Importance of portfolio diversification with Devina Mehra | First Global PMS

 Radhakrishnan Chonat

Good day, everyone. I’m back with our Fund Manager Series. And today, truly we have a very special guest. We have Devina Mehra, the Chairperson and Managing Director of First Global. She truly is a highly accomplished individual with a remarkable academic background I must say. She holds gold medals from both IIM Ahmedabad and Lucknow University, and she has achieved extraordinary success, earning close to eight gold medals. And with her visionary leadership, she established First Global as a securities firm three decades ago and subsequently has spearheaded its globalization efforts over the last 20 years. Under her guidance, First Global became the first Asian ex-Japan firm to attain membership in the London Stock Exchange and NASD.

Ms. Mehra’s exceptional market insights and astute calls have garnered significant recognition and she accurately identified the cash flow turnaround of Amazon when its stock was valued at just $15. And in fact, was also one of the first to highlight the accounting irregularities in WorldCom and Enron, you know, how Sarbanes-Oxley Act and all came after that. So as the research head in global strategies as First Global, she has consistently identified market turning points showcasing her expertise. She is identified as Fortune’s most influential woman in India.

Ma’am, it’s rare to see a person at your level from a woman’s perspective also. Hats off to you, ma’am. It’s a pleasure to have you on my Fund Manager Series.

*A – Devina Mehra

Thank you. Thank you very much.

*Q – Radhakrishnan Chonat

Ma’am, just to begin, if you can share your journey and the key milestones on your journey that has made you reach here and got yourself listed in Fortune India’s Most Powerful Women? For the audience that don’t know, it’ll be good to share about your journey, ma’am.

*A – Devina Mehra

Okay, so I grew up in Lucknow. So till my undergraduate degree, I was in Lucknow. And Lucknow was not at all a business city, so I had absolutely no exposure whatsoever to business, let alone finance and specific things like that because my parents were both professors and they had no interest whatsoever in investing. So after my undergrad degree, which was in math statistics and English literature, I went to IIM Ahmedabad and in those two years there, everything was new to me because I didn’t even know what a share was, what a debenture was, what assets and liabilities, debit and credit, nothing. But I’m a learning junkie. I know learning is what, till date, drives me. So I often say that in this business, the input and output is money, but I’m really there for the learning because very few businesses that 30 years on, you can still say that you don’t know it all. Every day you have to learn something new. So those two years at IIM were very interesting for me from that point of view because everything was new.

And of course, you know, when I graduated from IIM, securities research did not exist as a profession. So there was no option to go into securities research. I mean, let alone a course, we didn’t even have a full module on that because it didn’t exist. So I joined a bank, so I joined Citibank, where for the first five years, I was there for about seven years. So first five years I was in merchant banking, what is now called investment banking, that was called merchant banking then. But it was rather constrained at that time because pricing was not free. There was actually a department in ministry of finance called controller of capital issues that used to determine the pricing and so on.

And I really enjoyed the last two years in Citi which were as a credit analyst. And I often say that in hindsight, that was very good training. I mean, one of course, you got to know about a lot of industries. I visited a lot of plants. I was very much interested in that sort of thing. But the other thing also is a perspective because in credit, when you are a bank lending or giving any facility to a company, you do not participate in the upside. So you are concerned only with the risk and the downside, and which was very valuable training because otherwise if you come straight into equity, everything is ra-ra, everything is good and glorious and every company has great prospects. So that training of specifically looking for the risk area, that was very good from the credit analysis point of view. And then, you know, things change, of course, in early ’91, India liberalized. And soon after that, in the next year, in ’92, ’93 budget, Dr. Manmohan Singh opened the market to foreign institutional investors.

So actually there were two triggers how I came from banking into becoming an entrepreneur. And one was this, that the market opened to FIIs and I said, now is the time that broking will professionalize because still then broking meant only traditional Bombay Stock Exchange brokers who had been doing it for generations but there was no professionalism, no real research, et cetera. That was one.

And then in that same year, NSE did not exist then. So Bombay Stock Exchange said they will give 71 new memberships to professionals. And this was at much below market price. At that time, market price of a BSE card was INR 2 crores. And this was at INR 55 lakhs. So everybody told me that, you know, don’t apply because BSE — and they were right, BSE is a broker’s club. And I mean, at that point, and said, you are a complete outsider, let alone knowing people there, you’re not even a Gujarati or a Marwari, which was nearly 100% of the BSE broker said. I said, let me apply, dekha jaayega [Phonetic]. So you know, against all odds in some senses. And I always say that that was the one thing where visualization of a goal took me to something which logically didn’t seem possible. And later on when I found out, it was just the two extra marks I got for the IIM gold medal that pushed me over the cutoff. So, in spite of the broker’s trying not to give me the cut, that pushed me over the cutoff. So you don’t know in life where the dots connect in hindsight.

