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Wednesday, June 03, 2009

Selling India to foreign funds

Chief Executive Officer, CEO and chief investment officer, Quantum Advisors, Ajit Dayal seems to have known what he wanted from life, very early on. Though, his father was a doctor and it was expected he would follow his footsteps, he chose to play the equities game because he didn't find the prospect of making house-calls at 3am in the morning very appealing! So he went off to the University of North Carolina at Chapel Hill to get an MBA degree.

He did have the option to work on Wall Street but gave that up to work in India. He sure has made the most of his time here. For instance, he's written the Quantum Year Book and some lighthearted stuff as well - well, like comic books on the stock exchange!

Pre-liberalisation market scenario
He felt there was excitement in the air, of working in a nascent market like India, which in 1984, had yet to see big-ticket players like Franklin Templeton and Alliance come in.

The person who gave him his first break was Ashok Birla. Dayal told CNBC-TV18, "I met him in 1984, and he took me on. He was setting up a company then, with SG Warburg called Mercury Asset Management. The fund was called Birla Mercury Funds and I was the director of the fund. Our role was to get money from non-resident Indians, NRIs, to invest in the Indian stock markets, to help the company develop.

"That was an idea, which was way ahead of its time, maybe 10 years ahead of its time because the first foreign funds actually were launched in India in 1993-94. That's when Franklin came down to India, Alliance came down to India."

But India wasn't ready for such radical business practices then. So, between 1985-89, Dayal did the rounds in New Delhi, meeting with the finance minister and other mandarins who could move the pace of the financial market reforms along.

But, at that point India was fighting shy of allowing foreign capital into the country because the real fear was that the Birlas were gearing up to take over companies and also because of the Swraj Paul episode in 1981.

Dayal recounted, "So people were scared of the foreign flows of money and here we were, trying to sell the idea that NRIs had a lot of capital and India as a country needed capital, there was a perfect match and the bridge for the two was the mutual fund route."

The irony was, that even as early as 1985, foreign funds were eager to come in despite the 40 per cent cap that was prevalent, for any fund launched by NRIs.

He wasn't successful in getting mindsets to change about foreign inflows but he did move to Unit Trust of India, briefly to help them raise money when they ventured into the US market.

He recalled, "I actually joined at the tail-end of the marketing exercise. I helped them to choose stocks for portfolios in India and then I left UTI and went back to the stock exchange, where I was a sub-broker on the floor of the exchange."

But research reports was what he really wanted to do. He admits, "The idea was to get information flowing, to as many people as you could about India and also to begin to let people know, 'what's a share, why should you buy shares', not because it was owned by the Tatas, Birlas or Ambanis but because there is a P/E ratio, price to cash-flow ratio, dividend yield and there is earning."

A time of change...
When the 1991 balance of payments crisis forced the then Finance Minister, Manmohan Singh to throw open the economy, he was ready with his homework. He explained, "That was a day that we were actually waiting for, we started the Quantum Year Book in January 1990 - a year and half before the rules were announced for foreigners to buy shares - so on July 2, 1991 when the rules were announced for foreigners to buy shares, we were just waiting. Every single foreign group came down to India and they met us and we finally did a joint venture with Jardine Fleming."

Working with Jardine Fleming "was fantastic in many ways because they helped me to make Quantum from a 12 person team of research analysts to Jardine Fleming Quantum Enterprise with 180 people, in the course of a year. It was a JV and when I first met with them, they asked me, 'what's your dream for India and what's it going to cost?' when I told them what I had dreamt up and said it would cost $3 million, they gave me a cheque with no questions asked."

This proved a boon for his team's research purposes because now he had access to data flow from across the world. He elaborated, "We could, sort of, position ACC and Ambuja with respect to Holcim of Switzerland and in relation to Lafarge of France. So the data-flows were great. It's not that we actually went and wrote research reports on those companies but we read a lot of stuff on these companies."

There was a lot of action happening on the stock market, around the time, he inked his deal with Jarding Fleming - it was witnessing the Harshad Mehta led spike, so he cautioned Jardine Fleming, telling them. "There will be a collapse but don't worry, the fundamentals of the economy are still solid and they believed it."

Selling India to foreign funds
After his Jardine Fleming stint, he became a local advisor to funds looking to come into India. One of them was a UK fund called Prolific Asset Management and the other one was the California-based Walden Group. He and the Walden Group established the second venture capital fund for India. It was around this time, he had the opportunity to meet his guru and someone who inspired him.

Sir John Templeton
He reminisced, "I met Tom Hansberger in July 1998. He's an absolute genius, he was the co-founder of Templeton, Galbraith, and Hansberger. The first thing Tom told me is that I am going to make you unlearn all the nonsense you have learnt and I am going to teach you real long-term investing and real long-term research and he just changed the time horizon - the way we look at companies, the way we studied managements, the way we look at anything in the market - is really born out of what is happening with, what Sir John (Templeton) and Tom had done in their own enterprise, right from 1979.

"I actually moved to Florida in 1998 and then I was shuttling between Florida and India for the last six years, but I had my team in India. So my team and I, would chose Indian stocks for the portfolios that we ran on Tom's behalf."

Tom Hansberger
"In fact, when I went to Hansberger, Tom liked my work a lot and he actually made me the deputy CIO of the company in March 2000 and I know that he was running a fund valued at about $5.4 billion, till I left last year. Included in that, was the fact that I ran a large fund for one of the largest money managements groups in the world called Vanguard International Value Fund."

Personal investment fundas
His personal investing philosophy is to look at long-term five-year plans and how the management plans to achieve it. He's also a stock picker and does not believe in playing by the index approach. He explained, "When I say value, it means that I must buy a stock which has got profit power or the EPS power more than the market at a P/E ratio, that is equal to the market."

His future goals include running money for large institutions and becoming a wealthy individual! He reiterated, "It is about getting long-term money into India. It's what I always wanted to do - to get equity capital from the hands of big institutions and big pensions in the US to India, not short-term momentum money."

There are some things he cautions about. He stresses on being disciplined about when you plan to get into the market and how long you plan to hold onto the stock. Otherwise, it just hints at the fact that you don't believe in the numbers yourself.

He elaborated, "We are value guys, so by definition we buy shares that no one else wants, and we tend to buy them when they are going down. So it's like catching a falling knife, which is always dangerous. And at the other end when shares go up, we are disciplined. We are not willing to pay what the growth momentum guys are willing to pay."

And what's his advice to upcoming market analysts? "I would tell them that irrespective of nationalities, you can find good and bad people anywhere in the world and don't get fooled by the fact that foreign money, per se, is sort of, angelic in nature because it's not", he concluded.

Written for moneycontrol.com

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