Markets with Bertie: Provider of capital

It’s not often that Bertie receives a call from a foreign headhunter. While he is quite content with his work, such calls are like a ‘Follow’ request from a college crush. They make one feel quite chuffed. The headhunter set up an online interaction with a human resources lady of a large financial firm which was conspicuous by its absence in India.

The HR lady went on about how her firm was a global powerhouse with a wide repertoire of products and long history of investing. Bertie sometimes feels that these spiels are more to reassure themselves than to impress the prospective hire. After the advertorial, she asked about Bertie’s views on the Indian markets. Bertie parroted platitudes about supportive macro conditions, multi-year growth and strong domestic flows.

The lady seemed quite interested in domestic flows and asked for more data about this trend. It was Bertie’s turn to ask the questions now and he got straight to the meat of the matter by asking about the size of commitment the powerhouse wanted to make to India. He was expecting a double digit billion number. The HR lady put on her practised ‘I am about to dash your expectations with a lot of English words’ voice.

The gist of the monologue was that the firm was looking to set up shop in India to raise assets domestically and invest them in India and overseas. “But that would be a rounding error in your assets,” countered Bertie. The HR lady smiled and lobbed Bertie’s platitudes about India back to him. Not wanting to be outdone at the game, Bertie declined the opportunity by deploying a lot of English words. But he did wear a smile for the rest of day, not for the follow request, but for the fact that his homeland that was always thought of as perennially capital-starved was now being considered as a provider of it.

No such thing as a sure thing

On the sidelines of a recent financial services summit, Bertie caught up with an old friend. Though many years apart, the two had attended the same alma mater. Bertie had a lot respect for the entrepreneurial zeal of his friend who had co-founded a successful brokerage and investment bank. After airing their shared dread about the upcoming Test series, the chat moved to markets. “You guys are rocking!” Bertie said, alluding to the multiple investment banking deals that his friend’s firm had done.

“Yeah buddy, but the market doesn’t care.” The banker was referring to the low multiple that his listed firm earned despite delivering handsome profits. He then edified Bertie on why they deserve to be valued better suggesting that capital market businesses were in the midst of a secular trend. Now Bertie has been in the markets long enough to know that when an inherently cyclical business is being pitched as a secular one, the end of the cycle is probably nigh. Bertie said this but not in as many words. The banker friend got the drift though and flipped the question back to Bertie. “So, what will get me a 40 PE (price-earnings multiple)?”

Bertie had no hesitation in saying “Wealth Management”. The banker sounded dismissive. “And that you think is not cyclical?” he shot back. “May be or maybe not,” said Bertie. “But the industry in India is young. No one has seen a cycle. So, it gets the benefit of doubt.” As they shook hands, the banker friend was still not fully convinced and as a parting note asked “40 pucca?”

Bertie nodded and said “Sure thing!” As his friend walked away, Bertie, liked Yudhisthira, annexed a whispered addendum, “The only sure thing is that in business there are no sure things.”

Operating leverage denied

While on the subject of 40 PE, Bertie met with the sales head of a large mutual fund at the same summit. Since strong domestic flows had become a cornerstone of his India pitch, Bertie was quite keen to check on its health, especially in the light of recent market correction. The sales head seemed unruffled. “No problem, Bertie. When you see the October numbers you will know. Lump-sum money that was waiting on the sidelines has jumped in.” Bertie smiled a relieved smile.

“But what about mid and small cap flows. Those stocks have been under the pump.” Bertie wanted to be sure that all is well there too. “Arre Bertie bhai, you worry too much!” laughed the MF man. “See the performance of mid and small cap funds. Hardly a dent in them. Nothing to worry.” Bertie smiled some more and repeated his line, “You guys are rocking!”

This time the buoyant tone sobered a bit. “You know what’s the best thing about an asset management business” he asked. “Operating leverage!” The term was finance speak for a business whose costs were largely fixed and so any extra revenue added straight to the bottom line. Like an airline selling an extra ticket for a flight. Similarly, for every new rupee that got added to the assets of a mutual fund, there was hardly any extra cost to be incurred.

Bertie nodded in agreement. “But that’s where the problem is,” the friend said, “With the mandated sliding scale of fees, we get robbed of the operating leverage. Larger the fund, lower the fees.” Within minutes his upbeat tone had almost become gloomy. “See those investment bankers there,” he went on pointing in the general direction of some suit-clad men. “No fee cap. It’s a party there.” The two conversations reminded Bertie of the opening lines of Anna Karenina, “All happy families are alike; every unhappy family is unhappy in its own way.”

Bertie is a Mumbai-based fund manager whose compliance department wishes him to cough twice before speaking and then decide not to say it after all.