Even my time in merchant banking, which I didn’t like that much while I was, I didn’t want to spend five years there because after a couple of years I thought the learning was very little. But that again helped me in the BSE card. If I’d been elsewhere in the bank, it would not have counted as experience but this investment banking counted as capital market experience. So, everything fitted in hindsight. So that’s when I in ’90s, it’s almost exactly 30 years. So ’93 is when I started this venture.

And the ’90s were basically mainly being an institutional broker and also doing very, very selectively things which I was totally convinced about what are now called the QIPs, the institutional placements. So that was the business. And towards the end of the ’90s, this was totally different thinking from everyone. We went global and there were two triggers for that. One was the Asian crisis where you saw, I mean, today also people say that why should we look outside India because India is the fastest growing economy. The Asian tigers were the fastest growing economies in the world. And then there was a crisis. And in one year in dollar terms, all those markets fell 50% to 90%, you know. So an investor in Indonesia would have lost 90% of her holdings in a matter of a year. And even the best Taiwan was down 50%, South Korea, Thailand, everybody in between. So that was a wake up call, one. I said, being in a single market is dangerous. And the other thing was, I was just simply bored. I said, you know, kitna time yehi sab karte rahenge [Phonetic], same Bajaj Auto, Infosys, HDFC, Ranbaxy, which were the majors then. And I said, you know, how long am I going to keep doing the same old companies? Let me do something different. But, you know, everybody told me it cannot be done.

So by that time, I had become friends, not just with the India fund managers, but their bosses, bosses, bosses, no, so really senior people in fund management internationally, and I asked them that we want to go global. And they said, you know, that very, very tough. If you want to add a Thailand or a Philippines so that the emerging market fund manager can give you some business there. And then what’s the point of adding some small markets? If I really want to do this, I have to do it in the biggest markets in the world, which everybody told me, you know, it’s not possible. And they said, like, why would anybody listen to you? And if you want to go to a market like the U.S., do the smaller stocks, do stocks which nobody covered. I said, no, and if I’m doing it, I’m going with the biggest stocks. And that’s what we did.

And not just in the U.S., we started covering stocks in U.K., Europe, even China, etc., Baidu and things like that. In Asia, we’ve been covering since then. So it’s now like London Stock Exchange membership was in 1999 and NASD was the next year. So we’ve been doing it that long and those companies are much more complex than Indian companies. And the companies themselves change. As I often say that in 2000, U.S. tech meant companies like IBM, Motorola, Dell, Cisco, not many people would remember, was once the highest market cap company in the world. And now you talk tech, it is a totally different set. I mean, not those companies have disappeared, but other than Microsoft, none of these companies are majors anymore, you know, or companies like Walmart, Procter & Gamble, all those have become much less important now than they were then.

So that’s been the dynamic part, but I mean, really interesting part, I said like, I’m a first principles thinker that you can learn everything by first principles. And the interesting thing when we went global was that in India, at least, you know, some of the media, you know, some of the journalists. When we went global, it was like, you didn’t know anyone. You are only sending the reports to all the media houses. You know, it’s like to anonymous, almost like that. And yet it was in no time it was picked up. Fortune, Business Week, Forbes, Barron’s, Wall Street Journal front page, we were there everywhere. That was a real vindication of that if you really can do research properly, the world is your oyster. So that was like really a big vindication, something I was very happy about.

In fact, in India also, when the FIIs came in, the foreign brokers also came in. So right at the beginning, I said, let me see their reports because I don’t even have a training in this and they have been doing it 50 or 100 years, you know, there must be lots to learn. But once I saw the first lot of reports, I said, this is nothing to learn, you know, I did, I was not impressed with the quality of either the analysis or the presentation and I said, okay, so, you know, keep this aside, let me do it from first principles.

So in ’90s also we did a lot of theoretical work also on valuation, coming up with new ratios and things like that. So this was in the ’90s, then this was the globalization was the, like the first decade of 2000. And then we moved from more the investment banking and securities broking side to the fund management side. And interestingly, we started first with the global fund management. We started the global asset management first.

In India, you’d be surprised we got a PMS license in around year 2000 first time, but we started off a PMS scheme only in 2020. And the reason for that was that, I mean, internally also people would say that, you know, we have the license, we have the brand, why don’t we launch? And I said, you know, taking somebody else’s money is a big fiduciary responsibility. I mean, I take it very seriously. It is not just like a form filling for me. So unless we have a system where there’s some consistency, some replicability, I don’t want to take people’s money. Your own money you can manage, that you invest in 10 stocks to do so well that [Foreign Speech] I don’t want to take people’s money and do something where I’m not sure of how the outcome will pan out.

So we started only just a little over three years ago. Of course, since then we’ve been the best performing PMS on returns and risk adjusted returns. That’s another matter. And then because of so much pressure from investors, we started a small case about a year and a half ago. So those are the India products. And globally also see, again, this is also a cause for me that Indians should diversify globally for the same reasons as we did on the business front. Same reason Indians should diversify globally. And I wanted a product that was actually global, not create NASDAQ’s ETF, because that is not global because that is, you know, as I always say, that no theme lasts forever. No geography, no sector, no asset class.

