there is Unilever India,

[00:27:09] you know, fast, you know, consumer goods company, Indian version of the Indian affiliate of

[00:27:15] Unilever. If you would apply, you know, the traditional valuation metrics that we talked

[00:27:22] about to Unilever, you know, in 2005, you'd be out of there by 2010. It's continuing

[00:27:28] to compound at 15% a year from then on. So India, on the face of it, looks expensive.

[00:27:36] It's always been expensive. There are reasons for it and, you know, the methodology is just

[00:27:42] one of them, you know. What is the relationship of like the average Indian investor with the

[00:27:47] stock market? I mean, are they investing in the stock market? The people that are investing

[00:27:51] in the stock market, are they using index-type products like most people here do in the U.S.?

[00:27:57] How does that work? So let me just go back to some context. It's very important. If you go back

[00:28:06] just about 10 years, maybe a little more than that, 10-15 years, typical family balance sheet,

[00:28:14] or family wealth allocation was between real estate, physically gold, and certificates of

[00:28:23] deposit. Because you had blue chip companies that in the high inflation, you know,

[00:28:31] has always existed in India relatively. The U.S. has started making India look pretty good now,

[00:28:36] you know, which are giving you sort of 12, 13, 14% annual yield. Blue chip companies,

[00:28:43] that's how people invest. These are like, you know, my parents' generation.

[00:28:47] Like, you know. Now, obviously not healthy. You know, a lot of money was parked in real estate.

[00:28:59] In real estate, the Modi government in its very first term essentially informed that. They

[00:29:05] made it very difficult to have any sort of cash component. Let me explain that. Because

[00:29:13] there's a higher stamp duty, a large portion of the value of an apartment would change hands in

[00:29:19] cash to avoid the stamp duty or to avoid part of the stamp duty. They came up with reforms

[00:29:26] that made it extremely difficult for any of that to happen. And suddenly the parking of

[00:29:32] cash in real estate is actually going away. And, you know, not to pick on China in any

[00:29:38] which way. I am a sap of China, but we look at what housing is doing to China,

[00:29:44] where it's exactly the same. See, Jat, unlike the developed Western world,

[00:29:49] you know, the Eastern world, you know, is a low trust society where we believe in tangible assets.

[00:29:59] They were assets not as trusted yet. Now, when Modi came in, he realized

[00:30:06] to broaden and deepen the capital markets, you need to get people investing in the stock market.

[00:30:12] So gold, which is India's largest consumer of gold in the world.

[00:30:18] Because for intergenerational sense of wealth, etc., etc., it is most convenient way of doing it.

[00:30:25] India, I mean, I am a good Hindu. I say that. Well, you know, the Hindu religion,

[00:30:32] there's a particular day, you know, during our New Year, which is Diwali,

[00:30:36] where you're supposed to go out and buy gold. In the U.S., we go and buy

[00:30:39] an ounce of gold every year. I bought it as low as $230. I paid as much as $2,400.

[00:30:47] But we have pistachios, Krugerians, and maple leaves, and all kinds of combinations.

[00:30:54] So gold is just a traditional investment. Now Modi came in,

[00:30:58] lured the gold into India, you know, because of high duties, etc., etc.,

[00:31:04] was funded into India. Modi made that very difficult. Now, if you go and buy anything

[00:31:14] which is worth over 25,000 rupees, it's just $300. You need to have your tax ID papers with

[00:31:20] you to be able to buy anything like that. That essentially put a stop to all this.

[00:31:23] So everyone naturally, and as interest rates came down, you know, these blue chip

[00:31:31] certificates of deposit were no longer an option. So the only option became the stock market,

[00:31:38] and Modi's government encouraged small savings into the mutual fund-type business

[00:31:47] that goes in there through a dollar-per-savage type plan, which I call Zip-Sale.

[00:31:53] Mostly saving plans. And this is like, you know, everything from $2 to $10 a month.

[00:31:58] When you have 100 to 300 people doing that, that provides a lot of, you know,

[00:32:04] a lot of, you know, output into the markets. So it's a relatively recent phenomenon.

