@seyon wrote:Good article related to GUAR Group..
Sri Lanka's Ceylon Guardian group's superlative performance
In just the six months to Sept 2010 Guardian group portfolio more than doubled to Rs 28 Bn when the ASI rose 88 pct
LBR,Sunday 27 February 2011
It takes patience and guts to hang in there for the long haul. Many investors will be tempted to avoid the difficult decision to invest in companies for the long-term on the ground that, as John Maynard Keynes put it, “In the long run we are all dead.”
Buying companies that are well run but cheap, because they are temporarily out of fashion with other investors and holding for a long period called ‘value investing’, was promoted by Ben Graham who taught a class at Columbia Business School, almost a century ago. Berkshire Hathaway chairman Warren Buffet, a student of Graham at Columbia, is perhaps the most famous proponent now of ‘value investing’. In fact Buffett has taken the value investing concept further with a focus on "finding an outstanding company at a sensible price" rather than ordinary companies at a bargain price.
During the recent gloom years at the Colombo stock market from 2006 to early 2009, most investors unwound their portfolios’. For others to survive the crisis there was no choice but to obsessively focus on the short term. The trend has continued.
In Sri Lanka retail investors deserve much of the blame for short-termism, because of their obsession with today’s share price and their preference for frequent buying and selling of shares instead of picking stocks for the long term. Stockbrokers, whose income is linked to trading, usually encourage retail investors to frequently overhaul their portfolio making commissions on every trade. Brokers have pumped the market full of unregulated credit and left it dangerously close to the precipice.
On an average trading day when a billion rupees worth of shares are transacted by retail investors, stockbrokers collect an estimated Rs20 million in commissions from both the seller and buyer if the non negotiable one percent brokerage rate is applied.
During the downturn, even Sri Lanka’s top value investors took stock of their positions, sold out of some firms to take refuge in cash. But they also kept one eye on what the private sector was doing, ready with their piles of cash, for the first sign of a turnaround.
Guardian Fund Management which invests Carson Cumberbatch group controlled listed and unlisted investment funds, is Sri Lanka’s largest portfolio manager. Excluding Carsons group strategic holdings, the market value of the portfolio under Guardian Fund Management topped Rs13.7 billion at September 2010. That makes the funds under Guardian group management greater than the entire mutual fund industry combined.
“Through the good times and the bad we have the strength to hold on, that’s a privilege,” says Ruvini Fernando Chief Executive of Guardian Fund Management about the group’s long term ‘value investing’ focus. “Most of the shares we have had for 3 years and some stocks we have had for 10 years.” The crown of Sri Lanka’s largest fund manager sits lightly on the head of Ruvini Fernando who is unassuming and soft-spoken.
Guardian Fund Management invests the portfolios two listed companies Ceylon Guardian Investment Trust (CGIT) and Ceylon Investment and Rubber Investment Trust which is an unlisted firm. Ceylon Investments (67% owned by CGIT) and Rubber Investment Trust (100% CGIT owned) and Guardian fund Management (100% CGIT owned) are subsidiaries of Ceylon Guardian. As a result Ceylon Guardian’s performance automatically reflects the gains of the other portfolios.
The three funds control an equity portfolio topping Rs30 billion out of which an oil palm company with plantations in Indonesia called Bukit Darah, a Carsons group strategic investment, accounts for over Rs18 billion. The firm also manages the Cayman Islands registered ‘The Sri Lanka Fund’ and around Rs275 million in private portfolios.
Overall only a few individuals and institutions manage portfolios that are bigger. They include Rusi Captain - a high net worth investor, a government management private sector provident fund and a handful of private firms.
In just the six months to September 2010 the Guardian group portfolio more than doubled from Rs13.6 billion to Rs30 billion when the benchmark All Share Index of the Colombo Stock Exchange rose 88%. The portfolio has achieved superlative gains over the last few years.
