‘Fundamental Issues’ That First Global’s Devina Mehra Sees In IPO-Bound Tech Firms
As a cohort of technology companies is set to make much-anticipated market debuts this year, First Global’s Devina Mehra advises caution.
“It’s great that the market is giving an opportunity to loss-making companies to list but we remember how the previous IPO frenzies ended,” the founder and chairperson of the portfolio management firm told BloombergQuint’s Niraj Shah in an interview. “As far as the investor is concerned, a lot of them are invested in the IPO process rather than the company. They think if everybody is jumping in, I should also get in and I will make money out of it.”
This year has seen the best start for maiden offers since 2018 in India as companies look to ride the record-setting rally. New-age firms have lined up IPOs. Zomato Ltd. already trades on stock markets, and the likes of One97 Communications Ltd., the parent of Paytm, and Oyo Hotels & Rooms Pvt. are also planning to go public.
There are “fundamental issues” when companies like these come to the listed market, according to Mehra. “We’ve seen that with Zomato, we’ve seen it with Paytm. You try to reduce losses, which means that there is a hit on either the revenue or market share or both and how do you sustain that when your main rival still has venture capital money to burn?” Mehra said. “[And] if you are in the profit-making mode, then you have a P/E (price-to-earnings) to contend with. What is the logical P/E?”
Citing the example of Uber Technologies Inc., DoorDash Inc. and Grubhub Inc. after going public in the U.S., she said they didn't have "such a great experience post listing. Those things remain, so caution is advised, definitely.”
Permanent Bull Market
Investors, Mehra said, must always consider all geographies and all asset classes if they want to be in a “permanent bull market”.
That is because “there’s always a simultaneous bull market and bear market on somewhere in the world, she said. "It’s never a case that everything in the world is going up or everything in the world is going down.”
“Visualise asset classes or geographies like a giant wheel.”
A correction in India is possible but investors are not in a “danger zone” in terms of prices or valuation on a long and medium-term basis, according to Mehra.
“Till December 2019, we were much below average returns. Now even after the current rally, one is still not at 13-15% equity returns that you were talking about in the longer term,” she said. “That gives you some comfort that it’s not as if you are now compounding at 25% for three years in a row and therefore, you have that danger that 10-year returns are at 22% and it might come back to that average of 15%.”
There are still issues on the economic side, she said. There are businesses that have shut down, there are a lot of people without work, poverty has gone up —so all of that has an impact on the demand side. “That’s the caveat.”
Mehra said small caps have had only a very short bull run. “On a long-term basis, they are not at a point where the returns have been very high.” But in small caps, she said, "you have to be cautiously bullish because it is a risky category around the globe."
It’s very difficult to make a case that you should go into small caps wholesale at any point in time.
Watch the full interview here:
Here are the edited excerpts from the interview:
Is a globally diversified portfolio a precursor for having a permanent bull market in your portfolio?
Devina Mehra: The thing is this that in the world whether you look at asset classes or geographies, I mean, visualise it like a giant wheel. So whenever people ask me is the market going to go up or down — really the answer to that is which market, because there is always something that is going up and something that is going down. If you go back in history, you will find many, many instances where it comes out very clearly. So, that is the reason why, at least in your consideration set, if not in your actual holdings, you must always consider all geographies and all asset classes if you want to be in a permanent bull market because there's always a simultaneous bull market and bear market on somewhere in the world. It's never a case that everything in the world is going up or everything in the world is going down, that never happens and we can go into the instances in the past of how that has happened.
Would you want to do that, because I'm sure people have some recollection of concurrent bear markets or concurrent bull markets but never quite the exact idea of one asset class or one market went up significantly while the others were tanking. So some instances about this, please?
