If S&P 500 is up double digits in single quarter, Funds will under perform
In an earlier piece, I had pointed out that Mohnish Pabrai’s PMS Funds have underperformed the NASDAQ and S&P 500 in the calendar year 2018.
“All three funds significantly underperformed the benchmark indices in 2018. The funds were down between 23 and 42% in 2018 versus the various indices being down under 5%,” Mohnish had candidly disclosed.
Mohnish blamed “irrational declines” in his high-conviction stock picks, namely, Fiat Chrysler and Rain Industries for the underperformance.
“Much of the decline can be attributed to irrational declines in the prices of our two largest holdings, Fiat Chrysler and Rain Industries,” it was stated.
Unfortunately, the streak of underperformance has continued in Q1 CY 2019 as can be seen from the table below.
|Index||Return from 1/1/19 to 31/03/19|
|Fund||Return from 1/1/19 to 31/03/19|
|THE PABRAI INVESTMENT FUND II, LP||5.4%|
|PABRAI INVESTMENT FUND 3, LTD||3.8%|
|THE PABRAI INVESTMENT FUND IV, LP||13.1%|
Mohnish explained the situation in cogent terms:
“The three benchmark indices were up between 11.8% and 16.8% for the quarter. The S&P 500, which was up 13.6%, delivered its best first quarter performance in more than 20 years. It also had its best single quarter gain since 2009. The three Pabrai Funds were up 5.4%, 3.8% and 13.1% respectively for the quarter. They lagged most of the indices during Q1 2019.”
He also explained that it is not worth reading too much into the results of a single quarter.
“When markets are up double digits in a single quarter, we are unlikely to keep up“, he said bluntly.
Temporary headwinds in wonderful businesses
Mohnish observed that three of the larger positions in the portfolio of Pabrai Funds, namely, Fiat Chrysler, Micron Technology and Rain Industries, are facing “temporary headwinds” in their businesses during the first half of 2019.
However, he made it clear that he is not worried about the situation.
“All three management teams expect these headwinds to dissipate in the 2nd half of 2019 and beyond,” he stated.
“Our investments in these businesses have very little to do with their short-term results. What I care about is the underlying intrinsic value of these businesses in a few years,” he added.
Mohnish also opined that while there are no guarantees in investing, the Pabrai Funds is likely to do very well with these and other holdings.
“The three funds own fractions of a set of wonderful businesses run by exceptional leaders. In the last few years we have added some remarkable assets to the portfolio at significant discounts to underlying intrinsic value,” he stated.
Don’t tinker with the portfolio
Mohnish took the opportunity to tutor us not to be hyperactive with our investments but to let them ride into multibagger glory.
“My biggest challenge is to avoid doing anything to this terrific portfolio for several years. If I can just sit on my ass and do nothing for a few years, I think we’ll all be very well off,” he said.
However, he did add that if “spectacular opportunities” show up he will not hesitate to change his mind.
It is worth recalling that in the CY 2018 newsletter, Mohnish had candidly admitted that it was a mistake not to sell Rain Industries when it was soaring at the highs and that he may do so in the future.
“In hindsight, it was likely a mistake for at least PIF3 not to lighten up when the stock went over Rs. 400/share. We did sell some of PIF3’s Rain position at around Rs. 375, but the stock wasn’t there for very long and as Rain’s stock price declined, our selling ended. I will continue to carefully monitor Rain and lighten up our holdings if such a move is warranted,” he stated.
No rains. No rainbow – right?
Well….sometimes there is no ? after Rain (industries). The picture is courtesy @safalniveshak
— UnseenValue (@unseenvalue) March 30, 2019
#4QWithCNBCTV18 | ‘Will import 3.5 lakh tonne of raw petroleum coke in #FY20’ says Shrinivas Dempo, Chairman of Goa Carbon, adding that ‘Q1FY20 quite challenging; Expect Q2FY20 to see some recovery’ @Nigel__DSouza @_prashantnair @SumairaAbidi pic.twitter.com/zYQzadGF98
— CNBC-TV18 News (@CNBCTV18News) April 22, 2019
Dolly Khanna lightens holding of Rain Industries
It is well known that Dolly Khanna shares Mohnish Pabrai’s bullishness about the prospects for Rain Industries.
In fact, Rajiv Khanna, Dolly’s illustrious alter ego, made a rare appearance at the IIT Madras in which he described Rain Industries as a “no-brainer” (see How I Found Mega Multibaggers & Became Millionaire: Dolly Khanna Reveals All Top Secrets & Discusses Latest “No Brainer” Stock Pick).
“In Jan 2017, Rain Industries was available at a market capitalisation of Rs. 2500 crore and it was likely to earn cash profits of Rs. 1000 crore …. To me it was a no-brainer. I did not get into anything further … I didn’t look back at all and kept buying the stock … from morning to evening,” Rajiv Khanna had then said, revealing the thought process behind the brilliant investing mind.
However, it is a fact that unlike Mohnish Pabrai, Dolly and Rajiv have a penchant for tinkering with the portfolio.
In July 2018, Dolly had baffled cloners by dumping some of her vast holding in Rain Industries (see Dolly Khanna & Mohnish Pabrai Baffle Cloners By Taking Contra Views On 10-Bagger Stock).
However, much to everyone’s relief, Dolly dived back into the stock in October 2018
Now, Dolly is once again showing ambivalence in her confidence for Rain Industries.
As of 31st March 2019, she has slashed her holding to 74,78,042 shares as compared to 89,51,872 shares as of 31st December 2018.
This implies that Dolly has dumped a consignment of 14,73,830 shares of Rain Industries during the Q1FY19 quarter.
Rain industries can be an exception here
— Avinash Gorakshakar (@AvinashGoraksha) April 23, 2019
Is Dolly Khanna spooked by “Dream Manager” Jagan Mohan Reddy’s abrupt resignation?
Dolly Khanna’s action has naturally sparked furious debate amongst her vast fan base at MMB.
Some theorized that Dolly may have been somewhat disillusioned by the Supreme Court’s adverse order on the CPC pollution controversy.
MiLords had dismissed Rain’s prayer for production of CPC and held tersely that it is “totally misconceived and cannot be entertained“.
The matter was compounded by S. Venkat Ramana Reddy, the Company Secretary, listing out a long litany of woes that are plaguing Rain Industries, including a high in raw material prices, slump in margins and NPAs.
Also, Jagan Mohan Reddy, who is described as “Dream Manager” who has not made “even one dumb decision” by Mohnish Pabrai unceremoniously resigned from his post as MD.
Mr. Jagan Mohan Reddy Nellore has submitted his resignation from the position of Managing Director but will continue to be the Director & Vice Chairman of the Company with effect from March 31, 2019. pic.twitter.com/m8FPTqBANd
— Gautham Polisetty (@Gautampolisetty) February 27, 2019
Mr. Jagan Mohan Reddy Nellore has submitted his resignation from the position of Managing Director but will continue to be the Director & Vice Chairman of the Company with effect from March 31, 2019.#RAIN @mohnishpabrai #mohnishpabrai
— Surabhi Chauhan ?♀️ (@WonderWoman991) February 27, 2019
Q1FY19 results will provide clarity
Naturally, the events listed above have created some doubt as to the business prospects of Rain Industries.
Hopefully, the Q1FY19 results, which are scheduled to be revealed on 8th May 2019, together with the management’s commentary, will provide clarity as to the business prospects.
Then, we will know whether the problem is only that of “temporary headwinds in wonderful business” as opined by Mohnish Pabrai or something else.