So our starting point for a totally global product is that totally diversified is at $10,000. So just over INR 8 lakh, when you will not get that kind of product for less than a $1 million elsewhere. So that was the other thing.

So this has been the, you can say the big turning point. Of course, I didn’t tell you why we started that PMS three-and-half years ago because we now have a system. So we actually, the engine for all our asset management, all our fund management is artificial intelligence machine learning system. We say we use a human plus machine model. So our small case is called FG-HUM, because human plus machine. Because a lot of the expertise we have codified into the machine, which can then use it consistently across all security. So globally, we look at 25,000 securities and choose from there. In India, everything above a thousand crore market cap. So that’s roughly about 700 companies. So we choose from that, but everything is on the same basis. And then on top of that, but it’s not a black box. It’s not like some algo running in the background. So if the system recommends something, we can always go back and check why it’s being recommended. [Foreign Speech] what is happening actually, if something is going down the ranking, you know, what exactly has gone wrong. So that’s been another journey and very interesting. So that’s again, you know, something which I am not a techie. So this is something, you know, I’ve learned only off late. But it’s, but I mean, my view is that the playing field is changing and fund managers, which is the bulk of the fund managers still stuck in the 1990s, which is why you see so much underperformance because it is like hockey moving from grass to AstroTurf. The skills you require have changed and which is why India, which was dominating hockey till mid-70s for, you know, was totally out of reckoning for 40 years. So same thing in investing, you know, something has fundamentally changed and you have to adapt to that.

*Q – Radhakrishnan Chonat

Excellent, ma’am. Such clarity of thought. Kudos to all the work that you have done. And not only have you broken the glass ceiling in India, but you have basically entered the global market when everyone was stuck to India story.

Ma’am, you are the best person for me to ask you this, the macro situation, right? Your fund, the global fund, has the biggest stake in the U.S. market, but you have, when I saw it, it’s spread out both Europe, everywhere. Ma’am, with the kind of change we have seen in the last two years with COVID, now impending recession looming across the U.S. markets, what are sort of your macro views for the next decade? Let me ask you for the next decade. What are sort of your macro views? And why, when everyone is talking about the India story, I kind of felt that you are a little skeptical. You are kind of giving us an advice that, you know, spread across your risk. So portfolio rebalancing away from India also. So what are your thoughts and views?

*A – Devina Mehra

So when I say global diversification, it is not from the point of view that I don’t like India. Like, I mean, in 2020 to January itself, I clearly said that India will outperform the world, which it did. And the thing that I said was that no theme lasts forever. So India had, why did I say that India would outperform from like about second half of 2021 onwards, I’ve been saying that quite clearly because India had come out of a very long period of underperformance relative to the world and relative to its own history. So you know, we like for in India, we have this thing in mind that equity markets give 15%, 16% compounded returns over a period of time, because that’s roughly the returns since the SENSEX started. But if you look decade to decade, the variation had been very high. So if you look at 1980 to 1990 to 2000, so you had, I think it was 21%, then the next decade was 14%, then the next decade was 17%. And this 2010 to 2020 was just about 8.5%, which if you think about it, and those days fixed deposit rates were over 8%. So it had given no returns practically to compensate for the risk.

So when it came out of that, in that post-COVID double run, and it sustained, I was quite clear it would last. And then also, if you look at versus the globe, there are roughly about 40, 42 major country indices. We used to be number 24, 25, sometimes 21 at the most for years. And then once you broke through that, then again, it was clear that that outperformance would go on. But asset allocation, global diversification, these have to be long-term decisions. These are not like that one year you think this is — like last year people did tell us that your India fund is doing so much better. So why should we be in global? So if you’re just chasing what has done well recently, this you can actually calculate. If you just chase the theme that has done well recently, you will always underperform. Like in 2021, you had all these NASDAQ ETFs and all that coming. I was on TV saying that, don’t think the NASDAQ will always outperform. Just because it has done well for three years, you’re forgetting the history that there are long periods when it doesn’t do anything or goes down. You know, the 2000 crash, that high was – the pre-crash high was taken out only in 2015. Or it can be as long as that. But at that time, nobody listened. Then when the NASDAQ crashed 40%, then everybody wanted to get out. And I said, you’re now compounding out bad buy decision by bad sell decision. And last year, NASDAQ was close to the bottom in those country in the scene. And this year, first quarter, it was around the best performing almost. So that’s how things change. So that is why you need global diversification and you need a dynamic and tactical reallocation. So as you were saying that for us, global doesn’t mean U.S. So we look at, so we’ve had everything from South African REITs to Australian mining companies or Chinese footwear companies and all kinds of things. So that’s how the system also helps in the screen or what we want to buy. But the rationale for global diversification, just let me give you a nugget. When I started my career, the dollar was INR 12.

*Q – Radhakrishnan Chonat

Wow.

