The Nifty was up 1.5% for the month, but is still in negative territory (-5.0%) for the financial year (Apr-Oct). Our portfolios continue to do better than the market. After a strong FY2015 (Nifty up 26.7%), owing to the post elections positive sentiment, business sentiment seems muted in the current year and aggregate corporate performance has continued to be weak, largely on concerns regarding commodity producers, infrastructure, real estate and other indebted companies. Though lower inflation should lead to pick up in volumes over time, we are yet to see significant consumer demand revival and investment spending is also poor.
At the same time, there are some sections of industry which are doing quite well. HDFC Bank, for example, has seen its growth rate accelerate over the last few quarters. Its advances in the latest quarter grew at 28% pa, at a time when the rest of the sector is complaining of anemic growth in credit offtake, besides asset quality problems, which HDFC Bank has been able to avoid because of its disciplined lending practice. Even more surprising is that deposits grew by 30% in the same period. A bank of such size growing its deposits (Rs 500,000 cr) at such a high rate in a weak economic environment is definitely evidence of what a great management can achieve (further confirming our bias towards investing in companies that are run by an excellent management team), and the opportunity that the Indian economy provides. IT services companies like Infosys are also growing at respectable rates backed by extraordinary return on capital. On the other side, commodity and related sectors, and other capital intensive, debt heavy companies continue to have problems. In a sense we are in a dichotomous economy where the better companies continue to strengthen and the weaker ones are under severe stress. So, although aggregate corporate performance is nothing to write home about, there are quite a few companies doing well and it is possible to construct a high quality portfolio, growing at satisfactory rates even in these tough economic conditions.
The last few years have been very satisfying for us, both in terms of absolute returns as well as relative returns as compared to the Nifty, our benchmark. However, at this point, we would like to remind investors that over the last 10 years, the number of years of outperformance is only slightly higher than the number of years that we have underperformed. What has led to this large outperformance over time, has been that the years in which we underperformed the Nifty, we did it by very little and the years that we outperformed, the quantum of outperformance was quite high. While we shall continue our efforts to first protect capital, then beat inflation, and finally to outperform the market, investors should remember that this outperformance will not come each year but is more likely to come over time. Even the legendary Warren Buffett has underperformed the S&P 500 one fourth of the time.
We remain committed to our steadfast path of identifying high quality companies which we hope to buy at reasonable prices – the times today continue to be challenging but we have found with past experience, that if one looks hard enough, one should be able to find reasonable investment opportunities which should meet our triple objectives mentioned above, over the long term.