[00:32:09] No, this is not ever traditionally sort of a form of savings. Obviously now,

[00:32:17] generational change where sort of most, a lot of stuff in sort of middle class,

[00:32:24] upper middle class, buy looks not that different from London or Hong Kong or New York or Dubai

[00:32:31] or anything like that. So there's generational change going on too, where, you know,

[00:32:36] paper investing is perfectly fine. So we are seeing the early parts of, you know,

[00:32:42] the Indian populace getting involved in the stock market. And Jack, I also point out that

[00:32:50] if you went back probably about five years, 10 years in the Indian markets,

[00:32:54] the foreign institutional investors, you know, were the dominant force, the dominant force

[00:33:00] in the market. You know, if you want to explain why the market's going up,

[00:33:04] you say, you know, FVIs are buying, the portfolio fully invested, they're buying.

[00:33:08] Why is it going down? Well, both were invested in the settings. Today, they're not nearly as

[00:33:14] important as domestic investing. So the focus has changed quite a bit because of these plans,

[00:33:20] you know, where small savers are putting in, you know, two to $10 a month into

[00:33:25] mission funds. So your second question, Jack, on indexing. And there's never been

[00:33:32] a traditional indexing here whatsoever. You know, that's the explanation that I have for that

[00:33:42] is if you look at the indexes, the heavyweights in the index or, you know, IT companies,

[00:33:50] you know, IT companies or Walmart companies, you know, India didn't have much of an IT

[00:33:59] business until the Y2K problem came about. And Indian companies got involved in

[00:34:05] reviewing code and fixing the Y2K problem, et cetera. Now you've got five IT companies,

[00:34:10] which are in the $100 billion type market campaign. But if you look at these companies,

[00:34:15] you know, even though they're Indian companies, their operations are based

[00:34:19] along India, Manpower, Consummedia, their markets are in Europe and also in America.

[00:34:24] So what determines, you know, their revenues, et cetera, et cetera, et cetera, the factors

[00:34:30] that move them and rate them are much more outside of India than within India.

[00:34:35] Like the exchange rates. Similarly, I mean, that's when IT itself is like a

[00:34:41] like a 120, 130 billion dollars a year type of export from India.

[00:34:45] Export from India. Pharma companies, either of us, you know, take any genetic medication

[00:34:51] in the U.S., you know, because of our insurance companies or whatever, it's most likely,

[00:34:56] you know, the medication is actually made here in India. India has the second largest number

[00:35:03] of FTA pre-mass action facilities after the United States. But genetic pharma, which is

[00:35:10] again a huge business in India, heavyweights in the index are much more influenced by,

[00:35:16] you know, the embossing policies and insurance policies in the U.S. or in the U.K., et cetera,

[00:35:21] et cetera. They're not domestic players. So that's why I think active management in India

[00:35:28] always, you know, work because most people, you know, more people, if they think they're

[00:35:34] buying the index in India and getting exposure to what is desirable in India,

[00:35:39] is consumer growth, they keep getting out of that. Only the nations are the heavyweights

[00:35:46] in the index that are part of sort of consumer growth in India. You know, two of the biggest

[00:35:51] companies in India which are both over $100 billion are oil companies. India don't control

[00:35:58] the price, but they've got a 10% weight each, you know, in most of the industries.

[00:36:07] So, Jack, it just has never been a sort of a low-cost indexing Vanguard-type model here at all.

[00:36:19] I believe that, you know, low-cost indexing, et cetera, et cetera,

[00:36:24] features all the totally developed and very efficient markets, which India is not.

[00:36:32] What's interesting about your approach is you've decided, you know, a lot of times when you

[00:36:35] look at funds that invest, you know, for U.S. investors in emerging markets, you'll see,

[00:36:39] I mean, you'll see index-type stuff, but you also see very, very diversified funds. And

[00:36:43] you've decided to run a very concentrated fund, which I think is really cool and it's similar

[00:36:46] as to what we do in the U.S. What made you make the decision to run a very concentrated

[00:36:51] approach? So, again, some history here, Jack. The primary focus that we have in India,

[00:37:02] we have four offices here, about 80-some people in India. Four offices here are primary business

[00:37:10] head-ones. We run a large, quantitative business focused on it, which we've got a long history.

