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Advised by
Indian Entrepreneur Fund A 5 Star Rated Fund by Morningstar
Advised by
Indian Entrepreneur Fund: The Strategy
Philosophy
Value Creating Traits
The Study: Indian Entrepreneur Businesses
About ASK Investment Managers
Fund Features
Biography
Contents
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Indian Entrepreneur Fund The Strategy
Note: Promoter / Family stake of at least 26% is desired in portfolio companies, except in rare and fit cases.
• Invests into Indian entrepreneurial businesses of size, superior quality and high growth at fair
valuations
• IEF follows a very rigorous, disciplined, strong filters-based investment approach, while embracing
value-creating traits (more about it later)
• Invests into quality entrepreneurs with
• Vision and dynamism
• High standards of governance
• Wisdom
• Demonstrated capital allocation and capital distribution skills
• Superior quality achieves the preservation of value and high growth is sought to achieve expansion
of value
• Promoter with adequate skin in the game ensures alignment of management and shareholder
interests
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A 5 Star Rated Fund by Morningstar
Advised by
Why Entrepreneurial/Family Businesses?
We believe Entrepreneurial / Family Businesses have
• Passion, Conviction and Commitment
• Longer term view
• Own skin in the game – Alignment of interest
• Ability to spot opportunities early
• Dynamic leadership
• High score on innovation and intellectual capital
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1) Capital Preservation
2) Capital Appreciation over a period of time
Key Investment Objectives
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• Greater certainty of earnings Vs mere quantum of earnings growth
• Superior and consistent quality of earnings Vs mere quantum of earnings growth
• High quality at a reasonable price Vs inferior quality at arithmetically “cheap” price.
Overarching Investment Philosophy and Principles
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• Price the value rather than valuing the price
• Buy “growth” businesses at “value” prices
• Disciplined investing into outstanding businesses
• Seek compounding opportunities
Investment Approach
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Value Creating Traits that we seek in our investments…
• Material Size of Opportunity
• Superior Management Quality
• Strong Earnings Growth – A Compounding Machine
• Superior Quality of Business
• Favorable Value
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Value Creating Traits Size of Opportunity
• Size of Opportunity is a foundation for Continual Growth (of profits) and creating a Compounding
Machine: Foundation on which large Value Creation rests
• It is Less about “How Large a Business is” and more about “what it Can Be”. Debate is really about
Future Size rather than the Present One.
• Size of pond Vs. size of fish: It is more about size of pond rather than size of fish. Even a small
capable fish can grow big if it is in a big pond and if the pond conditions are right.
• The debate between Large-Cap and Mid-Cap is largely an artificial one
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Value Creating Traits Management Quality
• Two vital tests for Management: Capital Allocation and Capital Distribution
• Conglomerate Complexity leads to less Value Creation
• Corporate Governance is not a Jargonistic Buzz-Word. Honest Mistakes, even if significant, are
punished less by the markets compared to relatively less significant but Deliberate Violations of the
Value System.
• Capital Allocation has a deep Impact on the Investment Returns
• Good Businesses typically seems to attract Good Management and Vice versa
• Management Quality has far higher impact on returns than investors care to imagine
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Value Creating Traits Earnings Growth
• Price is nothing but a slave of earnings and its relentless growth over a period of time
• When Growth goes away, Equities reduce to a Bond
• Growth has a Way of covering Valuation Mistakes and fighting with Prolonged Period of Market
Machinations
• (Capital) Dilutive Growth results in lower Relative Value Compounding compared to Non-Dilutive
Growth.
• Qualitatively growth has to be secular, predictable, less volatile and business having character simple
enough to understand, even for a lay person
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Value Creating Traits Quality of Business
• Two vital tests for Quality are Capital Intensity and Capital Efficiency
• Persistent and Superior Capital Efficiency is the single most important evidence of Quality
• Earnings Growth is necessary but not a sufficient condition for Value Creation
• Growth and Quality of Growth are not co-incidental for creating value but they actually cohabit to
do so
• Root to Preservation of Wealth solely resides in Quality i.e. Quality of Business and Quality of
Management…..
