IDFC Premier Equity Fund and Kenneth Andrade were synonymous with each other in the Mutual Fund Industry. Andrade managed the fund from June 2006 to September 6, 2015. In our earlier notes we have described the fund and the fund manager as follows: "IDFC Premier Equity Fund managed by Kenneth Andrade, who is known to be a maverick at stock picking has been able to outperform its peers during all market phases". For research teams like us, Andrade was a fund manager who instilled discipline in our investors by allowing only SIPs in IDFC Premier Equity Fund. We truly believe that his exit from the industry left our investors in the lurch.
Two years hence we are glad to see Andrade back in his game and continuing to create wealth for our investors by identifying stocks that have the potential to grow. Andrade started his own firm called Old Bridge Capital Management, which provides investment management services through Portfolio Management Services (PMS) and Alternative Investment Funds (AIFs). There is a story behind the name. 'In ancient Rome, when a bridge was built, the engineers had to stand underneath it when the scaffolding came off. Leaving no room for error, they ensured that the load bearing capacity of the bridge was much higher than the expected loads. They thus built a higher margin of safety into their construction'.
This echoes the philosophy behind the portfolios constructed at Old Bridge Capital Management. By buying enduring companies at the right price and valuing with due emphasis on limiting capital losses, Andrade makes sure that a margin of safety is built into the portfolios thereby protecting it even if the estimates go wrong. Andrade follows two simple steps - rigorous screening and disciplined due diligence of companies. After the successful launch of two Portfolio strategies, Andrade is introducing an AIF, called Vantage Equity Fund which is an extension of its All Cap PMS portfolio on December 11, 2017. Before analyzing the fund, let us explain the instrument in simple terms.
Like mutual funds, AIF also pools money which will then be invested into a vehicle with a defined investment philosophy and mandate. However, unlike mutual funds, the investor base in this product will be the sophisticated investors as the regulatory minimum investment amount is INR 1 crore. The regulator has categorized AIFs into three broad areas as follows:
- Category I (Venture Capital Funds,SME Funds, Infrastructre Funds, etc.)
- Category II AIF (Real Estate Funds, Private Equity Funds, etc.)
- Category III AIF (Hedge Funds and Private Investment in Public Equity (PIPE) Funds)
Andrade's fund falls in the Category III as it is PIPE fund. It is a long only pure equity fund and is ~ a three-year close-ended fund.
As of end September 2017, the cumulative investments made in the different AIF categories are as follows:
Vantage Equity Fund
This will be a value fund with four focus themes as follows.
We have seen Andrade's style of managing funds for years and that strategy will be extended to this fund too. A fund manager who always picks up companies which are out of favour due to depressed valuations but has the potential to turn around first when the cycle turns in their favour. The companies included in this portfolio will have a consistent Return on Equity (ROE) of 9%, have no debt on their books and of course those with low valuations. Andrade believes in the sanctity of balance sheets and does not take financial risks. The fund will have necessary absentees like banks and NBFCs.
Our take on the Vantage Equity Fund
This value fund has focus on four concentrated themes as the Fund Manager believes that the Government at the centre is unleashing policies which will stimulate demand in the rural areas and the corporate balance sheet is ready to deliver in the next cycle. An all cap strategy wherein the portfolio includes stocks from sectors which are in the early stages of their cycle means that the names included in the portfolio may not look comfortable to our risk-averse investors. Therefore, this AIF is recommended only for our aggressive investors who understand the volatility involved with themes which are just beginning to play out in the economy and for those who understand Andrade's style of investing which is to explore the unknown, a path even the veteran analysts and fund managers fear to tread.