Guardian group funds have grown 47% a year when their 10 year compounded growth is taken as an annual figure. Market capitalization of Ceylon Guardian Investment Trust is up 54% annually when the last 10 year performance is compounded. Stocks are up 29% annually compared on the same basis during the last 10 years.
“The investment sector has performed, and given Carsons and other shareholders a 40% plus compounded return over ten years which I think by any yardstick is very good,” says Krishna Selvanathan a management team member of the investment funds. Carsons, the ultimate parent of the Guardian group, is controlled by the Selvanathan family. In addition to the investment businesses the Carsons group has interest in oil palm plantations and the Lion Brewery, which bottles both its own branded and Carlsberg brand beer in Sri Lanka.
The performance has so enamoured Selvanathan that he draws parallels with one of the most successful investment companies in the world. “If you can get All Share Index 5% for 10 years you are an exceptionally good fund manager, if you look at the records of fund managers all over the world it’s very difficult to find someone who has done Dow Jones plus 5% or 10% for 30 to 40 years, maybe Warren Buffet has,” he says about Guardian which seeks out firms with a Midas Touch to invest.
In fact US investor Warren Buffet’s Berkshire Hathaway has an annual compounded return of 20.3% over the 45 years ending in 2009, beating the market by over 10% annually. Compounded returns on the Dow Jones Index averages 8.8% over the last 30 years. Guardian Fund Management, which took over managing the Carsons stocks portfolio in 2000 hasn’t done badly, even during the lean years either.
Ruvini Fernando, who has nearly two decades experience in portfolio management, accounting and research, says Guardian managed funds outperformed the market by 9% during the years 2000 to 2008 when the market was volatile and effected by developments in the war. Then came the two best years for the stock market.
In 2009 the market was up 125% and 97% in 2010. Guardian funds have also matched that performance with gains topping 216% according to Niloo Jayatilake, Head of Portfolio Management at Guardian Fund Management.
It’s during adversity that long-term investors earn their legendary status, by keeping their head while everyone else is losing theirs. Berkshire’s Buffett for instance has been accused of losing his touch on several occasions—most recently during the dotcom bubble, when he refused to buy internet shares. He was vindicated in the end.
But few like Buffet have the privilege of long term funds. Some funds require investors to lockup their money for five years. Hedge-fund managers typically have a one-year lock-up and thus a more short-term approach to investing. So the challenge for funds like Guardian is to find firms with a longer term focus.
Companies have to be analysed in forensic detail before ones that can yield superlative results over a long term can be pinned down. “We look to invest in businesses that have good growth and management and if it’s a market leader and the industry is growing and the business is likely to be performing better than the average industry,” says Selvanathan.
Companies with a view on the horizon usually sacrifice profits in the short term. They are also different from the rest because of their greater focus on innovation, willingness to enter new markets even if they don’t yield exciting results at first and emphasis on good corporate citizenship.
For companies, the past years have been first and foremost about short-term survival. As a result initiatives that couldn’t justify the cash outlay or the retention of expensive talent were shelved. To survive the crisis, there may not have been an alternative to the obsessive concentration on the short term.
However now those same companies are challenged to refocus and quickly abandon the short-termism that threatens to otherwise become endemic. In many ways, this will be the harder part of the recovery. Keeping the show on the road during the downturn required certain skills, but setting a company on the right course afterwards will be a true test of corporate leadership.
That’s a challenge to which the response has been rather indifferent by many listed firms afflicted by leadership crises. Guardian group funds have been exceedingly picky because they are breaking one of the golden rules of investment, of not putting all your horses in to one derby. Guardian fund managers believe they can pick firms that won’t come a cropper. “When we analyse a company we don’t just look at the numbers, it’s the people behind it, it’s the model of the business, and if in the macro level the business can be sustained,“ says Jayatilake.
Anticipating the end of the war in 2009 Guardian increased its holding in diversified firms John Keells Holdings and Aitken Spence. It also added banking, hotel and retail stocks. “Tourism and banking were sectors that we got fresh exposure to, if you look at the funds before May 2009 we had no exposure to these sectors,” says Jayatilake.