• Even with significant but Temporary Earnings Destruction, a High-Quality Business will manage to
shrug-off the blues
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Value Creating Traits Value
• Price is Servant, Value is Master: Our investing is about Pricing the Value, rather than Valuing the Price
• Price–value gap: Margin of safety (or Implied Returns)
• Cash Flow is the only enduring reality: Accounting Profits and PE Multiples are Popular, but Unreal,
Pastimes
• Quality of Business Vs Valuation: Superior Business at a Reasonable Price is Wealth Creating rather
than Inferior Business at a Mathematically Cheap Price
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Key Investment Attributes
Size of the Opportunity
• Size of pond Vs. size of fish
• Dominance
• Resilience
• Liquidity
Quality of Business
• High quality of business (Superior RoCE)
• Strong moat. Impregnability.
• Sustainability
• Key pivot of strong wealth creation
Earnings Growth
• Quantum
• Consistency
• Durability
• Predating (Early Vs Later)
• Compounding power
Value
• Favorable Price-Value Gap
• Margin of Safety
Four key investment attributes
In addition to the above, good management quality is a given constant
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Imperatives of Equity Investing
• Proper calibration needed across all aspects
• Quantum of returns being just one of them
Equity investing comes as a package!
Returns
•Quantum
•Qualitative
Consistency
Permanence
Degree of Certainty
Volatility
•Inherent in the character of equity investing
•Diminishes with time
Time Period
•Time is more important than timing
•Risk inversely correlated to time
Real Risk
• Margin of Safety / Risk of permanent loss of capital
Paying excess price over value
Buying inferior quality
•Investor psychology towards investing
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Trait Parameter Tangible Rule
Size of Opportunity Top 500 businesses Top 500 businesses as per Market Capitalization
Scale and Resilience Bottom-line Minimum PBT of INR 100 cr. (Trailing 12 months or current fiscal)
Management Quality Integrity, Vision, Execution, Capital Allocation and Capital Distribution skills
Earnings Growth Earnings growth without capital dilution
Minimum 20 to 25% earnings growth over the next 3 to 5 years without capital dilution
Quality of Business Strong Capital Efficiency (Demonstrated or Imminent)
Minimum ROCE of 25%
Value Margin of Safety Price Value Gap of 20% or better
Rigorous Filters Based Approach Value Creating Traits Parameters Tangible Rule
Value Creating Traits are converted into Rules as below
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Portfolio Research Methodology and Filteration
Top 500 as per market capitalization 500
Only companies > 25% promoter / family holding (except in very rare and fit cases)
Universe of Entrepreneur and/or Family Owned Business = 306 cos 306
Condition of minimum PBT of INR 100 cr (USD 16 mn)
Two more filters for selection of stocks a) Minimum 20 to 25% earnings growth over the next 3 to 5 years without capital dilution and b) Price-Value gap (margin of safety) of 20%
Indian Entrepreneur Fund 20
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Subjective evaluation on management quality, their integrity, vision, past track record, execution, capital allocations and distribution skills, corporate governance standards etc.
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Quality of Business (Capital Efficiency) – Minimum ROCE of 25% 59
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The Study Indian Entrepreneurial Businesses
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Indian Entrepreneur Fund The Study and the Origins
We analyzed the top 500 companies over a period of ten years (from 1999 to 2009) on four principal
parameters
• Top-line
• Profitability (Operating Profit, Profit Before Tax, Profit After Tax)
• Capital Efficiency (Return on Capital Employed, Return on Equity)
• Actual Investment Value delivered (net of any capital dilution)
Four ownership buckets were examined
• Entrepreneur led firms
• Public Sector Undertakings
• Multi-national Corporations
• Pure Professional Firms
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The Study Empirical Findings on Family Owned Businesses (FOBs)
Continued Dominance
Fastest growing businesses
Superior operating performance
Strong capital efficiency
Biggest wealth creators
On most parameters entrepreneurial firms had done far better than the other forms of ownership and Indian Entrepreneur Fund was launched in March 2010 following our study
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The Study Indian Entrepreneurial Firms
Note:
• Source: Capitaline
Top 500 publically listed companies as per market capitalization (as on 31-Dec-13)
Banks and Financial firms are excluded throughout this research study for definitional consistencies
Entrepreneur/Family Owned Firms comprise ~50% of market cap of top 500 companies.
2013 2003
Categories No. of Firms Avg. Market Cap. % of Market Cap.