[00:37:16] One of our family office investors, I think in 2020, essentially asked us the following question.

[00:37:24] They said, hey, India was economically very, very weak going into the pandemic,

[00:37:31] unlike the rest of the world, which was sort of, you know, cranking at full speed.

[00:37:37] So we believe that India, he's the family officer of Hong Kong actually, they said,

[00:37:42] we believe that India will bounce the hardest coming out of the pandemic. How should one play

[00:37:48] India? Should we play beta? We said no, we believe it should be after man. They said,

[00:37:54] do you have an actively managed product? No, we don't. Can you build one for us?

[00:37:58] And he says yes. And that's what caught us in that business. We wanted to be completely

[00:38:09] index agnostic, you know, sector agnostic and say we want to focus on the primary driver

[00:38:18] of growth in India for the foreseeable future. The dominant factor there is consumer

[00:38:24] discretionary spending. And there are other answers on the things around what's driving

[00:38:29] the markets in India. But the primary one is consumer discretionary goals. And most of our

[00:38:39] portfolio wars around that, we believe that, you know, we believe that if you have,

[00:38:48] when you release, you know, in a market like India, you really cannot have a one-name portfolio,

[00:38:56] even actively managed and be that much better than the index. You're almost the index.

[00:39:02] So in order to have to be at the management, you've got to be almost, you know,

[00:39:08] in my day, I may be a still proud investor in the Janus 30 funds.

[00:39:13] You just had to write names and they were high conviction, highly concentrated large bets.

[00:39:22] We said, no, we said, and no, the size of what we manage long on in Indian response.

[00:39:28] So, you know, he said the ideal portfolio should be between 20 and 40.

[00:39:33] No more of that. But we believe in things like active share, you know, in, you know,

[00:39:41] in no, you know, in no, you know, conditionally index whatsoever. Because in India, we believe

[00:39:48] it is, it was possible to beat the index white consistency that we've shown in the last four

[00:39:54] years of managing the property battle. Just one more for me before I hand it back to

[00:39:59] Justin. Can you just talk about your process in terms of how you get to your portfolio?

[00:40:03] So I would assume, you know, you said that there's five or 6,000 companies in India,

[00:40:07] but I would assume your investable universe is a lot smaller than that

[00:40:09] in terms of the companies you would actually invest in.

[00:40:12] How does 5,400 industry companies in India? I wouldn't call anywhere near 5,000.

[00:40:20] So we start with extraordinarily simple and extraordinary, you know, just in

[00:40:26] the liquidity and market cap type of filter, you know, and liquidity and market cap type

[00:40:34] of filter. And that automatically takes us 5,400 names into about 800 names. Then we apply some,

[00:40:41] you know, sector specific factors and, you know, some other quantitative filters,

[00:40:46] which are sector specific, et cetera, which takes, you know, which takes the names down

[00:40:51] from to about, you know, 250 to 300 names. And then what we do is on those names,

[00:40:58] we apply, you know, what we call our, you know, our four pillars system. You know,

[00:41:05] first we look at, you know, business moat, we look at the quality of management,

[00:41:09] we look at sustainable growth, we look at industry growth, things like that. And that

[00:41:14] takes the numbers down to about 70 or 75 names, which we believe are our investment.

[00:41:22] Then we do a much deeper dive on these names. We build our own values models, you know,

[00:41:28] we talk to the management, do sort of challenge it, you know, there's a production facilities,

[00:41:33] et cetera, et cetera, et cetera. And then essentially come up with a portfolio of

[00:41:38] 25. How do you go about assessing the quality of management? You know, some investors kind of shy

[00:41:48] away from talking to management because they think they're always going to get a good spiel

[00:41:51] for other investors, you know, particularly I think strategies like yours that are really

[00:41:58] going actives, you know, they tend to, I think, man, you know, talking to management

[00:42:02] trying to assess management quality is important. So just generally, how do you think about that?