*A – Devina Mehra

Now it is INR 82. So in the course of less than a career, you’ve seen 85% depreciation. So this is one other reason why you have to look at global diversification because nowadays that more people are studying abroad, settling abroad, and therefore your kids are abroad. So post-retirement, many people also then want to go and live somewhere else. So this is another reason.

So I mean, basically, I mean, it is as simple as don’t put all your eggs in one basket, and especially India is only about 3 odd percent of the world market cap. So there’s no reason to have 90% of 100% of your assets here. Every country has a home country bias. You know, Canadians hold 60% of equity in Canada and Canada is not 60% of world market cap, but for us it is very skewed. And it also comes out of history because when we were growing up, there was no option to invest abroad. Even if you were traveling abroad, many of your viewers will be young and won’t know this, we could take only $500 and that too once in three years.

*Q – Radhakrishnan Chonat

And here we are complaining about 20% TCS for credit cards.

*A – Devina Mehra

And every other trip you could just take $20, that’s it. And then you had this draconian foreign exchange laws that if you borrow even $50 from a friend abroad, you would be in jail. So I don’t know how you are supposed to manage not taking money from here and you can’t take money borrow from there. So I’m just saying that because of that, we never really looked at global investment. But now the liberalized remittance scheme, the LRS is very generous. So it’s $250,000 a year per person. So family of four can actually limit a million dollars. So you have to look at global diversification over a period of time. And look at asset allocation in general also. So it does not, I never say that even for somebody very young that they should have 100% of their assets in equity, because equity returns come over a period of time, there are many ups and downs. So this is not some, so you must have something in things like fixed deposits, even things like gold, etc., because you might need some money, you might need to, you want to study further, you want to down payment on a house, you have some medical emergencies, it could be all kinds of things.

So have asset allocation, and oftentimes people don’t even know what the present asset allocation looks like. And this is one other message I want to tell to investors that look at how your entire funds are deployed, how much is in real estate, how much is in fixed income, how much is in gold, how much is in equity. Because at least you must know the starting point. It is like, you know, Google Maps, you can’t just put the destination, you have to put the starting point also.

*Q – Radhakrishnan Chonat

Sure. Yes, I mean, this snippet on LRS scheme, how good we have right now, though we are complaining about the 20% TCS on credit cards now. This is going to, I’m sure this is going to be the talking point from this interview, where you have actually given us what kind of regulations we had earlier.

*A – Devina Mehra

So, I think I did not answer part of your question on the global macro.

*Q – Radhakrishnan Chonat

Yes.

*A – Devina Mehra

See one other thing I must tell you is that the economy and the market are two different things. So, both ways. So, you know, China had a — did not take out its 2007 market highs, even as its economy went up 6 times, 7 times. So, and like last year, October, I said, you know, this one signal, we were looking at certain interest rates and the yield curve and said like, this is, this signal has never failed to, you know, if the signal comes, then the recession is almost certain. And people said, then why invest in the U.S.? And I said, this is like, that’s the thing. It is not as if that, that if the economy has not bottomed, the market has not bottomed because the market may have discounted it in advance. And when we were sitting in October, the S&P had been down for three quarters in a row, which has literally happened only a couple of times in 50 years. In fact, you know, and so it’s like sitting here, is it already in the price?

If you look at 2022 as a whole, it was one of the worst years ever in global market history.

*Q – Radhakrishnan Chonat

True.

*A – Devina Mehra

Almost the worst, you know, so like for the U.S., it was the worst year in the bond market since records began about 230 years ago, very worst. In both bonds and equities being down, it has happened in the last 100 years. It happened once during the great recession, 1931, once during the world war, 1941, once in 1969. And this was the fourth time in the century and the first time in 50 years. So that, it was that much of an outlier here. We did a grid of all asset classes around the world. Every regional bond index down, every regional equity index down, metals down, precious metals down, meaning almost flat, like they went up and they came down. Only thing in the whole world that was up for the year was energy and a handful of agri commodities, that’s it.

So it was, that’s when you know, at the beginning of 2022, I said, you know, such terrible years don’t repeat. So law of probability says the next year will be an up year, meaning 2023, which we’re living through will be an up year. So that’s the thing, just because something is not bottomed in terms of the economy, doesn’t mean that the market has not bottomed and vice versa. I mean, they’re like, they work independently up to a point.

So in India, I mean, there are concerns on the economy, more, I would say also on the spread of the growth. So you see that dichotomy that, you know, high-end cars are selling, but two wheelers and entry-level cars are not selling. You have 80 crore people who need free ration. That shows you again the distress in the economy. Whereas on the other hand, because a lot of movement has happened from the unorganized sector to organized sector, for the listed companies, things might be looking okay, because the organized sector employees have done well. And also basically the higher end has done well. So, that’s showing in the luxury homes are selling.

*Q – Radhakrishnan Chonat

Correct.

