Opportunities In Value Investing On The Horizon For Ironhold Capital
In the past ten years the correlation of the BSE SENSEX - 30 of the largest companies listed on the Indian stock exchange - with the S&P500 has been 0.31, a score which would be low enough for most investors to consider that a solid diversifier. That’s certainly the case for newly formed Ironhold Capital, a New York-based investment manager which is launching an equity hedge fund focusing specifically on value investing in U.S. and Indian stocks.
Ironhold’s ‘Global Deep Value’ approach will focus on stocks in both markets with each accounting for roughly 50% of the overall book of between 70 to 100 securities. The focus on the U.S and India comes from the founders, American Paul Gray and Indian Siddarth Singhai. The pair met at business school and were planning on launching their own funds but realised that two heads are better than one and decided to partner up. The opportunity in India is particularly appealing, according to Singhai.
“The Indian market is an inefficient stock market compared to the U.S which means that there is more opportunity for price discovery and therefore generating returns. It’s also a much less crowded market. The U.S has something like 4,000 listed securities and there are way more than 10,000 funds – not just hedge but long-only mutual funds – which trade these securities. The Indian stock market has around 4-5,000 securities but less than 500 hedge funds. There’s much more opportunity in India for value investors like us to find value plays,” he said.
Ironhold’s strategy will be long only and they won’t use derivatives to hedge any portion of the portfolio. The exposure to India stocks acts as a quasi-hedge because of the U.S. Dollar and Indian Rupee relationship.
The US has most of its debt denominated in USD, whereas India has 40% of its debt denominated in foreign currency. During times of crises, foreign investors typically get scared and subsequently start pulling their money out of India (and emerging markets generally). To combat these outflows of capital, the option for the Indian Central Bank is to increase interest rates which would allow foreign investors to get a better return but doing that in challenging economic times is not feasible; the only solution is for the Indian central bank to print money which leads to inflation of the Rupee versus the Dollar. This relative devaluation leads to Rupee denominated investments becoming more valuable in comparison to US investments.
For this hedge to work, of course, there needs to be a crisis which leads to foreign investor outflows. Even in good times, however, Singhai says that exposure to India provides solid diversification.
“Typically, if you want to hedge your long equity exposure you have to go short. Equity long short hedge funds that primarily trade U.S. stocks have struggled in part because the market is so efficient. Add to that, shorting is difficult and expensive. Investing in India is a great way to hedge U.S. stocks exposure without assuming short selling costs and risk,” he said.
On the other hand, being a value investor in U.S. equities has been tough for some time. Factor investing commentators will point out that value has underperformed growth for most of the post-Global Financial Crisis era, but for Ironhold, the current state of company valuations in the U.S. equity market means that there should soon be opportunities out there in the country that represents the other 50% of their book.
“We do see some sectors being out of favour, such as semiconductors and automobiles,” said Singhai. “However, we do think that we are at the tail end of the current boom in U.S. equity prices, given where valuations for the overall market stand. While we can’t predict the exact timing of a downturn,
“This market is like a 120-year old person. We don’t know when the funeral will be, but we had better start prepping for it,” said Gray. “The market, over long periods of time, should mirror the U.S. economy. There’s a massive overvaluation in U.S. equities and we expect a mean reversion in the next year or so. We think this is a great time to be a value investor in the U.S. – we think there will be plenty of bargains to be had in the near-term.”
To find an edge, Gray and Singhai have worked on their valuation model for the past three and a half years and they have had the structure of the strategy for some time; but only recently have they finalised the optimisation layer in terms of position sizing and the number of positions they take in either the U.S. or India. They’ve had some esteemed assistance in building the risk management layer.
"Siddharth met Joel Greenblatt at the 2019 Benjamin Graham Conference in New York and he [Greenblatt] was kind enough to invite Siddharth to his office. At the meeting we talked with Joel's Head of Business Development and we took away some insights which in part part contributed to how we have built our risk management infrastructure."
Alongside the equities product, Gray and Singhai are working on a real estate investment fund. Gray spent seven years working in real estate investing, and Singhai has been investing in real estate in India for more than a decade. Singhai says that the duo applies the same value-oriented approach to buying real estate assets as they do to equities; furthermore, the change in behaviour of companies and people towards working more from home as opposed to the office doesn’t scare them.
“We buy assets below their intrinsic value, whether that’s equities or real estate. It’s the same approach. We think that commercial real estate is going to be attractive. There will be a lot of distressed selling in real estate, and similar to equities, we have a medium term view on assets, so maybe the market will have a short term dip but we feel medium term that the opportunities will be there”, said Singhai.
Value investors are generally having a hard time of it but Ironhold is sticking to its guns.
“It’s very difficult making money when you’re fishing in the same pond as everyone else,” said Gray. “There are only so many fish in the pond, so we don’t do that. We’re playing the long game in both equities and real estate and we’re strong believers in what we’re doing.”
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