(Top 500) % of Market Cap.
(Top 500)
Entrepreneur run and/or Family Owned Businesses (FOB)
306 $1.8 bn 50 38
Public Sector Undertakings (PSU) 39 $ 4.2 bn 15 32
Multi-National Corporations (MNC) 57 $ 1.9 bn 10 15
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The Study Growth of FOBs
Note:
Banks & Financial firms are excluded from the above study for definitional consistencies.
Audited consolidated results as on 31-March-2013 are considered for the above study.
Source: Capitaline
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The Study Sectoral Spread
Entrepreneurial firms are present across vibrant and emerging sectors
Entrepreneurs identify sunrise sectors early e.g. Pharmaceuticals, IT, Telecom etc.
Entrepreneurial firms include a blend of both manufacturing as well as service sectors
Note:
Banks & Financial firms are excluded from the above study for definitional consistencies.
Audited consolidated results as on 31-Dec-2013 are considered for the above study.
Figures above are percentage of market cap of that category (FOB,MNC & PSU) within Top 500
Top 5 - FOB Top 5 - MNC Top 5 - PSU
IT - Software 21% FMCG 35% Crude Oil & Natural Gas 27%
Pharmaceuticals 11% Pharmaceuticals 10% Mining & Minerals 24%
Automobile 9% Capital Goods 9% Power Generation & Distribution
20%
Refineries 9% Automobile 8% Refineries 9%
Telecom-Service 7% Cement 7% Gas Distribution 6%
Source: Capitaline
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The Study Capital Efficiency
High operating efficiency for Entrepreneurial firms
Tight cost control
High RoE for Entrepreneurial firms
Note:
Banks & Financial firms are excluded from the above study for definitional consistencies
Audited company results as on 31-March-2013 are considered for the above study.
Source: Capitaline
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The Study Wealth Creators
Note:
Data as on Dec-13
Bank & Financial firms are excluded from the above study for definitional consistencies
TOP PERFORMERS – Investment Returns: 5-Year price CAGR (as on Dec 2013)
FOBs PSUs MNCs
PI Industries 100% Petronet LNG 28% Hexaware Tech. 72%
TTK Prestige 97% G M D C 25% WABCO India 65%
Eicher Motors 86% Indraprastha Gas 24% Bata India 60%
Eclerx 82% Guj Gas Company 22% GlaxoSmith C H L 53%
Page Industries 77% Engineers India 19% Blue Dart 53%
TOP PERFORMERS – Investment Returns: 10-Year price CAGR (as on Dec 2013)
FOBs PSUs MNCs
P I Industries 80% NMDC 25% United Spirits 44%
TTK Prestige 73% MMTC 25% CRISIL 39%
Amara Raja 51% Guj Gas Company 19% Blue Dart Exp. 37%
Havells 46% G M D C 19% Accelya Kale 34%
Emami 45% B H E L 15% Bata India 34%
Source: Capitaline & Bloomberg
Entrepreneurial firms have significantly outperformed PSUs and MNCs in Wealth Creation
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The Study Snapshot
Criteria / Category FOBs PSUs MNCs
Growth Highest Growth rates In aggregate, underperform FOB companies
Shown steady but lower growth than FOBs
Capital Efficiency High Growth coupled with strong capital efficiency
Good efficiency ratios; although much lower growth
High capital efficiency
Alignment of Interest Promoter's own skin in the game
Social priorities, Low-float? Transparency may be an issue and may impact minority shareholders
Wealth Creation of Shareholders'
Highest Wealth Creation Low contribution Steady contribution of wealth
Sector/Industries Value-creating business areas, innovation led, intellectual property rich businesses
Natural resources, Commodities, Power and Energy
Pharma, FMCG, Automobile
Decision Making Speedy and Dynamic Over-regulated /bureaucratic and hence could often lack speed, tends to be rigid
Usually driven by parent company priorities
Business Environment Competitive environment; often results in more efficiency
Natural monopolies in many sectors they operate
Often satellite operations of parent companies abroad
Corporate Governance Improving with emphasis on independent professional boards
Governmental practices Overall good governance
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Some Successful Family Firms
Industry Spectrum
NEW AGE TO TRADITIONAL
Size Spectrum TECHNOLOGY HEALTHCARE AUTO CONSUMER FINANCE AGRO
COMMODITIES COMMODITY
LARGE TCS Sun Pharma,
Lupin Eicher Motors
Asian Paints, Dabur
Kotak Bank Coromandel Shree Cement
MID-SIZED Eclerx Divis Lab, Apollo
Hospitals Motherson
Sumi Marico, Emami
Bajaj Finance
PI Industries Hindustan
Zinc
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However, we have addressed these issues by adopting rigorous filters on management quality for stock selection
Risks
Succession planning
Corporate governance concerns
Centralized decision making
Nepotism
Control retention concerns can affect capital structures
Capital allocation issues
Risks Associated with Investments in Entrepreneurial Businesses
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• Only Indian firm to make successful foray in US branded and Japanese market
• Focused on the large and evolving generic pharma opportunity
• Strong product pipeline
• Track record of strong and sustained domestic growth
• Earnings growth of 20-25% for the next few years
Examples Lupin
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Examples Pidilite
• Market leader in adhesives and sealants, construction chemicals, hobby colours and polymer emulsions in India.
