Guilty until proven right: the making of a non-consensus investor

From

Rupal J. Bhansal

Continued uncertainty within global markets are pushing investors to explore unconventional ways to generate returns while managing risk, according to Rupal J. Bhansali, Chief Investment Officer, International & Global Equities at Ariel Investments.

Speaking at a Women in Super event in Sydney yesterday, the New York-based global equities specialist discussed an active approach that goes against the grain in today’s market.

“The massive changes afoot in political and economic regimes play into the hands of active managers and, I believe, require an unconventional approach,” Ms Bhansali said.

“There has been an epic battle between formulaic, passive investors and fundamental investors,” she continued. “While passive investing has received a lot of inflows, market momentum is key, and by obsessively focusing on low cost, indexing models these investors can be oblivious to market risks.”

“In the last few years, the flood of money into growth stocks through passive investing, has in my view created a market level which is not justified by the fundamentals. Markets are at an inflection point and by analysing the fundamentals I can see that value stocks have a steady growth and are priced fairly.”

When being right is not enough

Non-consensus investing relies on having a different point of view to the market and understanding when value is mispriced.

“As a non-consensus investor, you are guilty until proven right,” Ms Bhansali said. “In life, if your answer is correct that’s all it takes to be successful. But in investing, it isn’t enough to be right. If there is already consensus, then there’s no money to be made because it’s already in the price. You must have a different point of view and have a good idea of what’s misunderstood about the stock and why it is mispriced,” Ms Bhansali said.   

Picking a winner

In selecting individual companies, Ms Bhansali looks for quality at the right price, giving the example of China Mobile.

“One of my investment ideas, China Mobile, is the leading wireless carrier in China with 949 million subscribers, 55% subscriber market share, and with limited competition. It has a strong net cash balance sheet in a world that is gorging on debt. I believe fundamentals are key, including growth, undervaluation, a strong balance sheet, and a resilient business model. China Mobile has this in spades with roughly 30% net cash to market cap, 11 x 2020 estimated earnings, and 4.92% dividend yield,” she said.

When asked what investors should be wary of, Ms Bhansali pointed to a FAANG favourite, Netflix.“Netflix is the most at risk of the FAANGs. People assume it has a competitive advantage with its subscription revenue model, meaning it’s sticky. But content is sticky, the platform is not, and with Netflix increasing its price, users are going to be looking at other market players, like Disney, for their content.

“Netflix also could lose the rights to hit shows such as “The Office” and must develop in-house content which requires billions of dollars of upfront investment that has been funded with debt. The risk profile of the business and the balance sheet are heightened,” Ms Bhansali added.

“You don’t have to own the star performers. The crowded trade is often the riskiest trade.”

Diversity leads to superior outcomes

Non-consensus thinking has resulted in major breakthroughs in science, technology, and society. Investing can have similar results and Ms Bhansali hopes sharing her personal experience will encourage more women to learn about finance.

“I worry that women think of money as taboo. It should be thought provoking. I want women to become better investors and encourage them to join the finance profession. We have mastered medicine, and the law, it’s time to conquer finance and not leave it to the men,” she said.

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