*A – Devina Mehra

Whereas, if you look at affordable housing, the housing loan dispersion, I think, has flatlined for five years or something like that. So, those are the things that, I mean, that’s a different thing from saying that the market is not looking good. So, I mean, I remain positive on the Indian market in general. And in fact, March end, I had said it in actual with no ifs and buts, I said it on Twitter, one, two, three, four, that risk of a crash is much lower than the risk of missing out on an up move. I said, is it the bottom? I don’t know, but it’s close to that. And so you look at the run from there. Last year in June, I had made a similar thing that it’s time to get in. And I later on saw index was 15,293 on that day. In two months, it went up 18%.

See, one other thing I must tell you that in equity, there is a risk which we all understand that if you’re invested in the stock market, the portfolio might go down. The risk people don’t understand is that there’s a risk in not being invested in sitting it out. So that, and how does that work? And we did this, I mean, we are very data driven. So I mean, whatever you say is backed by data. So we looked at the data since the census started. And we said like in 40 odd years, that INR 100 you had invested at the time we did the exercise would have become last year, so INR 44,000. So we said, suppose you miss out on the 10 best days and 10 days in 40 years doesn’t seem like much, right?

*Q – Radhakrishnan Chonat

True.

*A – Devina Mehra

But that INR 44,000 comes down to less than INR 15,000. So two thirds of your returns gone in 10 days. If you miss out on the 30 best days, which is less than one day a year, your returns instead of your INR 100 becoming INR 44,000, it’s less than INR 4,000. So all your returns effectively gone, 90% of your returns gone. So that is, and when do these big up move days come? That’s the other analysis we did and they don’t come in the bull phase. The bull phase, the day-to-day move is not so fast. They always come when there is fear, there’s insecurity, when the market has not been doing much or has been declining. I mean, the only exception to that was the Harshad Mehta Teji because that was an artificial rigged market. That’s the only time in a bull phase you had a rapid move. So, and this is not particular to India, we did a similar exercise for S&P over a 100 years and the results were pretty much the same.

So, when the risk of the crash is not very high, there’s danger to sitting it out. So often people say, when to get in and when to get out. And I said, do you act when I tell you? In fact, recently I tweeted with my own tweet from March and saying, did you act? Because I had said it in very explicit terms, that if this happens, then that will happen. It was like one, two, three, four, very clear. Similarly at COVID time, I had tweeted on March 2, 2020 that something very strange is going on because that was when Italy and Japan had closed schools and you saw these pictures of the top tourist attractions in Rome with nobody there. I mean, later on we got used to those pictures but first time we saw those. And I said, this has never happened. I mean, it’s never happened during the world wars or anything. This is very strange. And we completely went risk averse in India and globally, you know, buying hedges, going more into cash in our global portfolios where we normally hold 70%, 80% equity, we went to less than 10% equity. We still lost some money because even investment grade debt went down, but all our products, we lost only 8%, 10% as against most funds, which lost 35%, 40% in that period. And then March 23, 2020, we again said that, now it’s time to get in. And we got into, global funds, we reinvested around that time, and India by the end of March. So I said, if I told you in March to get out, March 23rd, get in, which is what we did, would you do it? And if you missed that out from that March 23rd to April 30, in that five weeks, both India and U.S. went up nearly 30%, 28% to 30%. And if you missed that move, you missed it. After that, no matter how well you manage your fund, you will never make it up. So that is, we always emphasize risk management. So whenever there is a little bit of danger, also we hedge and all of that, but it is equally important not to be out of the market when this probability of an up move. So that’s the way we try to balance it out.

*Q – Radhakrishnan Chonat

So, I mean, very well said, ma’am. The Black Swan event that we had in March 2020, most of the fund managers, I mean, at least from our point of view, we thought that’s the end of the world because we are seeing such a Black Swan event for the first time in our lifetime. But you have seen enough recessions over the decades and you kind of had the knowledge. Ma’am, I would love to know the — I mean, you talked about AI and machine learning that you have already implemented when other fund houses are still doing the old brick and mortar way. Sort of what kind of quant numbers are you looking at and what sort of a qualitative approach you also do in terms of your research or investing approach, ma’am? Any insights into that? Probably I can call this exclusive. Any insights into your quantitative and qualitative analysis of a sector or an industry or a stock? What are the thought processes that go behind?

*A – Devina Mehra

Okay. So I mean, this COVID, when I say human plus machine, this COVID, the time was an example of where the human intervenes, because that is something that obviously past numbers of any kind will not be able to capture.

*Q – Radhakrishnan Chonat

True.

*A – Devina Mehra

If there is a war brewing or this kind of pandemic, that’s one of the places where a human override comes in. So this is an example of that. And in terms of what our quant models do, they’re actually very rigorous models. And there’s more than a million lines of code. You know, I’m sure very soon AI will become a buzzword and people will say AI-driven, but that is like, as I always say, that if I ask you this question, that our financial models made in Excel accurate or not, you would say what an absurd question because everybody is making their, you know, it’s only a tool. But it is the same thing with AI. AI is only a tool. It depends on what you are putting in it.

*Q – Radhakrishnan Chonat

Correct.