[00:42:06] And then how do you assess it? Sure. So Justin, just a little bit of context there. India is

[00:42:14] largely almost all the companies are public, were family owned companies at some point.

[00:42:20] And the public in India, you know, at least 25% of the outstanding shares have to be in

[00:42:31] the public float. You know, a lot of companies, you know, are dominated by the founding

[00:42:38] and the families that own, you know, anywhere up to 75% of the company. And, you know,

[00:42:44] the moment someone has 75% of his shares, you have to be very, very certain they can pretty

[00:42:50] much do what they want unless you're very, very sure that so we look at things like,

[00:42:56] you know, we look at things like, you know, allocation of capital, how efficient is that?

[00:43:04] And I'll just give you a cool example there. They're all conglomerate type tendencies in India

[00:43:12] like in the rest of the emerging markets, you know, a family that's in, you know, just given

[00:43:17] any business here, assume it's some consumer good, some boards and studies, computer science

[00:43:23] in the US comes back and say, hey, one is starting an IT business for the share.

[00:43:28] And they start allocating. Now, the moment you see that, and they have no underlying

[00:43:33] expertise in that business, that's a misallocation of capital. So we look at,

[00:43:38] you know, we look at that. We look at, you know, what they essentially give you as guidance

[00:43:48] and how true is that guidance? We typically need for a company to get full-weightage with us,

[00:43:55] you know, in our portfolio, at least a five year track record of being a public company.

[00:44:01] That means 20 quarters of financials, 20 quarters of financial, and we are constantly comparing,

[00:44:08] you know, what does the management outlook, what exactly is just bad. Typically, you know,

[00:44:14] the very nosy outlooks you get, you know, you only just pointed it. The realization is

[00:44:20] very shorter than what is promised to you. So we look at sort of, you know, how close

[00:44:26] is that correlation and how close is that correlation? And the other thing is that

[00:44:33] the management's typically in young public companies, you know, they react quite differently

[00:44:45] to being a public company than when they were private. So we need to see enough

[00:44:50] seasoning in that and make sure that, you know, that the management is, you know,

[00:44:54] we obviously look at, you know, family ties, you know, if, you know, the son is a CFO and

[00:45:00] the daughter is this and it's completely family controlled, you know, and it's not what we call

[00:45:06] more professional management. You look at, you know, what are sort of the credentials of

[00:45:11] the C-level suite, you know, how independent is the board, things like that. Because

[00:45:17] in our portfolio where we essentially, we have been comfortable holding the stock

[00:45:24] between three and five years, you know, if you don't have, you know, sort of management that

[00:45:29] you can put your trust in, you know, holding the stock for that long and not, you know,

[00:45:34] you can get bitten by a lot of things. So yeah, we're very sure management quality is pretty

[00:45:39] good. I think that explanation was an excellent example of why having an understanding of

[00:45:47] the different cultural aspects that are sort of embedded in these companies

[00:45:53] in different countries is so like strategically important. So that was really excellent. Thank

[00:46:01] you. I find the family like ownership thing, you know, here in the U.S., like these founder

[00:46:08] run businesses, you know, many of them that are public and still have the founders at the

[00:46:12] helm, you know, and you can kind of name them. You kind of start with Berkshire Hathaway,

[00:46:17] look at Facebook, Google, you know, they have these unique ownership structures to some extent

[00:46:22] in some cases. You could see the benefits of that, but then you can also see the downsides

[00:46:29] of it as well as if, you know, if it's being taken advantage of and if decisions are being

[00:46:34] made that kind of put the family or the owners ahead of shareholders. Excellent. So I

[00:46:41] wanted to also ask you, I know you as part of your process, you like to look for,

[00:46:45] and you kind of touched on this, this sustainable growth and sort of a competitive