Guardian group invested Rs2.5 billion in stocks during 2009, over a billion of that in banks. They owned shares in Commercial Bank, HNB and insurance firm HNB Assurance, by March 2010. The group only reveals the composition of its long term portfolio in its annual report.
Most of Guardian group investments are long-term, meaning they will be held for at least three to five years. Many investments are usually held for much longer. “Our approach is research based and we had done our homework and picked those four sectors for exposure,” says Jayatilake about the portfolio which may now remain mostly unchanged for some time. Overall the Guardian group has long term investment in 10 stocks excluding ones controlled by its parent Carsons according to its annual report.
The portfolio overhaul started in 2008 and continued in 2009. Guardian group also sold off its holdings in SLT, Hayleys, Hunters, Ceylon Cold Stores, Union Assurance and John Keells PLC in 2008 for Rs2.15 billion. Rubber Investment Trust, which is wholly Ceylon Guardian, sold its holdings in three Colombo Stock Exchange listed Malaysian oil palm companies Selinsing, Good Hope and Indo Malay for Rs728 million.
“During the downturn, it was prudent for the fund to accumulate cash for future investments,” says Fernando of the decision to sell the stakes in Malaysian oil palm firms listed at the Colombo Stock Exchange. “Guardian had high exposures to oil palm companies so it made sense to book good capital gains and secure cash, part of which went out to shareholders and the rest re-invested in other sectors.”
It acquired stakes in the Cargills super market chain, Distilleries and Aitken Spence. It continues to hold a 2% stake in John Keells Holdings. “We had cash and used a little bit of leverage to invest the over two billion,” says Ruvini Fernando at an interview at the Carsons group main office located opposite the still heavily guarded area in front of Colombo’s Echelon Square.
Unlike most long term investment funds, Guardian doesn’t have to ask investors to lock in their cash, because it operates like a close ended mutual fund. Any investor wanting exposure to its portfolio would buy shares in one of the two listed funds and when they want out, the investor sells. For the Selvanathans and other high net worth investors in Guardian, stock performance hasn’t mattered because they haven’t diluted their holdings by much.
Many Sri Lankan firms controlled by tight groups of shareholders who view their holdings as strategic are relatively unconcerned about share price fluctuations. However for thousands of minority shareholders, the companies low liquidity results in less than optimum returns because they, unlike the owners, would like to exit at some point.
Guardian’s attitude to their share price is somewhat cavalier. “Shareholders should see opportunity and buy now,” contends Niloo Jayatilake. Relatively illiquid stocks attract a discount because of pricing difficulty due to thin trading volumes. Companies like Dialog and John Keells Hotels, where a majority shareholder has over 80% control, have over eight billion and one billion shares respectively, offering plenty of liquidity for anybody from day traders to institutional investors.
“The divergence between net assets and the market price has been narrowing,” says Fernando. Guardian and Ceylon Investment funds split their shares last year following a share by back costing Rs1.9 billion in 2009. The firms reduced liquidity with the share by back and increased the number of shares in issue with the split. Fernando says the number of shareholders has doubled from around 1,000, since the share split in 2010.
However the group’s decision to buy back shares had the effect of a snake eating its own tail. It compounded issues for minority shareholders already afflicted by the share trading below or only marginally above net asset value. Listed liquid stocks trade at over three times their net asset value at the Colombo stock market. Guardian group recognizes long term equity investments at market value but investments in unlisted firms and associates are carried at book value. The group’s investment in Bukit Darah was worth three times the cost at Rs6 billion at end March 2010. Since then Bukit shares were split and the firm now has around 100 million shares up from 400,000 previously. It’s market value on Guardian’s books has since increased.
“We don’t want to be a penny stock,” argues Selvanathan about Ceylon Guardian of which Carsons Cumberbatch controls 67% and has a Rs18 billion market cap. Krishna Selvanathan’s father sits on the Carsons main board and his uncle is Deputy Chairman.
