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The Hedgeweek Interview: Sanjiv Shah and Vijay Krishna-Kumar, portfolio managers, Agra India Fund: "Indian equity markets are on a firm long-term growth trajectory"

Sanjiv Shah and Vijay Krishna-Kumar outline the investment thinking and processes that will drive the performance of their new India-focused fund.

HW: What is the background to your fund?

SS/VK-K: The Agra India Fund is an equity long/short fund focused on India. It was launched on December 1, 2006, with assets under management of USD23m. The principals are ourselves, Sanjiv Shah and Vijay Krishna-Kumar.

HW: Who are your service providers?

SS/VK-K: The fund's auditor is BDO Mauritius, law firm is Brigitte Ringadoo (independent legal counsel, Mauritius), administrator is InterContinental Trust, Mauritius, and the prime broker is UBS.

HW: How and where do you distribute the funds? What is the profile of your current and targeted client base?

SS/VK-K: We have one principal seed investor - Paris-based ADI/NewAlpha Advisers, which manages EUR4.8bn across four strategies (credit and volatility arbitrage, equity, fixed income and multi-strategy).

Our targeted client base comprises institutions, fund-of funds, endowments and family offices globally. We are looking for high quality investors seeking volatility-controlled Indian equity long/short exposure. Early stage interest is mainly from the US and Europe.

HW: What is the investment process of your funds?

SS/VK-K: The process combines bottom-up equity screening followed by rigorous desk research (smaller company research done locally by analysts in Mumbai) coupled with a top-down macro technical and volatility control overlay. Long ideas will be growth-biased, while shorts will be more opportunistic and catalyst-driven. The fund will also seek out sector pairs and other sources of alpha.

The bottom up process will determine the composition of the portfolio, while the top down overlay will determine the fund's net exposure to achieve desired volatility control. Net exposure will be actively managed to avoid significant drawdowns. 

HW: How do you generate ideas for your fund?

SS/VK-K: Equity fundamental screening and manager-local analyst network leads.

HW: What is your approach to managing risk?

SS/VK-K: Risk is managed along two dimensions, position and portfolio, and for two timelines, pre- and post-trade. Both individual position, leverage hard rules and VaR decomposition and scenario-based stress tests. Risk is managed internally by ourselves (aided by PCE) and supported by ADI's well-known six-person risk team.

HW: Has your performance been as per budget and expectations? Do you expect your performance or style to change going forward?

SS/VK-K: We ran a live model portfolio, which was time-stamped but gross of all charges and fees. The model portfolio was run between late March 2006 and end-November 2006 and returned 10.37 per cent (annualised 16 per cent counting March as a full month) and with an annualised volatility of just 5.93 per cent (Sharpe of 1.91; Sortino 4.65). In May, when India's Sensitive index lost 13.7 per cent, this model portfolio lost just 1.49 per cent. We stress that these are just indicative of our style and should not be construed as a predictor of future performance.

HW: What opportunities are you looking at right now?

SS/VK-K: The best opportunities, the managers believe remain the infrastructure plays such as cement and power construction, manufacturing, engineering, banking, telecommunications and IT services, which have pricing power and demonstrable ability to go up the value chain. Consumer discretionaries are unattractive, in our view.

HW: What events do you expect to see in your sector in the year ahead?

SS/VK-K: We believe Indian equity markets are on a firm long-term growth trajectory, with the latest earnings reporting season being one of the best ever, underpinned by the economy, with latest GDP growth at 9.2 per cent, beating the consensus of 8.9 per cent. Nevertheless, the prospect of a US slowdown on global equity correlations impacting foreign institutional investing in India, together with supply side constraints such as wage/margin pressures in some sectors and rate/inflationary pressures at the macro level and infrastructure bottlenecks, with high capex utilisation in manufacturing, suggest some volatility ahead.

HW: How will these changes/future events impact on your own portfolio?

SS/VK-K: One of the most important attractions of the Indian equity universe is its breadth and diversity across sectors. We are confident that our combination of bottom-up fundamental stock picking with its strong emphasis on valuation combined with portfolio-level risk management and top-down technical analysis of the market allows us to cope with the increase in volatility that is likely to occur in the future. The focus will be on minimising drawdowns during downturns but participating in strong bull trends, while constantly focusing on generating alpha.

HW: What differentiates you from other managers in your sector?

SS/VK-K: India represents a huge investment opportunity over the next two or three decades, for various reasons: demographic, institutional and economic. It is arguably the most significant long-term global opportunity for equity investors. The economy is set to grow at an average of eight to nine percent a year for a number of years. The stock market has a long history, but its infrastructure and regulatory environment has improved significantly in the last 10 years. There is a huge reservoir of technical, scientific and entrepreneurial labour and an increasingly strong entrepreneurial culture driving a consumer-led boom.

However, strong trends are not without their associated volatilities, nor are bull markets without their cycles. Arguably the greater opportunity lies in offering a risk-controlled, equity long/short product to fulfil the demands of sophisticated investors that would focus on managing net exposure, absolute return and minimise drawdowns as much as on fundamental stock picking and sitting in strong bull trends.

This is the main motivation behind, and key differentiator of, the Agra India Fund. The consensus view is that other funds in this space tend to be heavily long-biased with managers who have been trained in fundamental analysis in the long only world.  

HW: Do you have any plans for other product launches in the near future?

SS/VK-K: We want to focus on this fund first. Our studies suggest that under the current level of development of the market, this strategy is scalable to at least USD400m. The dynamism of the economy and its potential have opened many new opportunities from private equity and small-cap long-only to infrastructure-focused, single sector funds. We will explore these depending on where we believe our core competency to be.

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