Is betting on aging population and obesity right stock investing strategy?

Q. You are very bullish on US, but what about India in your entire scheme of things?

Certainly, of the developed economies I think the US is the strongest of the bunch. Among the emerging economies India should be considered to be right up there. It has got some of the best growth. It is the world's fifth largest economy. Infrastructure is already a huge opportunity here.

India is very strong in IT services, agriculture and manufacturing. In the years ahead I would love to see India’s participation in the IT sector evolve and get out of just services and get into creating its own intellectual property. In manufacturing there are opportunities in India to become an important alternative to China.

Q. In your portfolio, where does India stand?

We are available in India through a feeder fund which is an US Opportunities Fund, which means that it is primarily US domiciled companies. And then the technology portfolio that I manage, we own 40 to 60 public names and we have just found great opportunities in companies primarily in developed markets. We don't have as much exposure to emerging markets and we have no holdings right now in India.

Q. You are primarily betting on two themes: Aging populations and obesity?

So, our investments are primarily in this space with the drug manufacturers, but we also own names like United Healthcare that will benefit from the gains of patients becoming healthier. We also own AstraZeneca, which is a leader in oncology and solving of issues with cancer, but also a variety of other ailments.

We own a number of health care names that will benefit from the usage of digital technologies to design drugs, testing of drugs. We are not investors in hospitals, but we do own United Healthcare, which is a vertically integrated health care services provider and insurance provider and also has pharmaceutical delivery.

Q. Because you mention obesity, do you have any holdings in restaurants or fast-food chains?

We own Chipotle Mexican Grill, which makes quality food, very fresh food. We also have Monster Beverage that makes energy drinks and there is big opportunity for growth. Most of their business is in the US and have a huge opportunity to expand internationally.

Also read: Interest rates will have a mild upward bias because growth is strong, along with inflation: SBI Mutual Fund

Q. In the last few months, technology stocks in the US had heated up both in terms of valuations and rally, led by a handful of stocks. Nasdaq, then, rebalanced the index. Did it impact your returns?

Well, we don't think the rally was out of sync. We do think that it did benefit a small number of companies. We think that many of those companies will benefit from some of the same growth tailwinds that the biggest companies will benefit from. However, investors have been nervous about investing in those smaller companies because of the fear that that we are going to go into a soft -landing rate cycle, et cetera.

We think that the strength we have seen in the magnificent seven [Microsoft, Apple, Nvidia, Amazon, Meta, Tesla and Alphabet] will start to expand out. We are not in the camp that thinks that the magnificent seven or the small and mid-cap names are overvalued. Investors are not appreciating the earnings potential that lies ahead for these companies.

I will use the example of Microsoft. It almost doubled the entire business on the sale of AI features into one of their product categories. So that is profound; if you could take the world's largest software company and make it almost two times its size on the sale of just a few features. It is putting generative AI into all its products. It is going to sell these products to companies that expect to get a productivity gain out of it, then earnings estimates potentially for the entire market are just too low. I think that investors are going to start to appreciate this when these models are deployed in the tools that we use every single day for knowledge work.

India is a huge knowledge worker economy, the US is a huge knowledge worker economy. We spend our days deleting emails and struggling with the drudgery of knowledge work. I think a lot of that is going to be reduced with these models and I think that increased productivity is going to go right to the bottom line for companies that are early in adopting these tools.

Q. What about the valuations of these companies? Do they appear frothy?

While investors have adjusted for some of the opportunity, they are missing the full opportunities. Certainly, as you go out of the magnificent seven and into the small and midcap names, they too will build some of these technologies. Their valuations are not at all reflecting that. I do not think the big ones are necessarily overly frothy. I definitely don't think the small midcap ones are frothy.

I have a point of view on this, others can have other points of view and then we are going to see what happens. We may even go through a period where it looks like the bears are right because we are in this weird transition between infrastructure, building, and experimentation phase. And we have not yet gotten to the application phase. But I am confident the application phase is coming.

Q. How are you factoring in a rate-hike cycle in your portfolio?

Ultimately, when the cost of capital is not zero, it has to generate a return that just squeezes out low value projects. When capital is free, you can do all sorts of projects because you don't have to generate very significant returns.

As easy money is almost over, necessarily, that means venture-backed companies that don't have established business models or don’t have very good ideas, will find its way to good projects. But everything getting funded will not be the case going forward. So that part of the market is going to struggle more. The incumbents that do have strong business models have paired out the lower value projects from their businesses, have existing relationships with customers, generate their own capital, they are going to do relatively well because they are covering their cost of capital.

Q. Apart from AI and health care, what excites you in the upcoming sectors?

The whole digital transformation opportunity is exciting. We have already talked a lot about cloud and AI, but there are eight other sub sectors in digital transformation.

Let's talk about the opportunity in cybersecurity. We own a company in the portfolio called Cloudflare which delivers cybersecurity services using cloud, traffic acceleration services from the cloud, and delivers cloud computing services.

 Let's talk about fintech and digital payments, a big portion of whose business comes from tax preparation software for consumers, but also have a very significant business in helping small and medium-sized businesses operate more efficiently. They have large amounts of data that they can wrangle and compute, and deliver their new services with AI into those small and medium-sized businesses and help them run more efficiently.

In Internet of Things, we own a semiconductor company.

Also read: Mid and small cap stocks frothy, large cap valuations comforting: Anish Tawakley of ICICI Prudential Mutual Fund

Q. The years 2020 and 2021 were unprecedented times that also brought unprecedented methods of trading. Individual investors in India and the US were mimicking fund managers and along came the rise of  Robinhoods. How does it pan out now?

People have taken out money and they are deploying the same amount with a fund manager. A similar situation is playing out in India as well. The period during Covid was unique because people had time on their hands. Capital was cheap. Governments were, at least in the US, giving capital to citizens. So they went and speculated in the markets. I don't think those times are coming back.

I do think the rest of us are busy trying to live our lives and go to work and take care of our families and the likes. There is a role for a professional fund manager and an active fund manager to take care of some of the complexities of digging around for good and interesting ideas. And for that, they should earn a bit of a fee.

The phase of high speculation driven by cheap capital and free money being handed out to consumers is over.

Q. How do you react to bizarre events when somebody tweets about a certain meme and it actually catches on like a wildfire and the stock goes up?  

We are long-term investors. We have a point of view on what the future is going to be and we have done detailed rigorous fundamental analysis to understand that and then figure out in a variety of scenarios what an equity might be worth. And when we see stocks going up wildly or down wildly, we are always evaluating those moves versus what our understanding is of the fundamental.

Q. It doesn't upset you?

It doesn't upset us one bit. If it creates an opportunity to trim, we will do that. If it creates an opportunity to act, we will do that. But otherwise, we stick to our thesis. If we learn something new that is fundamental, we incorporate that. Typically, when we see stocks moving, we are always asking ourselves, is the stock capturing what we understand the fair value of the business to be? And if it is or it is not, then we will adjust accordingly. But we stay focussed on the long term.