The stoic refusal to acknowledge minority shareholder expectations of a reasonable return is symptomatic of family controlled businesses seeking a public listing for prestige. Guardian’s share buyback followed by a share split was like rearranging the deck chairs on the Titanic. It didn’t improve liquidity by much.
Guardian group’s managers are also shy about being lionized in the media about their track record over the last decade. The interview with LBR was the first one by the fund management team since they took charge of the Carsons controlled investments a decade ago. Investors sometimes are distrustful of reclusive firms.
Tendersteps are being taken in to private equity too as opportunities to buy listed shares are limited. Guardian group’s equity portfolio already accounts for 0.6% of stock market capitalization excluding its strategic holdings.
“At Guardian there is now a structural transformation; expansion and diversifying of our investment base is happening,” point out Ruvini Fernando. “We have re-launched the “Sri Lanka Fund” and we are moving from public equities to private equities.”
The Sri Lanka fund is a Cayman Islands registered fund for foreign portfolio managers and high net worth individuals to invest in Sri Lankan shares. Ceylon Investment and Guardian Investment Trust have pumped a million dollars each to re-launch the fund. The Sri Lanka Fund was suspended redemptions when it was unable to sell its main investment in UK based Douglas Bay PLC (earlier called ‘Tea Plantation Investment Trust’), set up to invest in plantations in Sri Lanka. When finally the stake was sold at a loss it resulted in The Sri Lanka Fund’s net assets declining by 60%. In the same time stocks were up 125%, a major blow to investors. The fund’s only other investment was in government’s dollar bonds. The circumstances and logic of investing in Douglas Bay isn’t discussed in the funds annual report.
The foray in to private equity is more measured. Up to September Guardian had invested Rs750 million in three firms. In the three months to December the third investment was made the details of which will only be announced in the forthcoming annual report.
“On private equity we try to make a 10% premium on what we make on public equities given the risk that its unlisted and we are locked in to a company and the holding period is relatively short, around one year,” says Tharinda Jayawardana, the Guardian group’s research head. “It’s kind of a hurdle rate.”
“Fifty percent of new investments could be private equity. But it depends on the kind of IPO’s that come up in the market,” says Fernando. “If the IPO offering is small and not of the larger companies then 75% of our new deployments could go to private equity.” However finding the right investments have been challenging so far.
In Ceylon Guardian’s 2009/10 annual report its managers confess they “explored many Greenfield ventures and companies at the pre IPO stage. However no investment was made during the period of review due to the mismatch with our expectations and the financials of the companies that we evaluated.” It also says the management will step-up efforts to locate opportunities but will “invest in ones only that best fit the Guardian model.”
Selvanathan adds that the firm is now putting together structure and looking at fund raising for private equity investments. They will also recruit a specialist team since managing private equity is a more hands on job.
The Guardian model is conservative. Selvanathan says the group is satisfied with the performance of the investment sector and hasn’t considered investing that money in a venture of its own. “You can’t look at it that way. We (Carsons) have a brewery, plantations and investments, three main sectors. You can’t always try to put money in to what is going to be the best because you will never find that sort of an investment,” he says.
Fernando says Carsons expects them to beat the market by a few points, without being specific about the target. Market performance is also measured on the three year rolling average since the fund has a long term investment horizon.
Stocks crossing the 7,000 point have spooked some investors. However, long term investors are relatively unfazed by the valuations. In the last few years Guardian group has purchased stocks with high price to earnings multiples. Supermarket chain Cargills was purchased when the historic PE was in the mid 20s’. The Rs200 million investment in Cargills in now worth over Rs1.4 billion, valued at Rs200 a share.
“If Guardian is a long term portfolio, why would we not buy at 16 times historic earnings if we think the market can give us another 20% to 30% growth, it depends on the outlook of the investor. Whether it’s a one year or a 5 year,” points out portfolio management head Jayatilake.