Questions and Answers Session Featuring Himanshu Shah of Shah Capital in the Hedge Funds Sphere
In a recent outlook, Shah Capital, a sector-agnostic, fundamental investment firm, has expressed concerns about the future performance of passive investing due to "Most Elevated Valuations." The firm, led by President and Chief Investment Officer Himanshu Shah, believes that understanding historical patterns provides valuable context in today's fast-changing world.
Shah Capital sees a trend reversal on the horizon, primarily due to the lower interest rates regime and a softer global economy. This shift, according to the firm, could lead to more profit growth disappointments, especially among the "Nifty Fifty" and the "Magnificent 7," highly elevated large cap equities.
Instead, the firm identifies real opportunities in smaller, undervalued stocks. They find better opportunities in the small-mid-cap US equity space and non-US equities, where despite balance sheets being stronger, valuations are underwhelming. This strategy aligns with their belief that a concentrated portfolio can create significant alpha, but it requires careful management to address potential liquidity risks.
The firm's approach to activism is known as 'soft activism' or 'Suggestivism,' involving open, consistent dialogue with management and constructive contributions to strategy conversations. They prefer to avoid public activism unless necessary due to its time-consuming nature.
Shah Capital runs a concentrated book and follows companies for a long period before investing. Their strategy has been successful in the past, similar to the period from 2000-2005, where identifying smaller, undervalued stocks led to significant outperformance.
The firm's focus on small-mid caps and non-US equities is a response to the markets' assumption of a "Fed Put," where the Federal Reserve intervenes to stabilize markets. This assumption has led to higher equity indexation investing and enrichment of US Mega-Caps. However, with the lower interest rates regime and a softer global economy, this trend could potentially reverse.
In conclusion, Shah Capital anticipates a shift in the investment landscape over the next three to five years, with passive investing underperforming and opportunities arising in smaller, undervalued stocks in the small-mid-cap US equity space and non-US equities. Their approach to activism, 'soft activism' or 'Suggestivism,' and their long-term, unlevered capital management strategy aim to capitalize on these opportunities while mitigating liquidity risks.
- Shah Capital, owing to their belief that a concentrated portfolio can create significant alpha, plans to capitalize on the anticipated shift in the investment landscape by focusing on smaller, undervalued stocks in the small-mid-cap US equity space and non-US equities over the next three to five years.
- In the foreseeable future, the firm expects passive investing to underperform and seeks better investment opportunities in sectors where valuations are underwhelming, such as the small-mid-cap US equity space and non-US equities, as part of their strategy to generate profit growth.