[00:46:50] moat around the business. So how do you go in your investment process? How do you go about

[00:46:55] sort of trying to uncover that? Sustainable growth, we look at, you know, the segment

[00:47:05] or whatever industry that may be, you know, what is the addressable market and how many new

[00:47:12] consumers are coming into the market? They're just in, you know, the Indian consumer is

[00:47:18] sort of, you know, evolving quite rapidly as they have sort of the well-resolved to

[00:47:25] essentially. And there's really, you know, the factors which are strongly important is

[00:47:30] as families have enough sort of, you know, spending power, you know, they want the best

[00:47:38] for their family. So we look at sort of the phenomena of essentially getting the more

[00:47:44] premium, premiumized goods and especially in packet segments away from, you know,

[00:47:50] the generics to more the brand. So we see certain segments there which essentially

[00:47:58] are in the same, you know, in the industry which is deemed, you know, fast-moving consumer goods,

[00:48:03] which essentially the addressable market looks massive, you know, looks actually massive.

[00:48:08] And as, you know, as more consumers are coming into the low middle class and middle class,

[00:48:14] you know, their preference for higher quality, you know, brand name goods is much higher,

[00:48:22] can use to go. Then, you know, there's some unique some features of the Indian market.

[00:48:26] And if you want them, you know, instance formula example, you cannot advertise

[00:48:33] instance formula in India, whatever the quirk is. I don't know the history of that,

[00:48:39] but it's always been that you cannot advertise instance formula. Now, you know,

[00:48:45] some of the bigger Western brand names, you know, which manufacture in India, you know,

[00:48:49] et cetera, you know, like and for me and then similar etc. As people can afford them,

[00:48:57] they gravitate from local brands into these brands. And these brands have an absurd mode

[00:49:03] around them because they're deemed high quality, you know, high quality aspirational brands

[00:49:11] and which, you know, are not susceptible to advertising things like that. Now,

[00:49:17] Justin, just a little bit of history that is in 1970, 75, you know, the only one and a half years

[00:49:27] of India, 75 years of independent rule, which there was martial law in India. And, you know,

[00:49:35] essentially under the Indira Gandhi government, foreign companies that were operating in India

[00:49:43] either listed in India or they left, you know, all the left the country. A lot of companies

[00:49:50] like IBM and Coca-Cola refused to list here and they were ejected from it. However, a lot of other

[00:49:57] companies decided to stay at Procter & Gamble, you know, like Corbyn Almond, like Unilever

[00:50:04] and they all went public here also at least 20% of their stock and in the

[00:50:09] public market. So Procter & Gamble, I believe it's the only listing for Procter & Gamble

[00:50:15] outside the United States. So it's a quirk of the market and that's why the historical

[00:50:21] context is important. But, you know, the big instant formula thing I talked about

[00:50:25] is what public list companies do. You know, no one can touch them as far as I know for a

[00:50:30] while. At some point they may be able to change it but catch up to a very, very well

[00:50:36] established global brand like an Encyme or a Simulac or something like that. His foreign

[00:50:44] job, so the mess layers, the main lead was they're dominant in some of the premium,

[00:50:51] you know, sort of fast moving consumer goods. So there are lots and lots of examples like that

[00:50:57] that you sort of figure out that this sort of, you know, this brand is, you know,

[00:51:03] unassailable and the motors around it will visit you. And then, you know, just like every other

[00:51:08] place, India is also a hugely aspirational society. So the local brands which are also

[00:51:15] aspirational and command quite a bit of premium. There's certain, you know, there's certain,

[00:51:23] you know, business houses. Darta is one of them, you know, which is flocking the,

[00:51:30] you know, the consumer Indians got very, very high regard for the Darta brand.

[00:51:37] They've been, you know, and so it's a very large conglomerate, you know, everything's, you know,

[00:51:44] sort of automobiles to, you know, to tea to all kinds of stuff it does. When they do,

[00:51:51] they do own, you know, Javu or La Rova. But Darta's name is hugely, hugely sort of trusted.

