Nehal Chopra, a former Mumbaite, is only 35 years old. Despite her relatively tender age, she manages a portfolio that is worth $1 Billion (Rs. 6,500 crore). Her hedge fund is called Tiger Ratan Capital Fund LP. You can read about her impressive credentials in this Bloomberg article.
Nehal is a believer in the merits of a concentrated portfolio. She picks and chooses her stocks carefully and takes a concentrated position in them.
In an interview, Nehal revealed that her fund has a “very disciplined and targeted process” and that she focuses on three things when evaluating an investment. The first is that the company must have a great CEO. The second is that the company must be a good business available at cheap valuations. The third is that there must a “change” to the company/ business happening which will unlock value.
Nehal also explained that “change creates confusion” both inside and outside an organisation and that confusion creates “dislocation of value”.
She added that she “constantly confirms her thesis” as to whether the stock is worth owning and that if she realizes she has made a mistake, she does not hesitate to sell the stock.
This strategy has worked well for Tiger Ratan Capital Fund and it has delighted its investors with an average annualized return of 24%, after fees.
However, the fund is now experiencing the perils of a concentrated portfolio as a few stock picks are turning out to be bad.
According to WSJ, Tiger Ratan holds/ held a large chunk (more than 1/5th) of its AUM in Valeant Pharmaceuticals. We have earlier seen how, in the context of Bill Ackman’s Pershing Square, the allegation that Valeant Pharma is an ‘Enron-like’ scam has sent its stock price tumbling nearly 70% in the past few months.
While Pershing Square suffered a loss of about $2 Billion (Rs. 13,000 crore), Tiger Ratan’s loss is pegged at $300 Million (Rs. 1,950 crore).
WSJ also points out that another stock pick of Tiger Ratan named Altice NV, a European Cable Co, has plunged 44.2% over the past three months.
The result of this sorry state of affairs is that Tiger Ratan has lost 33% of its AUM in just the last three months.
WSJ also pointed out that some investors were concerned about Nehal Chopra’s tendency to maintain outsize positions without commensurate offsetting bets to protect against declines. That imbalance has bitten the firm lately, it said. It added that Nehal Chopra is taking steps, albeit belated, to downsize the fund’s holdings.
More than the concentrated bets, the risk is being a whizkid, sometimes going against the tide, sometimes trying to copy others with different philosophy/ principles. Also, during a wave (even that of floods), everything floats higher, but when the wave subsides, either the base is found or the floating stuff sinks. The wave of artificial liquidity (by a few central banks and governments dumping it into EMs) is now over. From hereon, only economically viable countries and companies will find investments. Since the markets are much ahead of their performance, there will be a big consolidation to take place in coming months and many of these so called whizkids will have a crash-landing.
It is true. One or once success does not guarantee every time or continue to be successful. In this case it might be a flash in the pan.