Question-and-Answer Session with Himanshu Shah, Founder of Shah Capital in the Hedge Fund Industry
In the dynamic world of investment, Shah Capital, a sector-agnostic, fundamental investment firm, is betting on a discretionary, bottom-up approach for small-mid cap US and non-US equities. This strategy, which focuses on individual companies and leverages historical insights for alpha generation, offers several advantages over systematic strategies and passive investing.
One of the key benefits is focused stock selection based on fundamental company analysis. By delving deep into the details of each company, managers can identify undervalued or high-potential investments that may be overlooked by factor models or market indexes.
The potential for higher alpha generation is another significant advantage. By making concentrated bets on specific stocks, sectors, or themes, discretionary managers can capitalize on opportunities that systematic or passive strategies may miss, especially in less-covered small-mid cap segments where information inefficiencies exist.
Flexible portfolio management is another advantage. Discretionary managers have the real-time authority to adjust holdings in response to market changes or company-specific developments, making them more agile in a rapidly changing market.
Integrating qualitative insights and nuance is another strength of this approach. Discretionary managers can consider factors such as management quality, competitive advantages, and macroeconomic context, elements that systematic rules and passive strategies cannot incorporate.
Tailored risk management is another advantage. By basing decisions on manager expertise and judgment, rather than fixed systematic rules or benchmark weights, discretionary managers can adopt a more adaptive approach to market conditions and portfolio construction.
However, this approach requires trust in the manager, potentially higher fees, and acceptance of more concentrated and style-specific risks.
Shah Capital believes that small-mid-caps and non-US equities have stronger balance sheets and underwhelming valuations, presenting potential for strong returns in the coming years. They predict better profit growth for these sectors in 2025, driven by a lower interest rates regime, despite some profit growth disappointments.
The firm also predicts a trend reversal for US large cap equities due to lower interest rates and a softer global economy. They are cautious about the "Nifty Fifty" and the "Magnificent 7," which have elevated valuations, and may only voice their concerns if necessary, as activism can be time-consuming.
In contrast, systematic strategies and passive investing have their limitations. Systematic strategies may miss idiosyncratic opportunities due to rigid rules or factor crowding, while passive investing lacks flexibility and the potential to outperform benchmarks, especially in less efficient markets.
Shah Capital continues to be a constructive and thoughtful contributor to strategy conversations, emphasizing the qualitative aspects of businesses for long-term success. They place a strong emphasis on having long-term, unlevered capital to manage liquidity risk, given the illiquid nature of a concentrated portfolio.
The firm also uses the term 'soft activism' or 'Suggestivism,' which involves open, consistent dialogue with management, as opposed to the more aggressive tactics associated with traditional activism.
In conclusion, the discretionary, bottom-up approach to investing offers a unique opportunity for alpha generation in small-mid cap and non-US equities, where systematic strategies and passive investing may struggle to deliver the same results. However, it requires a long-term perspective, trust in the manager, and a willingness to accept more concentrated and style-specific risks.
In the realm of business and finance, Shah Capital's approach to investing in small-mid cap US and non-US equities, using a discretionary, bottom-up strategy, sets them apart from systematic strategies and passive investing. This method offers an advantage in identifying undervalued or high-potential investments through focused stock selection based on fundamental company analysis.
By making concentrated bets on specific stocks, sectors, or themes, and integrating qualitative insights and nuance, discretionary managers can capitalize on opportunities that systematic or passive strategies may miss, especially in less-covered small-mid cap segments where information inefficiencies exist.