[00:52:04] There's two manufacturers and distributor watch brand Pertitan which they further expanded to

[00:52:13] jewelry and that is amongst the fastest growing, you know, and trusted publicly owned

[00:52:21] sort of jewelry distribution in India. I think it's interesting that the, you know,

[00:52:28] as a society sort of moves more and more to that aspirational sort of want or need and seeking

[00:52:37] that, you know, that those motes can kind of be around those. I mean, you know, a strong,

[00:52:42] strong brand name is a, it is a moat and it almost seems like it's even stronger moat

[00:52:49] in societies and cultures where you're having this migration towards more and more the aspirations,

[00:52:56] the company is moving up, people are moving up. And so as people move up, those aspirations

[00:53:03] become even like stronger and more sort of powerful, I think, possibly. Wanted to ask you

[00:53:16] about position sizing and sector concentration. It seems like, you know, your portfolio,

[00:53:23] it's completely bottoms up. And I would imagine your biggest positions are in your most,

[00:53:33] are in your best ideas. But just talk about that. So the portfolio holds somewhere between

[00:53:37] 30 and 40 stocks. You know, what might be the largest position? And do you care at all

[00:53:43] about sector concentration or is that not even a consideration?

[00:53:45] No, just enough. You know, the overriding sort of, you know, concern is, you know,

[00:53:54] exposure to the Indian consumer and other factors that are moving in the markets because

[00:53:59] you will be one of them. We do have in portfolio construction and this mattering

[00:54:04] fair amount of part of it's been important. The first one is very simply that no single

[00:54:11] stock can be more than 10%, you know, rated at cost. And if it becomes just 10%,

[00:54:23] we will review it again to see whether it still holds and 20% is the absolute upper limit.

[00:54:30] We will not exceed 20%. Right now our biggest name is 8%. Now what we also have is just

[00:54:36] for very deep dives that we do in the stock and our own valuation models. You know,

[00:54:43] we have a one year target and a three year target for the stock. And you know, sometimes

[00:54:49] we are surprised to talk that, you know, a one year target has been in six bonds, stock has

[00:54:54] dropped. You know, in our little under four years of managing the portfolio, we've had

[00:54:58] as many as four stocks doubled. So that poses a little bit of a challenge and dilemma.

[00:55:04] I mean, is there further growth potential here or has it been all

[00:55:07] fence loaded? Should we essentially trim this or not? We do have, you know, sort of,

[00:55:15] we don't want more than 30% concentration in any sectors and we further break it down.

[00:55:21] And more importantly, because of conflaminates and indiums, we don't want any single founder

[00:55:27] led company, founder led company to have more than 25% exposures in our portfolio.

[00:55:34] So those are the various ways in which we look at, you know, that we look at

[00:55:39] whether they need more diverse portfolio. And all of them, you know, if you have three stocks

[00:55:45] in your portfolio, I usually sort of a portfolio at all. Right. Yeah. You know,

[00:55:54] we want to make sure we're sort of balanced here. So if I'm an investor looking at this

[00:55:58] and I say, you know, this all sounds great. You got growth in the market. We got active

[00:56:02] stock selection. We're looking for moats. We're looking for companies that we can see clear growth

[00:56:09] in. What are the risks considerations that all investors should be thinking about with a strategy

[00:56:17] like this? Absolutely the biggest risk factor, we believe, essentially growth being detailed

[00:56:34] in India that could happen, you know, for a variety of reasons, both internal and external.

[00:56:41] And internally we feel that, internally we feel that, you know, the, and internally we feel that

[00:56:51] if consumption is not the path and become more concentrated, that could be a problem.

[00:56:59] Let me just give you the context. Approximately 52% of all India is rural, or 50 some percent

[00:57:09] is rural, while largely involved in the agrarian economy, while agriculture is only 70% of GDP.

