Bullish no more: Why Samir Arora decided to exit IT after 25 years

 Samir Arora, founder and fund manager of Helios Capital Management
Samir Arora, founder and fund manager of Helios Capital Management

Summary

The ace fund manager of Helios Capital says investments were moved into financials and consumer companies

The writing on the wall was clear. And Samir Arora saw it early enough. The founder and fund manager of Helios Capital Management had been bullish on the Indian IT sector for nearly 25 years but decided to steer clear of it early last year. The sector has been facing major headwinds and the outlook isn’t very bright either, at least for now. Blame it on global macro-economic challenges and the US banking crisis.

Arora’s foresight guided the asset manager as it exited all its positions in the sector. Prior to that, he recalls that his investment strategy in IT, and gold, bore fruit over the last year.

“After 25-odd years of being big bulls on Indian IT, we completely exited our positions in the sector in July. Although at some level they are connected, we were able to distinguish between the IT story in India and that of the US. This helped our funds to do well," said Arora during an interaction with Mint for the Guru Portfolio series. In this series, leaders in the financial services industry share how they are handling their finances and investments.

Asset mix

Arora’s investment portfolio comprises 40% of Indian equities, 40% of global (predominantly US) equities, and 10% each of gold and debt. He doesn’t have a separate contingency fund: all his investments are quite liquid, and can be redeemed as and when required. Arora’s portfolio has delivered overall returns of 8-10% in dollar terms over the past one year.

A bulk of Arora’s equity investments have been made through Helios’ own funds, barring some of his legacy investments in the Indian markets. In global markets, 100% of equity investments are through Helios’ own fund. In India, 90% is through Helios’ fund, apart from the legacy stocks.

The Indian fund, which is an offshore fund, shorts some stocks to hedge its position at times but remains net long. Arora says that since last year, the fund’s net long position has increased as he has turned more bullish on the Indian markets. “Our net long position would be around 70%. Last year, it was closer to 60%," he says.

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Last year, around the time the Russia-Ukraine conflict broke out, the India fund’s net long position was even brought down to just 40% for a short period of time. “That didn’t help or hurt because the markets in rupee terms didn’t go anywhere. Thereafter, this year, we have been much more positive on the markets, driven by two things. The US market, we thought would have stabilized, and now it seems to have stabilized. At that time, we thought the interest rate hikes were over or that there could be a couple more in January or February this year. But now it seems to be over, so it is maybe delayed by two-three months. The US market is up 8-10% this year," Arora says.

“And we think India should be a massive beneficiary of the China-plus one play by the world," he adds.

China-plus-one is an international business strategy, where large global businesses are looking at diversifying their supply chain dependence on China, post the Covid-19 outbreak. The lockdowns induced by the pandemic disrupted supply chains across the globe and this made businesses realize that they were highly dependent on China. Shipments bound from China were stuck during the lockdown.

Separately, Arora points out that the Indian market has generally gone up 14-15% in rupee terms per annum. “So, that kind of return is not unreasonable at a market level, which is a very high return in any part of the world. But it is not unreasonable to think that just because it has happened in the last 25 years, we are projecting similar numbers in the future. Even if you look at it independently, Indian GDP (gross domestic product) in nominal terms is 10-12% because GDP grows at, say, 6-7% and inflation is at 5% . If you look at it from equity risk premium (ERP) point of view, that is how much people are making from debt and add 5-6% of ERP, so that will also take it to 13% of expected returns. So, broadly over time, equity will beat other alternatives but it will not do so smoothly or in a linear manner. So, what you need is the ability to hold and after so many years, we have that conviction," he says.

Global play

The global fund, where the cash-levels had been raised to as much as 40% last year, has now been reduced to 22%. Arora says, globally, the outlook is more confusing, so it is difficult to have a strong view right now.

“But what matters more is that the companies we are invested in are very solid. These are large names, well-established companies, such as Alphabet, Amazon, and Microsoft. Many US tech companies like Alphabet and Meta have much lower valuations than Indian IT companies," he says.

Another company which has done well for us is Louis Vuitton, the French fashion luxury brand. “The rich will always be there to do luxury spending. Sometimes, this segment will be India rich, sometimes Chinese, sometimes Russia, sometimes Bitcoin rich," he says.

“So, these companies are interesting to own. But, we are not thinking all the time how US is doing, how the world is doing when investing in these companies," he adds.

IT strategy

As mentioned earlier, Arora had changed his info-tech strategy by completely exiting Indian IT.

Arora’s funds largely invest in three themes—financials, IT and consumers. So, the money was moved from Indian IT to financial stocks and consumer-facing firms.

“In the global fund, we have a big tech weightage. The US tech story is much different from that in India. So, that fund has 40% US info-tech. We felt that Indian IT companies were not dealing with the truth, which is in the last year —June-July onwards— everyone was saying they are firing people, slowing down; even consulting companies were saying so. The same sentiment was seen in software companies. I have observed in the past as well, one or two times, that during market cycle turns, Indian IT companies are not willing to (at least publicly) accept the truth (about facing a downturn) and therefore investors get more upset with them," Arora adds.

US tech plays have done well after they announced job and cost cuts and restraint on blue sky investments and as a play on growth in AI (artificial intelligence) rather than due to sudden high growth in their current businesses.

Indian IT is a pure growth story so if growth triggers are missing, stocks will not do so well. “So, we took a bet that maybe Indian IT doesn’t fall, but it is unlikely to outperform the market. But, so far, we have seen Indian IT underperform. The IT index has underperformed the Nifty 50 Index by a good margin over the past 12 months" he says.

In one-year period, the Nifty 50 Index has delivered returns of 12%, while the Nifty IT Index is down 7.6%.

Buying gold

Having gold in his portfolio also helped Arora last year. “I have usually avoided gold, but I had bought gold around 2020, only because interest rates were close to zero. So, the 10-15% I had invested in liquid-type funds, I just put that in gold as I thought that debt is anyway not yielding anything meaningful," he said.

Since the Russia-Ukraine crisis in February 2022, gold prices have rallied by 20%.

However, Arora says that he is unlikely to increase his gold investments but would continue to hold it for now.

Lifestyle changes

Apart from his investment strategy doing well, Arora’s weight management strategy also seems to be yielding results. He says he has shed nearly three kilos recently and avoiding deserts, including even his favourites like Gulab Jamun, helped him lose weight. “I have brought down my sugar intake to nearly zero," he says. Arora had started walking 10,000 steps a day, but he says that it didn’t help him reduce his weight. Reducing the sugar intake helped.

He is now seeing the benefits of the changes in his eating habits. He says he feels stronger now; he claims he can now play tennis non-stop for almost 90 minutes.

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