Devina Mehra: Let me go back nearly 25 years when most of your viewers may not have been around or may have been in their school. So this is the Asian crisis of the 90s, and that has a particular resonance for me because that was the point at which all these Asian tigers which India wanted to emulate you found that they were hit so badly so you had all these markets which went down 50-90% in a year, and that personally was a trigger for the decision to go global. So, which is why in 1999, we became the first Asian members ex-Japan of the London Stock Exchange and then the Nasdaq so that's another story. But coming back to the permanent bull market theme, even as the Asian markets were in such crisis, Europe went up 25%, U.S. Treasuries went up, oil went up—so they were places to hide and similarly if you see in the case of the 2000 tech crash which, might be something people remember either because they were there or they have read it in the books. Not just U.S. tech but all of U.S. equities crashed and the S&P not as much but did crash, like the Nasdaq. And then at that time also you had U.S. Treasuries going up, you had gold so you always have places to hide. Again, the flip side to that is not that nothing does well forever, for people who have been in the markets last two years or so think that the Nasdaq is always a good place to be but if you go back to let's say from 2003 to 2007 and this is to remember is like you had that U.S. crash. So, U.S. had still not recovered, Nasdaq did not reach its 2,000 levels for 15 long years till 2015. So that 2,000 levels have reached again in 2015, but during that 2003 to 2007 period, the U.S. did poorly it went up 61% but that was from the lows and it still did not reach its previous highs. Emerging markets were on the tear, it sounds weird now if people who have not been around at that time but the whole logic was that it's going to be the century of the emerging markets and that's where the money is going to be made and the emerging market index was up nearly four times about three and a half times, and individual markets—Brazil was up 10x, India itself was up 6x-7x so you had that whole period and then it changed again. So, the leadership always changes if you look at year to year also, countries, the leadership changes, last year yes Nasdaq did well, but that was up 40-odd percent but Vietnam was up more than 80%. The Korea tech index was up more than Nasdaq, the year before it was Russia and Brazil who were at the top, and so on now. In 2018 nearly all markets were in the negative barring a handful like Saudi Arabia and Tunisia and Ukraine so it changes. That is what people have to remember that asset classes change, the geographies change, asset classes itself if you see, commodities were in a bear market for a very long time in the last almost 10 to 15 years depending on the commodity and then middle of last year, that changed. We bought oil in April, May and metals a little after that, so that changed. So, always there is somewhere money to be made. So, you have to look at where that money is getting made and shift your portfolio accordingly.
I’ll try and play the devil's advocate and ask you two or three questions so from somebody who's watching the show perspective. So, they are listening to you right now and they are wondering, that Devina Mehra may have a compulsion or even if not the compulsion, is the desire to have performance shown almost every year whereas, who is/ was working somewhere is parking my money in equities in India, don't quite need to show, or have a positive performance every year, and history and every mutual fund managers’ presentation shows me that if I'm parked into equities long enough, eventually my CAGR numbers are 15-18, 20%, or what have you and that is good enough for me. Is that a valid argument for not looking and not diversifying geographically?
Devina Mehra: There are two things to that. One if you are only in India you are obviously exposed to the rupee depreciation. I looked at these numbers at the end of 2019 so again after that March lows that total run up has again distorted people's minds in terms of the recency bias but if you go to December 2019 for 10 years, the returns from the Indian market in dollar terms were just 3.5% compounded, even in rupee terms, had not even covered the savings account interest for five years and the fixed deposit interest rate for 10 years. So, those are the statistics. So, are you willing to live through those sort of periods? That is the thing and not have any other asset class in your consideration set. If you looked at the 2019 itself, fixed income instruments were up 17-18%, G-secs were up 17-18%, gold was up 20% but is your financial adviser—did they tell you in 2018 that you must reallocate to these? So, even if you're not looking globally, were you even within India looking at your portfolio? And many times I find people have no idea how their portfolio is, even sophisticated investors. I've had like large family offices think that, for example that we are in mostly in global fixed income and then when we actually do the numbers you'll find that a bulk of that is in Indian real estate. So those are the kinds of things. It's always first of all, step back and look at how your net worth is allocated and whether you want to reallocate. This is not something that God has written for you that in 10 years, there would be 10% compounding. As I said, being in India the dollar is the other part, the dollar-rupee itself can take away a lot of your returns and conversely if you are globalised, that helps you but no one is saying zero or nothing. I mean it is that you must have a slice from everywhere, that's really the important thing and the sequel to that is that going global doesn't mean buying a Nasdaq ETF or only looking at the U.S. markets. So that's the other part which is what people think that going global means that but that's not it either.