[00:57:19] So you've got rural consumers, you've got, you know, urban consumers. But,

[00:57:28] you know, in a democracy at hand, you have to have a rural vote to stay in power. So there's

[00:57:34] always, so we think that if for any reason and because of very large concentration

[00:57:40] of the population, we're still not, you know, sort of urbanized and living rural consumption,

[00:57:47] if that sells off, that could be a problem. And the biggest problem with, you know,

[00:57:51] agriculture is that about 80% of agriculture is dependent on the monsoon rains. You have

[00:57:58] poor monsoons, you have poor rural consumption. So the rural urban consumption and the balance

[00:58:05] between them, what the government does to, you know, to keep that in check, that could be,

[00:58:11] that could be a factor, a risk factor, you know, that could be a big risk factor, you know,

[00:58:16] political stability, which is one of the, you know, one of the very exact features

[00:58:21] of India compared to most EMs emerging markets with the latest polls. I mean,

[00:58:27] they just announced from yesterday. That's not as clear now. Do we expect this government

[00:58:33] to last five years? The answer probably yes. But if essentially, if, you know, some inciting

[00:58:43] conceptives within the volition partners and the government stopper, you know, we may have a problem.

[00:58:49] Those are more internal problems. External problems, you know, geopolitical risks are

[00:58:55] always, you know, you know, are always there. I'll name two of the biggest ones.

[00:59:01] One is India's highly dependent on food imports. You know, oil is a huge import for India

[00:59:08] and now, you know, a huge import for India. And I have two prices have a direct, you know,

[00:59:19] impact on the Indian economy and one of the work that we've done in Germany. India is very

[00:59:24] comfortable. We think the Indian economy is very comfortable with crude up to about $105.

[00:59:31] But all $105, you know, and it's comfortable. About $120, it then becomes inflationary

[00:59:39] and starts inviting the gold, etc. So, you know, price of crude is, and it has been somewhat

[00:59:45] fortunate that, you know, in spite of all the two wars going on, one of them is at least 10-1

[00:59:52] in Ukraine that price of crude has stayed there till we've been at it.

[00:59:59] The last one of the sector, you know, we are in a pretty nasty neighborhood.

[01:00:10] Northwest of us is a failed state called Pakistan, which is nuclear-armed. India's

[01:00:15] gone to war three times with Pakistan and it's a nuclear-armed state, which is essentially

[01:00:21] a failed state, which India has constantly had problems with. And we share, I believe,

[01:00:28] about 11,000 kilometers of border with China. Out of the 11,000 kilometers, almost

[01:00:35] 20,000 kilometers is disputed because of, you know, so, you know, there's, India's

[01:00:42] gone to war with China just once and that means it's stupid. There's low-grade warfare

[01:00:48] going on all the time. People shooting across the border. You know, war with China is

[01:00:56] unimaginable but a distinct possibility, you know. It's not a zero probability.

[01:01:03] It's a positive opportunity. I think those are, you know, fair and honest points that

[01:01:12] investors need to know about. We'd like to ask all of our guests a standard closing question

[01:01:17] and that is, based on your experience in the markets, if you could teach

[01:01:21] one lesson to your average investor, what would that be?

[01:01:28] The only free launch is diversification. That's pretty much it. That's pretty much it.

[01:01:39] If you have a weatherless white portfolio, you know, you're in good shape because

[01:01:44] that's the only free launch. That's great. Nufom, thank you very much for joining us.

[01:01:50] Really appreciate it. If investors want to learn more about you and the new ETF we

[01:01:55] have with Simplify, where can they go to learn more? They can go to Simplify's website

[01:02:01] and look under the HIO PP India Oscar board. Excellent. Thank you very much. Really,

[01:02:08] really enjoyed this conversation. Best of luck with the fund and the strategy and,

[01:02:13] you know, we I think like to have you back on in the future to get an update on the Indian market

[01:02:19] at some point, you know, down the road. So thanks so much. Justin, thank you for having

[01:02:23] me. It would be my pleasure. Thank you. Take care. This is Justin again. Thanks so much

[01:02:28] for tuning into this episode of excess returns. You can follow Jack on Twitter at practical

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