*A – Devina Mehra

So we are like, we test literally thousands of factors. Factors means things like data, financial ratios, industry data, and so on to make the models. And we have to keep testing it, that what is working, what is not working. And I’ll tell you, you know, see, I really love doing research the traditional way. So if left to myself, I would say that’s the fun part, going and visiting companies and going and seeing plants. So I’ve been to like ACC cement plant in the middle of nowhere in Andhra Pradesh or Hindalco’s plant in Renukoot or a lot of steel plants from Jamshedpur to Tarapur. And I’ve seen all kinds and I really loved this whole kind of going to the outskirts of NCR and Hyderabad and Chennai and meeting companies when people actually didn’t even know what the equity research was. So you would call up a company and many of them, especially the more conservative ones would say that what is this and why should I meet you? You need our annual report and attend our AGM if you want to. And I would actually sometimes land up at factory gates and see, [Foreign Speech] So that was fun, but they said, you know, when the playing field changes, you change. And the fundamental change has also been that earlier you could get some additional information by meeting companies and not just in India. I mean, Fidelity could sit with the Procter & Gamble and get something which was not publicly available. But now all over the world, regulators have put a stop to that. So even as a general investor, you will see the conference call transcript and all that. Otherwise, you know, that itself used to be a barrier, would you be called for a conference call or not? And so as a retail investor, you had no hope of knowing what was really going on.

So as that happened now, the trick is that now there is too much data. Earlier it was like getting extra data or information. Now there is too much data. So how do you handle that data? And handle it on a consistent basis, without bias, without random noise. And wherever human being and human judgment comes in, there is random noise. And you can see the same exact data you can give to five different analysts or fund managers, and everybody will come with a different view on that. So this is a system is to do that and to actually test out what is working. So for example, I thought we think a system can analyze financials, but what if the financial are manipulated? This is one of the questions that you have as a human being. And as you said in the introduction, we caught a lot of manipulations, including Enron, WorldCom, which were the two big scandals of 20 years ago.

And the interesting thing is that because the system is looking at so many things, it actually catches every single situation of manipulation. We’ve tested this out from one person beverages to under armor. There has not been a single scam that was not red flagged in advance by our systems. I mean, it might red flag it a year or two before the scam becomes public, but it does. Because it’s looking at a combination of many factors that accounting policy is changing too frequently, depreciation going up and down, too much volatility in quarterly earnings, or like in India, this factor still works in U.S., it has stopped working, that any unexplained increase in compensation to auditors, essentially auditors are being paid to hide something. So because it looks at so many things, and even in terms of traditional financials, for example, you look at growth of earnings or sales, that’s essentially the first derivative of sales or earnings. But you can look at the second derivative, which is acceleration or the third derivative, which is jerk. And sometimes signals come from there.

So it’s a fascinating field. And of course, you see cleaning up data itself is 60% of the work. And my team is extremely rigorous. You know, if I tell them, try this and that, they say, no, no, no, you can’t. Like if you tamper with the integrity of what we are doing, then we can’t, we held responsible for the output. So it’s like a, it’s a fun thing, but also once you have a system in place, you know, [Foreign Speech] let’s try this factor and let’s test this and that, that can be done. And if you read these two books of Daniel Kahneman, of course: Thinking, Fast and Slow, most people know, which is about biases. But there’s a second book of his, just come, Noise.

*Q – Radhakrishnan Chonat

Noise, yes.

*A – Devina Mehra

Which is about — and the essential, one of the, I mean, it has lots and lots of thoughts. One of the essential take aways from the book is that any system or algo will outperform a human judgment. So even if, see what also happens is that as an investor you think that I am buying stocks on X basis, that I’m buying stocks which have this kind of return or this kind of growth or whatever, but actual fact may know you are not buying that way. You are probably taking some tip, 70% of your portfolio is tips you heard on TV or from your friends. So you are not keeping to your own system. So if you actually, even if you had this five criteria and you put it into a system that let me put this into a system and I will only stick to this, you will do better than applying your judgment on top of that.

*Q – Radhakrishnan Chonat

Very true.

*A – Devina Mehra

Judgment on top of anything adds noise. As I said, you know, five different analysts looking at the same data will come to different conclusions. The same analyst might come to a different conclusion depending on whether she had a fight in the traffic on the way to work or you know, something like that. So human beings introduce randomness in the whole picture. So one is bias, which biases are also impossible to overcome simply because they are hardwired into us. They are part of human evolution. So Daniel Kahneman himself says that I have spent my lifetime studying biases, but I find my decision making has not really improved. I’m still prone to the same biases I talk about.

So because these are all very hardwired into us, like I always give this example of optical illusion. So you have these optical illusions that these two things look different, but they are the same, etc. Even when you understand it, you still will see it the same way. It still appears the same way. So it’s the same thing with biases. Just because you intellectually understand it, doesn’t mean that they will not affect your decision making.