But then this might be possible for people like you, for example, or for people who have 50 lakh or a crore for a PMS or an AIF which is able to do this like people want to invest in your funds as well need to have that minimum amount right, because of the criteria? So, what about the mass investor, what do they do? They want to do it but don’t know how to do it.
Devina Mehra: Two things to it — one that for global schemes the minimum is $10,000, so that's Rs 7.5 lakh. So, a lot lower than the Rs 50 lakh which obviously because of SEBI regulations we have to have for the Indian PMS schemes. We are also looking at a product for the smaller investor which we'll be launching quite soon—so it'll be on the small case platform. That's the other part of it. But even if you're looking at India and you're doing it yourself, at least be cognisant of what you can do which the formula will give us that buy 25 stocks at least and 25 stocks doesn't mean that you buy 10 banks and seven FMCGs and so on. If you really want to do a proper diversified portfolio, do a proper diversified portfolio, and then because there is an element of both luck and skill so there is nobody in the world who will pick 25 stocks and all 25 will do well. So, first, when you're making this investment be cognisant that some of them will not do well. So, once you have made that in your mind at least you should not be taken aback if one of them or two of them or five of them or 10 of them don't do well. Be clinical about it, lay down the rules upfront that when are you going to get out. Let us say if you have a trailing stop loss, get out when that trailing stop loss hits. So, risk management is number one, whether you are doing it yourself or whether someone is doing it for you because in markets, the number one rule is don't lose a large chunk of your capital. It is as I said not my coinage but Charles Ellis had very eye opening article saying that investing is a loser's game. I think he spoke about it last time also but this is so central, don't be a loser and then you have a chance of being a winner, that's really what investing is all about. So, fund managers who lived through that let's say last year's crisis with the drawdowns of 35-40% because they never took any action and number two were very overweight in financials which were the biggest hit. So, once you are down 35-40%, then a 50% run up only takes you back to base zero. So, you have to make sure you don't have those kinds of drawdowns. So, those are the things which you have to do yourself and also evaluate your investment adviser or fund manager on.
What are your views currently when you’re looking at all of these asset classes because for a perma-bull market, I'm guessing you're not just parking yourself within different markets, you probably look at different asset classes, as well, and currently there's just too much to look at including crypto? So, how are you currently viewing what's happening in the world with the scare of taper with bitcoin and cryptocurrency coming back with a bang, and a lot of conversation around inflation but the yields in a deep slumber of sorts in the U.S.?
Devina Mehra: You’ve asked a lot of things in this one question but let me just first one by one. So, looking whether, the risk of yields going up is high, no I don't think so. I think, central banks are in a bind that right from the last time there was a taper, and there was a taper tantrum right from that time—I think the markets have got the central banks by the short hair and this happened last week also, when there was wasn't even really a talk of a taper but just some conversation in the FOMC and the markets, I don't know and then they had to clarify, even though there's nothing happening on the easy money policy and that is true, around the world. We all grew up saying that Germans are hyper vigilant about inflation, they are the biggest—Bundesbank was the biggest inflation hawk in the world and today you have a case where inflation in Germany is there and for the depositor the bank interest rate is negative. So, you're being penalised for putting money in the bank. So something has fundamentally changed. So, whether you're looking at India or U.S. or for that matter the EU, I don't think the rate hype is happening and your easy money change is happening anytime soon. Of course, we know many of the smaller nations including many emerging nations have hiked rates so that has happened, so it's not as if that it's not happened anywhere but I don't think it's happening in the major economies just yet and all these things of that we do it a year later or a year and a half later is all meaningless so they know that is not to being paid attention to.
You don't believe that there is a case for rates to move high even in India because if inflation were to come back in some fashion, etc., you don't believe that as of now?