• Brand name Fevicol has become synonymous with adhesives in India and is ranked amongst the most trusted brands in India.
• Expanded its presence in emerging segments like mechanized joinery, modular furniture, flooring, auto care and waterproofing through brands like Dr Fixit and Roff
• Sales and EBIDTA grown at CAGR of 24% and 26% respectively over the last 5 years.
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• Motherson Sumi is a JV of the Sumitomo Group of Japan and the Motherson group in India. It has
transformed itself from a domestic player to a global tier 1 supplier by acquiring Visiocorp and
Peguform recently.
• Has been growing through expanding its product portfolio in the wiring harness, plastic moulds
and rear view mirrors business through JVs and acquisitions and has thereby increased its
customer base significantly.
• The company will benefit from the recovery in the global car demand, improving share of
premium vehicles in the domestic business and increasing content per vehicle.
• Reasonable balance sheet strength with 5 year average core ROCE at 26% and average payout of
25%.
Examples Motherson Sumi
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About ASK Investment Managers
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Introduction : ASK Investment Managers
Leading private money management firm in India Singular focus on managing money in Indian equities – ‘long only’ style
Long term investors
‘Bottom-up’ fundamentals driven, value-based stock picking Disciplined research and investment process
Experienced team of 3 portfolio managers and 5 investment professionals headed by a CIO
Purely discretionary money management Clients include family offices, pension funds, private clients across the globe
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Investment Universe Listed Indian Equities
Investment Style Long only
Active / Passive Actively managed equity portfolios
Investment Vision Long term wealth creation
Investment Approach Bottom up stock picking
Discretionary / Non-Discretionary Discretionary money management
Introduction: Profile
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Research Process
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Disciplined adherence to investment philosophy / process
Strong in-house proprietary research
Team bandwidth and experience
Strong relationships and industry interfaces Comprehensive understanding of Indian businesses and industries
Comprehension of long term secular nature of India opportunity
Investment Edges
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Portfolio Construction
Investment universe of nearly 200 companies
Detailed evaluation of the character of business and valuation of each firm Optimal aggregation of about 20 stocks, to construct a stable and consistent portfolio, to
generate superior returns over time Adequate sector diversification
Model portfolios for all strategies
“Portfolio Psychographics” - proprietary portfolio review tool
Strict buy discipline: Focus on margin of safety, pre-defined levels for each strategy/concept
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Risk Management
Integrated risk management and review mechanism throughout the investment process
Disciplined Buy and Sell mechanism
Discipline of buying businesses with reasonable margin of safety
High discount factor (of 15%) for cash flows in our financial models builds conservatism in value estimation
6-8 interactions per year with the management team of every portfolio company
Individual stock cap at 10%
Risk Manager is responsible for monitoring and supervising the risk of the portfolio and implementing the risk management framework
Regular and ongoing monitoring and reporting
Independence of Risk Management Function – reports to Group CFO & Head Compliance
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Fund Features
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Fund Features
Name Indian Entrepreneur Fund
Launch March 26, 2010
Geography Indian Equities
Strategy Long only
Domicile Mauritius
Base Currency USD
Fund Structure Pooled/Commingled fund
Umbrella Fund India Emerging Opportunities Fund* (IEOF)
ISIN/WKN MU0185S00191 (Retail T1) MU0185S00035 (Retail B) MU0185S00217 (Institutional T1)
Liquidity Weekly once (every Thursday)
Note: * 1) IEOF is the flagship fund under ASKIM’s advise. It facilitate creation of customized accounts under the defined strategy like Growth, India Select & Strategic (Value) portfolios. 2) IEF is a pooled share class under IEOF.
