Three simple questions are all it takes when evaluating money managers, yet Rupal Bhansali says they’re three questions too often overlooked by advisors and clients alike. In the (refreshingly) candid and direct style for which she is known, Bhansali, senior vice president and chief investment officer of international equities for Ariel Investments, wants to clue us in, and we’re more than happy to listen.
For those who might be tempted to dismiss Bhansali as just another vendor with a “system,” consider that in 2006, she noticed the financial sector was taking on risk that she didn’t feel was congruent with potential return, so she started to sell.
“As a consequence, we actually underperformed in 2007 because we started selling out of our cyclical exposure as well,” she says. But the textbook response, which many managers would now like to claim, has led to significant outperformance since. No one-trick pony is this; outperformance during times of stress (and calm) is a theme throughout Bhansali’s career.
Born and raised in Bombay, India—her name for the city, not ours; we won’t quibble—she speaks several languages, including Hindi. Bhansali earned a Bachelor of Commerce in accounting and finance and a Master of Commerce in international finance and banking from that city’s university, as well as an MBA in finance from the University of Rochester.
She knows a little bit about risk versus return, too, having worked for Soros Fund Management (yes, that Soros).
“What’s interesting is that my very first job actually ended up being on the sell side,” she recounts. “In hindsight it was the best thing that happened to me because I was able to observe the investment disciplines and philosophies of many of my clients.”
The time was 1993, when another recession was just underway. Her trial by fire was undoubtedly a plus in dealing with subsequent downturns.
“Also there’s the fact that I covered both emerging and domestic markets; not many people have covered both. More people go from covering developing markets to emerging markets, but having worked for George Soros, I have the opposite. I think it is very useful because we are truly in a globalized world and much more interconnected marketplace than ever before.”
An example of the type of situation of which you might not have heard, but of which Bhansali routinely encounters, is the recent financial crisis that occurred in Kuwait.
“It’s one that took a lot of people in developed markets by surprise, but we had a good position for that because of our unusual experience.”
She joined Ariel after spending 10 years with MacKay Shields, where she was senior managing director, portfolio manager and head of international equities. Her performance and asset flows in turning around an underperforming fund (which eventually received five stars from Morningstar) is what got Chicago-based Ariel’s attention.
“Ariel Investments has a philosophy similar to mine,” she says. “We are both independent thinkers. The difference is that I fish for opportunities in the international and global markets in an all-cap strategy. Ariel has historically been focused on domestic strategies, with particular expertise in small caps. This complements the entire lineup; as people are looking for more choice, we wanted to give them that choice.”
“Fish for opportunity” is, of course, another name for finding alpha, and in this regard her worldly, and contrarian, view is an asset.
“We recognized almost a decade ago that oil prices were going to be higher for longer. Now, many people would jump at the notion and say ‘Gee, let’s go and buy some oil stocks.’ What makes our research and investment philosophy different is that we believe not just in maximizing return but in making sure that we don’t take too much risk in doing so. If you’re going to directly buy oil companies, you expose yourself to a lot of risk from the volatile business models and business cycles.”
Knowing that oil prices would be higher for longer, she decided the best risk-adjusted way to participate was to own utility companies that were not driven by oil but by something like nuclear or hydro. If oil prices go up because of higher fuel costs, their costs will not go up, but they could take advantage of the higher prices and profits. In fact, she notes, utilities in Europe over the last decade have been one of the best performing sectors.
So she has the world view, experience, track record and philosophy; now what about those three questions?
“First and foremost, investors and advisors need to think more about the destination than the journey, which is to say, ‘What is the end game?’ There are too many people focused on what happens to the day-to-day gyration of the market or the daily performance of certain portfolios or managers that they own. That is too much of a focus on the journey. What really matters is the destination: where you want to end up.”
Investing is about patience, she adds. Watching something day-to-day is “the most impatient thing you could be doing.”
All well and good, but people who weren’t watching day-to-day activity in 2008 were badly burned. How would they accept such a message? The answer leads to the second question: What about valuations?
“Part of the issue is that people did not pay attention to valuations in the run-up to the crisis,” Bhansali responds. “This is the mistake made in terms of, say, owning real estate at inflated prices, correct? It’s not that real estate, in and of itself, is a bad asset class. It’s that if you overpay for something, even if it’s supposedly ‘safe’ as houses, you’ll end up losing on that investment. It’s critical in any investment decision; valuation is what really determines both the return, as well as the risk of the investment.”
Given her explanation, we can’t help but wonder about Apple.
“Valuations are a function of what you think of the normalized earnings power of a company,” she says. “While Apple may look particularly cheap on whatever the multiple is, we think that the normalized earnings power going forward is going to be lower than what the market is expecting. Therefore we actually do not feel that the risk of owning is attractive at these levels. We don’t think that success can be [repeated] on that same scale in the future, which differentially means we think they are over-earning.
The final question, she says, is how are investments being made within the risk/return framework?
“The question is not ‘How much money can I make?’ It’s more about ‘How much money can I afford to lose?’” she says. “One thing people need to always consider is buying insurance in their portfolios. Now it should not be dumb insurance; it should be smart insurance.”
So what does she mean by that? Non-correlated asset classes for when the markets fall.
“You’ve got managers who will do much better than the average because that’s when that alpha generation kicks in. Being contrarian in your asset allocation will help in terms of point No. 2 (valuation) because being contrarian is the best way to take advantage of undervalued securities. But it should be contrarian with a quality criteria because you don’t want to buy things that are distressed. That’s a very different sort of investing.”
If you think that’s an argument in favor of alternative managers (as they might be defined today), you’re wrong.
“I think [alternative investment managers] charge too much for what they bring to the table. Many of my friends and clients have told me ‘Rupal, you delivered hedge-fund-like returns without hedge-fund-like fees.’ That’s where you can add value.”
The challenge with alternatives, she says, is “not that all alternative managers are bad, but on average many of them tend to be, so it’s very hard for the individual to know which ones to pick.”
“The issue, as I said, is to focus on the destination and not the journey. Don’t think about the performance numbers as being the driver of your decision, but rather ‘What are the investment processes that the money manager applies to get to the destination?’ The recipe matters more in this context.”