Devina Mehra: It is not imminent certainly and if you see last quarter's results also, you saw inflation pressures on input side, which is why some of the margins got compressed for people who had metals or energy as inputs which is automobiles or FMCG etc., but I don't think consumer inflation is taking off just yet. I mean of course, food is selectively going up around the world but that even last time this happened, I mean I think when the inflation is anyway supplier-side led, the monetary policy does not really have much of an impact. This has been my thinking for a very long time. Monetary policy is a very blunt instrument so it does not hit everything that causes inflation—so you just tend to dampen growth without getting commensurate benefit on the inflation front. So, that's somewhere where you are currently so I think right now, given the state the economy is in, you will not see that happening. It might happen the other way which is also something that the U.S. is doing that in order to control commodity inflation you are letting the dollar strengthen which was a case that we made and, but of course in India that still means that in rupee the commodity prices remain relatively high even though they're off their peak. So, that will remain, but I don't think you will see interest rate hikes very soon or at least significant ones.
What about commodities?
Devina Mehra: So, commodities, nobody liked since last year, and we made a lot of money, not just globally also in India you know the metal pack has been one of our big winners, but prudently we never liked to have outsized bets and even though we started with relatively smaller bets because the price movement itself, it became quite significant, and we cut back from there. As I said that commodity inflation is something that people don't like and especially the U.S. since it's trying to keep that rate okay so you are playing with the other variables and that is what you have done that to keep the commodity inflation low. So, we had a good run up on that we cut back we still have holdings, it's not that we're down to zero but it is not as big as it was a quarter ago.
By any chance, any thoughts on crypto, it's such a widely talked subject out here.
Devina Mehra: I have written two long articles on it. Crypto I think people is taking up too much of people's mind space. It is a valid asset class, yes, but it's also a very volatile asset class. We actually did an analysis saying that should you invest in crypto and our finding was that while it is extremely volatile it is relatively less correlated to the other asset classes. So, adding a sliver helps your returns but a sliver for us means 1, 2-3%. So, we've held crypto in the past indirectly, but off bat order. I don't think it's an asset class where you should have 20% of your portfolio. That's where people are going wrong that they think this is like some great thing which maybe you have to jump in. More than crypto and I tweeted this today is, the blockchain technology itself might have a lot of applications so that will over time I think fundamentally change a number of industries from finance onwards and that's a different thing that that. Now, internationally, you do have ETFs which are not just currency oriented but overall they are technology oriented so. But as I said this is not an asset class where you should have outsize exposure but having some is fine at various points in time. I hear everybody from college students who haven't yet got a job to retirees and when I ask them, what are you doing? They say we are doing crypto trading and I say, Oh! God.
It's a great social party conversation, right?
Devina Mehra: Even equities—this has been my long held theory that a lot of people invest in equities simply because you want to have something to talk about in parties which was a good position to be in for as I said more than 10 years that you are newer in banks and fix deposits, but if that's what you tell people that I am in banks and fixed deposits, you would be laughed at. So you want to have that story that I found this multi-bagger, I told about this six months ago but now look at how it is done.
In an interaction that I did with Shanker earlier, he explained the mechanics of how you guys look at asset classes in multiple screens across and a lot of data, etc. Now my question to you is this, that, when do you decide you want to redraw your positions from asset classes? So, for example, in the last 12 months could you maybe give us an instance about where you decided that you wanted to up the position in equities or reduce the position in equities because of something? Are there other fixed percentage allocations or is it fluid, how are you going about doing this?
