Generate BIG ALPHA by following “Special Situations” Investment Approach

Date & Time: 5th March 2021, 05:30 PM – 06:30 PM IST
Speakers: Arun Malhotra, Founder & CIO – CapGrow Capital Advisors (SEBI Registered PMS)
Moderator: Sankalpo Pal, Biz. Dev, PMS AIF World

Most fund managers invest in their perceived best businesses (depending upon earnings, volume growth, market share growth). But stock price shows maximum move when underlying investment value in an asset is delivered. Special situations approach directly focuses on such value unlocking that could generate Big Alpha.

Mr. Arun Malhotra, Founder & CIO – Cap Grow Capital Advisors has experience of over 27 years, is following the “Special Situations” Strategy over a decade and has been managing a Portfolio Management Service in the name of CapGrow Capital PMS.

This strategy focuses on “Corporate Actions & Events” like: Spin offs, demergers, tender offers like buybacks and delisting, M&A’s, capital structure dis-locations, and so on. These events are mostly a one-time event in the history of the company and what is required here is to understand the event, the behavioral aspect behind it, apply investing skills as the event progresses and generate returns or ‘big alpha’ out of it. It is important to stay put and not invest on rumours; wait till the confirmation of the happening or non-happening event comes from the company itself. This eliminates the market risk and the only risk here is that of the timeframe in which the event will be carried out. Hence, this is a low risk-high reward strategy; low risk as the event has already been announced and is known to everyone.

Once the confirmation of the special situation is in place, the particular stock’s value is discounted and as the event progresses, value unlocking happens which ultimately leads to resulting in big alpha. For instance, once a de-merger is announced, discounting will happen; but post the de-merger, respective segments will get their justified multiples because capital allocation becomes clearer from the company’s perspective.

In the webinar organized by Team PMS AIF WORLD, Mr. Arun Malhotra gave the example of IDFC Ltd, parent company of IDFC First Bank. IDFC Ltd. held 40% of stake in IDFC First Bank. Now, the subsidiaries of the holding company were getting a valuation of 2.5x of the then market cap of the holding company. At the same time, RBI was working on a paper where RBI was contemplating on collapsing the holding company structure. IDFC Ltd.’s conference call of that quarter, based on RBI’s working paper, gave a subtle hint of the event that was going to follow- either IDFC Ltd. would merge with IDFC First Bank or reduce its stake from 40% to 15% – either way it was imperative to take advantage of this special situation and go long on the company. Going long on IDFC proved to be in CapGrow’s favour and they generated approx 200% returns on it.

Another example of a special situation would be distressed situations. CapGrow invested in both sugar and telecom sector during their respective distress periods and have been able to generate supernormal returns out of it.

CapGrow follows two kinds of PMS Strategies – one is plain vanilla growth strategy where any kind of cyclical plays and surprises are avoided and second is Special Situations Strategy which is focused on generating value out of statistical imperfections and/or any kind of special events as mentioned above.

For the Special Situation Strategy at CapGrow, their team tries to combine Buffetology i.e. Value Investing with Corporate Actions and generate returns by finding opportunities. Patience, coupled with the ability to sit on the money invested is the key for this strategy. Even if the market moves in a favorable direction, the particular stock might not move – because of the underlying event that is there. So, Patience & Conviction are important virtues of this strategy.

Mr. Arun Malhotra Added, “Each and every investment is backed by solid fundamental reasoning, robust thought process and a keen desire to generate supernormal returns.”