The now-forgotten left tail

Since Minerva India Under-served has camped within institutionally under-owned/orphaned names (while steering clear of street darlings), it is expected that we take a backseat when liquidity chases popularity and/or size. Since investors (especially non-institutional allocators) are often ‘trapped by happiness’, they often subconsciously filter out the not so pleasant moments of their investing life. We don’t! In our view, frequency and size of losses hold more value when it comes to delivering long-term alpha. This holds even more significance at this time because neither earnings growth, nor valuations are favorable. Sharp drawdowns aren’t just imminent, but could be sizeable in our view. While we clearly remain critical (and have remained so for a while) of how poorly uncertainties are priced in nearly all parts of India today, we nonetheless pick positions in the same market, not to be theoretical beneficiaries of the usual amplified domestic sentiment, but because the sheer breadth of this market allows us to identify select idiosyncrasies at a great price.

Picking idiosyncrasies at great value has particularly helped us weather drawdowns better. Be it by owning auto parts businesses that aren’t overly dependent upon industry-wide car sales, forestry names that demonstrate cost leadership that handily offsets otherwise tepid pricing, or apparel names whose global footprint (and not Indian presence) positions them solidly as supply chains consolidate. Now in its 15th year of allocating in India, Minerva India Under-served has been through 68 months when BSE Smallcap declined. In 52 of those months (>3/4th of the time), the strategy outpaced that benchmark. As boring as it might sound, minimizing permanent capital loss was, is, and will remain a key determinant of our long-term value capture. This also adds significant asymmetry to our performance. The attached exhibit plots monthly performance of Minerva India Under-served and BSE Smallcap into several buckets (ranging from worse than -11% decline to gain of >10%). Notice the stark contrast between our and BSE Smallcap’s dreaded left-tail (even as memories are fuzzy these days!)– March 2020 was the only month in our 14+ yr history when the strategy went through a worse than -11% decline, vs. 7 such instances for BSE Smallcap. Meanwhile, the strategy witnessed a >-5% decline in about a tenth of all months, considerably less than BSE Smallcap, where 15% of all months saw a similar decline.

For more information, please reach out to Arpit Khunteta or Devchandra Ramani.

DISCLAIMER: The information, opinions, estimates and projections contained in this note were prepared by managers of Minerva India Under-served and constitute its current judgment as of the date of this note. The information contained herein is believed to be reliable and has been obtained from sources believed to be reliable, but we make no representation or warranty, either expressed or implied, as to the accuracy, completeness or reliability of such information. We do not undertake, and have no duty, to advise you as to any information that comes to our attention after the date of this fund brief or any changes in its opinion, estimates or projections. Prices and availability of securities are also subject to change without notice. This is not a prospectus and does not constitute investment advice or an offer or solicitation to buy or sell any designated investments discussed herein. Neither Minerva Asset Advisors, nor its officers, directors, agents, or employees make any warranty, express or implied, as to the suitability of any fund as an investment or of any kind whatsoever, or assumes any responsibility for, and none of these parties shall be liable for, any losses, damages, costs, or expenses, of any kind or description, arising out of this newsletter or your investment in any fund. You understand that you are solely responsible for reviewing any fund, its offering and any statements made by a fund or its manager and for performing such due diligence as you may deem appropriate, including consulting your own legal and tax advisers.