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Fund Features
Service Providers
Administration Apex Fund Services (Mauritius) Limited
Auditors KPMG, Mauritius
Global Banker Deutsche Bank, (Mauritius) Limited
Custodian Kotak Mahindra Bank Limited (India)
Fee Structure (Retail) Fee Structure (Institutional)
Minimum Investment US$3,000 – US$250,000 US$ 250,000 – US$1million Above US$ 1 million
Management Fee 2.50% p.a 2.25%p.a. 1.75 % p.a
Exit Charges Up to 1% in the First year
Note: Please refer to the subscription agreement for details on subscription fees.
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Bharat Shah – Executive Director – ASK Group Bharat provides strategic guidance to the CEOs in managing their respective businesses while closely
supervising the IM business of the group.
Internationally renowned with nearly 29 years of experience in the Indian capital markets.
Deep interface in Indian corporate world and comprehensive insights in Indian capital markets (equity and fixed-income).
Bottom-up investment philosophy, with stock picking being a special strength.
Prior to joining ASK, was CIO at Birla MF, the then largest mutual fund of India, managing nearly USD 1.65 bn.
Built ASK Investment Managers into one of India’s largest providers of discretionary PMS services, managing currently close to USD 1.1 bn.
Prateek Agrawal – Business Head & CIO – ASK Investment Managers Has 22 years of experience in capital markets with SBI Capital Markets as Head of Research (10yrs) ,
and Head of Equity with ABN Amro and Bharti Axa AMCs (3.5yrs each)
In SBI Capital Markets besides heading research he was part of team that handled VSNL privatization for the government and handled Hindustan Zinc for Vedanta group. On the advisory side he was actively involved in the power sector and in the oil and gas space.
At ABN AMRO MF, he was head of equity and managed nearly INR 1200 cr of equity domestically and advised offshore assets worth USD700 mn and delivered stellar performance. He then helped set up the equity business at Bharti Axa IM in the post Lehman period. He joined ASK Investment Managers as CIO in April 2011
Sumit Jain – Portfolio Manager 10 years of experience with ASK Investment Managers
Manages Indian Entrepreneur Portfolio and Lighthouse Infrastructure strategy
Also engaged in research of business within ASKIM universe, identifying new
investment opportunities and tracking their performance at regular intervals
Biography
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RISK FACTORS: Equities as an asset class carry a higher risk in comparison to debt. While risk cannot be totally eliminated, it can be mitigated through a well-designed investment strategy. ASK Investment Managers Portfolios seek to mitigate risk and deliver superior returns through research-based investing. However, this objective may not be fully achieved due to various reasons such as unfavorable market movements, misjudgment by portfolio manager, adverse political or economic developments etc.
DISCLAIMER: Any information contained in this material shall not be deemed to constitute an advice, an offer to sell/purchase or as an invitation or solicitation to do for security of any entity and further ASK Investment Managers Private Limited (ASKIM) and its employees/directors shall not be liable for any loss, damage, liability whatsoever for any direct or indirect loss arising from the use of this information. Recipients of this information should exercise due care and caution and read the offer document (if necessary obtaining the advice of finance/other professionals) prior to taking any decision on the basis of this information.
ASK Investment Managers Private Limited has not independently verified all the information and opinions given in this material. Accordingly, no representative or warranty, express or implied, is made as to the accuracy, completeness or fairness of the information and opinions contained in this material. This information is of a general nature only and does not constitute an invitation or an offer in respect of any financial product or a recommendation to buy or sell any financial product or to carry out any other transaction. This or any material is provided to parties that are clients/ potential clients of ASK Investment Managers Private Limited (ARBN 146 559 980) (“ASKIM”), corporate authorized representative of Falconer & Co Ltd (AFSL No. 244315).
Disclaimer
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Thank You
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