*Q – Radhakrishnan Chonat

Very true, very true, ma’am. Very true, excellent insight, ma’am. It’s a human bias. Though you’re aware of the bias, you’ll still be prone to that bias. And ma’am, sticking to the bias thing, what are you biased about as the next big industry or vertical? And what are you less happy about in terms of give us something to the listeners in terms of what sectors. We’re not talking stock specific, let’s not talk stock specific, just industries that you are hopeful about and industries that you’re — teda meda [Phonetic].

*A – Devina Mehra

Okay, see, right now, if I look at our portfolios, we’ll still be most overweight, industrial machinery and capital goods. And this has been a theme for us for a long time now, since October 2021. That’s when we started. So since then, many of the stocks have doubled, tripled. We booked some profits also. We’ve changed from one stock to the other, depending on [Foreign Speech] compared to something else, which is just starting off. But I mean, still that sector will be the most overweight. Again, it came out of a very long period of underperformance from 2009 to 2021, that long. I mean, it compounded on, I think only 2 and odd percent as against the market compounding 9.5%. So when that, you know, the fundamentals change for the positive and that turnaround came, again, you knew this would be a long run. So that, I mean, we are watching because it’s not now the beginning of the run. It’s now over a year and a half, you know, how long it lasts. So we look at everything from scratch every quarter. That’s, you know, like today, if I had cash, where would I be? And that’s the way we invest. So, but for now it is holding up.

Banking is an industry that I’m normally very wary about. So if it wasn’t that much of a weight in the index, I probably wouldn’t even look at it. I even know in the HDFC Bank has been like a seminal call. One year out of IPO, we had done a report with the baby on the cover, and saying this is where it is, and Arnold Schwarzenegger, that this is where it will be. So even till now, and if I ever meet anybody who’s ever worked in a HDFC bank, that’s the first thing they will remember. So that of course had a great run. But that apart, I mean, generally I’m very wary about banks and in that case, as I always say, because banks, the thing is that negative surprises abound and you don’t know where it is hiding. So as I always say that Amazon was a pure financial-based call, HDFC Bank was plus-plus because a lot of the people in HDFC Bank, including Aditya Puri himself, were all ex-colleagues, and I was really betting on the team that they will manage the risk. Because in banking, having been a banker, I know this, you know, risk management is key. So, but last year, I mean, after we started up PMS in 2020 and 2021, we had very negligible weight to banks, considering, as I said, this is the largest weight sector in the indices. So, but we took that bet. Middle of 2022, we changed that and we went to market weight in banks, which because of price action has become a little overweight. So we still hold banks. We don’t hold — we hardly, I think very minor holding in the non-banking financials, so that we have still not dipped our toes in. So capital goods, banking, in terms of, we still be slightly overweight IT, not a lot, but somewhat. And in the January and April rebalances where we have added has been some pharma, some auto, some auto components. Those would be the areas, even a couple of construction and infrastructure space, not a lot. See, many of these are bottom-up picks. So like for example, last year, our big winners were ITC and Raymond, neither of which was really a sector pick. So that also happens. And we are always very well diversified. So we always say that risk management first, return maximization second, because investing is a loser’s game. So that’s been always our focus. So we are very well diversified in terms of sectors and in terms of companies. So unlike a lot of PMSs, which go for a very concentrated portfolio, I mean, that is leaving a lot of things to luck. So there might be short periods where you outperform.

So as I said, since we launched, we are by far number one in the multi-cap PMS space on returns alone. In fact, there are only three or four which have even beaten the index. So, like we have more than doubled indexes up I think 60 odd percent. There are hardly any which have even beaten the index but more important than this is the thing that on risk adjusted returns, we are like way above everyone else. So if you look at returns by volatility or gain to pain, which looks at how much drawdowns you had to see to get to that. So that all comes out of risk management. So diversification is one of the things we have like many things we do for risk management, including stop losses, including the fact that we never invest in illiquid stocks. And even when we like small caps, we will rarely go below, above 20% or so in small caps. And that too, I mean, each stock, we will make sure there’s liquidity. Because small caps, that is the thing that when you’re getting in, it is all there. And when you want to exit, the door is closed because liquidity disappears. So we are very careful on a lot of things on that.

So our PMS product is called India Super 50. So, we have roughly around 50 stocks. That’s the…

*Q – Radhakrishnan Chonat

Excellent. Ma’am, sticking to India Super 50. So a PMS fund you have started, you have seen a new influx of investors. And we have been talking about the fund management aspect of your life, the three decade journey. How has the investor, basically your customer, his or her evolution that you have seen over the last 30 years? Are we better informed now or are we still at the same level?

*A – Devina Mehra

No, I mean, definitely we’re better informed because now with internet and all that, the information availability is much better, as I said. At that time, there was really no information availability. Even though, I mean, I have to say that in the ’90s, we were primarily an institutional house. We were not doing retail broking. So we were catering to funds and mostly foreign funds and that. But obviously, I mean, as I said, that even as a professional, you didn’t have access to information, which is why I said that the fund managers are stuck in the ’90s, where getting differential information was the key. Whereas now the information is available even to the man or woman on the Street, the same information. So now your skillset has to be different.