Devina Mehra: No, it was never fixed. It is always dynamic and tactical which is why I tell people that you need a fund manager who can do the allocation because otherwise, how do you decide? Even if you look at India for example how do you decide when you should be in IT services, when you should be in metals in terms of higher weightage or in pharmaceuticals. Therefore sidelight to that is that very often the thematic funds out when that's the peak of that asset class or that sector. Whether you look at the history of IT services or technology funds in India or pharmaceuticals or financials services they always come around the time when that peak is there and everyone tries to jump in when things have done well, which is absolutely the worst time if you look at statistically over a period of time to do it. So, there is dynamic and tactical asset allocation, so of course the last one and-a-half years have been extraordinary in that you have had to do it much more often than would be the case in a stable-state world. So, normally we do reallocations every quarter but this time it has been different. So, last year in February, March, it was very clear that something unprecedented was happening. I remember tweeting at that time—at that time it had not hit the whole world but, Italy and Japan I remember the schools were shut down and then you had all these pictures of the tourist attractions in Rome absolutely empty with not a soul in sight, and then later on we got used to those visuals, but at that time, I thought, this has never happened not even during the World Wars. So, something strange is going on. So, at that time we had reduced our allocation in our global funds in equities to single digit, so we were very much in fixed income. Of course, we still got hit because we were in investment grade but as it turned out even investment grade fixed income got hit, but instead of being down 30-40% we were down around 10 or 8% something like that. That was one, then you have to again as I said, April-May, it appeared that oil after hitting I think it was $15-$17 that this was a good time, but even when we are making those decisions, it's not as if we bought 20% in oil. It is still a small allocation—so we put in 2.5% which went up to 5% because of the price action. So, at each time you have to reallocate—middle of the year we said for now the dollar is weakening and commodities are going up. After 10-15 years or so of a bear market is a strange thing, that if you look at dollar terms, or for that matter any currency terms there are very few hard objects that you can buy for the price that prevailed 10 or 15 years ago, other than electronics and this was the case in a lot of the metals and other commodities or for that matter soft commodities also. So, there was a case to be made for them going up. The other thing which we always do is that we are conservative so even for our equity portfolios wherever we are uncertain buy portfolio insurance, that's true both India and globally. So, India also, at that time last year, February, March, we bought insurance and people ask us that you got the timing exactly right and that's wonderful. I said that is wonderful, but it is also a fact that we have bought insurance, three, four times after that, which has gone unused and we are happy with that. The purpose of insurance is not that you buy health insurance, it is not that you want to go to a hospital but when you want great returns you want to lock in and make sure nothing goes wrong. If there is uncertainty or whatever kind let's say, there is Indo-China tension at the border or whatever that nature of that uncertainty is you want to make sure which shows in our numbers that not only are our returns good but they are extremely great on a risk adjusted basis... So, that comes out of that consistent system of one, systems which tell you where to be and two, being very conservative on the risk management track.
Are you buying risk cover right now because the reason I ask is because frankly the street, must be very confused with so many people coming out and sounding, if not the doomsday scenario, then a very high probability of a sharp drawdown, very imminent and then somebody today said, what is that 10% correction doesn't come at 16,500 but comes in at 17,500, and you are out right now because you believe it will come right now? Just wanting your thoughts.
Devina Mehra: That's why I said that we buy insurance. That's the way, rather than being out of the market. I don't think, you know, you are in a danger zone in terms of the prices or the valuation on a longer term, medium term kind of basis, which is not to say that there can't be a correction, but if you're looking at it—we have this leap of returns theory that only if you’re actually at the danger mark you will start to overflow. As I said till December 2019 you were in a situation when you were you were much below the average returns. So, now even after this run up you are not at that 13 to 15% equity returns that you were talking about longer term. So, that gives you some comfort that it's not as if that you are now compounding at 25% for three years in a row and therefore, you have that danger that now 10-year returns are at 22% and it might come back to that average of 15%. So, you're not in that danger zone. Having said that, of course, there are still issues on the economic side, on the macro side, that things are that—you are not out of the woods, there are still businesses that have shut down there are a lot of people without work, poverty has gone up so all of that has an impact on the demand side for sure. That's the caveat.
Did I hear or did I read about a comment that you made in the recent past that you don't believe, or you believe that small caps are far away from the danger zone and if you did, I wanted to ask you that, the classic markers of how this might sound toppish as a market, the frenzy of retail participation, a kind of IPO paper coming in and the number of IPOs which are filed as well that's the very popular tweet that is going around right now, and all of that. It kind of makes me wonder if there could be danger and whether small caps would be the first ones to get hit. Now did you say that small caps are far away from the danger zone and if so, why? Small caps in India, I mean.