So, but only having a couple of things I would like to say, I mean, of course, you know, now people have learned the lesson, but you know, I was like kind of shouting from the rooftops in 2021. Then don’t go from one — lurch from one end of the risk spectrum to the other. That you, I had people who had never even invested in equity suddenly talking of trading crypto or trading on Robinhood in the U.S. at night. So don’t do things like that. And one other thing to keep in mind is that, you know, this is there on page one of every investment book but we still have to learn it through experience that asset allocation determines most of your returns and not stock selection. So we all like to, as I said, we use equity investing for entertainment purposes that for party talk that you want to say, six months ago I told you that stock, now see it is double, now we just talked of four stocks out of which three have gone nowhere, you will forget about that. But actually you don’t need to do that. What you need to do more is to get your asset allocation right and within equities to get your sector allocation. So that’s most of the game.

*Q – Radhakrishnan Chonat

Excellent piece of advice. Devina ma’am, outside of work, tell us about what are your hobbies other than researching stocks? How do you chill?

*A – Devina Mehra

Actually, reading is number one. That is really, I mean, that’s been my hobby from age four. So that’s number one. Travel used to be my big, big passion from childhood. Unfortunately, because of certain personal circumstances, I cannot travel that much anymore. So that’s been sad. I mean, the only thing I’m glad about is that when I could, I did. So I was like, I used to take a holiday every month. And there were like many during the year also. These were the weekend ones, but there were many others also. So, like, I just went for my batch get-together in Paris for two days, and precious two days because I rarely manage to get away. So, it’s mostly reading, actually, and of course, spending time with my daughter and my mother because I don’t really see much video stuff, so I have no idea about the OTT shows and all that. I think it’s probably illegal, I don’t even have a Netflix subscription, can you believe it?

*Q – Radhakrishnan Chonat

That’s going to be the title of my show.

*A – Devina Mehra

So whatever time I get, mostly goes to reading. And of course, I’m fond of old film songs, so as I say that my knowledge stops from…

*Q – Radhakrishnan Chonat

Nice. Ma’am, let me ask you the toughest question.

*A – Devina Mehra

I lost you in the middle. I lost you before this.

*Q – Radhakrishnan Chonat

No, I said that is going to be the title, Devina Ma’am Who Doesn’t Watch Netflix.

*A – Devina Mehra

So for old film music, I’m quite knowledgeable, but only from about 1940 to 1975. After that it was patchy. So as I say, I grew up on the music of my father’s youth, not my youth.

*Q – Radhakrishnan Chonat

The fund manager who doesn’t watch Netflix, I hope Netflix stocks don’t come down. On a similar note, ma’am, the toughest question of this whole interview, I’m going to put you in a fix. Recommend three books for us. Only three. You can’t go and give us multiple recommendations. Three, it can be a mix of both, you know, stock-related or it can be something philosophical or anything. If you were to get a chance to read for the next one week, no other work, which three will you pick again?

*A – Devina Mehra

Okay, I mean pick again is a I’ve already spoken about ‘Thinking, Fast and Slow’, and ‘Noise’.

*Q – Radhakrishnan Chonat

Those are out of the equation.

*A – Devina Mehra

Okay, the books that I recommend to people who don’t even read, one is Being Mortal by Atul Gawande, which is because all of us will face those questions. So I would, you know, that is one that I recommend. Tony Joseph’s Early Indians, again, about how humans came to India and what is now India, the subcontinent. So that’s, I mean, that’s an amazing book. I mean, that’s like quite an amazing book. And books on your, basically, thinking that, because I would say that understanding the financials or the numbers is the easy part. Managing your mind is the hard part. So Daniel Kahneman has those two, but there are others also like Invisible Gorilla or Misbehaving by Thaler, so those books also.

*Q – Radhakrishnan Chonat

Yes, Thaler’s is a good recommendation, Misbehaving.

*A – Devina Mehra

Yes.

*Q – Radhakrishnan Chonat

So ma’am, your suggestion is develop second order thinking right? I mean you can always do number crunching but second order thinking, third order thinking all the things are…

*A – Devina Mehra

Yes, and understanding where your mind trips you up.

*Q – Radhakrishnan Chonat

True. Very, very insightful ma’am. It was a pleasure. I didn’t even realize that it has already crossed one hour. It has been a purely pleasure talking to you, ma’am. I hope I can do more such interactions.

*A – Devina Mehra

Even I didn’t realize that.

*Q – Radhakrishnan Chonat

I hope I can do more such interviews with you. Maybe we will come out with some other theme, industrial theme, and then I’ll get to talk to you. Thank you for talking to Alpha Street. It’s been a pleasure and I look forward to talking again.

*A – Devina Mehra

Thank you for having me. It was a pleasure.

*Q – Radhakrishnan Chonat

Bye, ma’am. Take care.

*A – Devina Mehra

Bye.