Devina Mehra: Small caps in India, it is again coming back to that theory that small caps have had only a very short bull Run. So again, on long-term basis, they are not at a point where the returns have been very high. So having said that, I always say, and in that same interview also had said that in small cap even when you say bullish it has to be cautiously bullish because it is a risky category, no doubt about it, it's a risky category around the globe. So just to give you a perspective in our funds we have only about 10% small caps, because again, part of our risk management is also liquidity. So we never go into illiquid stocks and small-cap stocks are defined to be below 5,000 crore. We have nothing below a 1,000-crore market cap. So that remains our guiding principle and small caps are also very much stock by stock. So, it's very difficult to make a case that you should go into small- caps wholesale at any point in time.
The tech IPOs—as I said it's great for the companies, great for the markets that the market is giving an opportunity to companies like this to list in India which are loss making not under the traditional mode, but I think that frenzy as I also said in that same tweet I think having a long memory is sometimes a negative. You remember the previous IPO frenzy is and how they ended so as far as the investor is concerned, a lot of investors as I said invested in the IPO process rather than the company so they think if everybody is jumping in, I should also get in and I will make money out of it. It's not so simple and these companies—there are also fundamental issues when you come to the listed market and we've seen that with Zomato, we've seen it with Paytm, you try to reduce losses, which means that there is a hit on either the revenues or market share or both and how do you sustain that when your main rival still has venture capital money to burn? If you are in the making profit mode, then you have a P/E to contend with, what is the logical P/E? Then that becomes a question, so as I said good times for the market and the country to have these companies here and also if you look at the international experience, if you look at comparables what happened to where or what happened Uber, DoorDash or Grubhub, that’s not such a great experience post listing. So, those things are also there so caution advice, definitely.
So are you saying you’d rather look at the global landscape and by some of the companies there in your portfolios as opposed to these for the time being? There are options available for you any way to choose, globally?
Devina Mehra: No, I mean, we've not yet invested—anyway there's like not many of the listings that have happened in the first place so it's still at real estate so that's not even necessary that we are buying that category internationally either.
At the current stage, if you are looking to maintain this fantastic bull run in your portfolios or your clients’ portfolios, where are you finding more favour? I mean because world over a bunch of markets are doing well—I hear comments about how emerging markets could come back from a lost decade. I think today somebody put out that one of the notes out there, but what's your view, because you look at asset classes in different geographies as well. How are you position your stance currently for this really good run that you have in your portfolios to continue?
Devina Mehra: More than emerging markets, the frontier markets didn't do very well. Emerging markets we had a position but since the last few months things have changed mainly because China has cracked down first on their tech giants and overall making a lot of aggressive noises against Taiwan and so on. So that has affected not just the emerging markets but overall the Asia pact—so all of China's neighbours have got impacted to a greater or lesser degree, fought back. So, that that's been there plus there was this hedge fund which went under which again affected the China stocks earlier this year, so all of those things are different. I don't think we can yet make a case that it's now going to be like that 2003 to 2007, where the emerging markets did amazingly well compared to all the developed markets. So, it’s in the wait and watch mode and nowadays I find that things change quite fast because of this Covid thing also because there are some cases somewhere in some country the lockdown happens and if nothing else, the currency gets impacted. So, there are many variables, as of now. The world is still quite uncertain. So, we are positioned according to that still, we had a lot more commodities which we have cut down, we made a lot of money on REITs from towards the last quarter of last year. Now, because of this whole Covid thing, the real estate investment trust, a lot of the good REITs also got de-rated along with the bad REITs so you were getting very good dividend yields even in sectors which actually were booming like healthcare REITs or warehouse REITs which took off with the e-commerce doing well. So, you actually had sectors within the REITs which were doing well and where the prices had come down and dividend yields were looking good. So, as I said last year and a half that dynamic reallocation has been quite dynamic. It is not business as usual yet, there’s many things to try on.