Dear Investor,
First and foremost, we hope this letter finds you and your loved ones healthy and well. During the last six months, we have gone from an economy which was just starting to get back on its feet to one that will most likely have no growth or perhaps even de-grow given the Covid-19 pandemic. The equity markets lost 23% to 30% for the month of March’20 contributing to the bulk of the erosion of 25% to 27% across the various market indices during the 2nd Half of FY20.
As we write this letter, the virus has already spread into a global pandemic. The world at large was massively under prepared for such a crisis and most governments have taken steps to lock down entire economies as a measure to counter the spread of this virus at a significant economic cost. The difference of this virus break out versus other natural calamities is the extent of its global spread and thus the unknowability about the time it will end. We hope that we soon get to the peak of this virus break out but till such time that businesses restart, it is difficult to assess the extent of the economic damage. At least for the immediate 3 to 6 months, economic data releases globally are going to read like a horror story. Most global governments and central banks have taken action to cushion the blow of the pandemic and more announcements and actions will be required to normalise economic activity over the next 12+ months.
Performance Update
For the 2nd Half of FY20, the QRC portfolio was down 17% and managed to outperform the local market benchmarks. As we wrote in our Market Musings note in mid-March, we were able to raise cash before the big sell off in March and this helped us to protect some of the downside.
While we run a benchmark agnostic portfolio, in the table below, we have put down performance of our portfolio during some of the periods when the markets had large downswings. As we had highlighted to each of you, our long-term aim of investing and managing investor portfolios is to ‘protect and grow your wealth’. We believe that if we protect the downside (by investing in good quality businesses at a good price), the upside will take care of itself once the challenging environment that we are going through passes.
| (Cumulative Performance) | QRC Portfolio* | BSE Mid-Small Cap | Nifty | BSE 500 | BSE Mid Cap | BSE Small Cap |
| March ’20 | -19.8% | -28.8% | -23.2% | -24.1% | -27.6% | -29.9% |
| Oct ’19 to March ’20 | -17.0% | -26.1% | -25.1% | -25.1% | -25.1% | -27.0% |
| Since Inception (25/01/2018) | -17.3% | -46.2% | -22.3% | -28.5% | -40.8% | -50.3% |
| Big Down Months – CY2018 | ||||||
| February | 0.2% | -3.8% | -4.9% | -4.4% | -4.6% | -3.1% |
| March | 0.5% | -5.2% | -3.6% | -3.7% | -3.6% | -6.3% |
| September | -3.6% | -14.5% | -6.4% | -8.8% | -12.5% | -16.1% |
| October | -0.4% | -1.3% | -5.0% | -3.9% | -1.0% | -1.6% |
| Big Down Months – CY2019 | ||||||
| January | -2.3% | -5.5% | -0.3% | -1.8% | -5.7% | -5.3% |
| February | -0.6% | -1.7% | -0.4% | -0.8% | -1.7% | -1.7% |
| July | -5.0% | -9.5% | -5.7% | -6.3% | -7.9% | -10.9% |
| August | -1.8% | -1.3% | -0.9% | -0.6% | -1.3% | -1.2% |
*Individual client portfolio returns may differ based on timing of their investments and specific instructions/circumstances. QRC returns are TWRR. Source: BSE & NSE
Portfolio Snapshot
| Key Sector Exposure* | |
| Consumer Staples | 19% |
| Banks & Financials | 18% |
| Retail/Realty | 10% |
| Building Materials | 7% |
| Auto Ancillaries | 6% |
| Top 5 Holdings* | |
| Kotak Mahindra Bank | 6.0% |
| NESCO | 6.0% |
| Marico | 6.0% |
| ITC | 5.5% |
| HDFC Bank | 5.5% |
*Illustrative. Individual client portfolios may differ based on timing of their investments and specific instructions/circumstances.
Looking Ahead
The government and RBI have taken various steps to try and mitigate some of the economic damage of the lockdown. Some of the western economies, especially USA have taken a far more aggressive stance to pump prime their economy. India, given its already high fiscal deficit has a much lower margin (1-2% of GDP) for aggressive action on the fiscal front – however, we can expect more monetary action from the RBI to stabilize the fixed income markets and push for transmission of lower borrowing rates through the economy.
As factories slowly re-start, the real impact of the lockdown will be more clearly understood. Supply chains which are spread far and wide will be tested. Given the issues with migrant labour, it could be a few weeks to few months before we see industry return to 50-60% utilization in some cases. The other more pertinent question that will need to be addressed is the extent of change in consumer behaviour (in the immediate future as well as over the mid to long term). Some new habits like working from home, lower travels and more virtual meetings will have business implications for sectors like airlines, restaurants, commercial real estate, malls, personal mobility etc. The demand outlook remains difficult to predict not only for us but for the businesses themselves. The second and third order impact of the pandemic and lockdown will only emerge with the passage of time and once a new normal is established and better understood.
In this environment, liquidity and cashflow are paramount for all businesses and we too continue to hold higher than normal cash in the portfolio. The situation is still evolving at a rapid pace and we remain watchful of the unfolding scenarios. We believe it is prudent to act based on data and facts as they unravel rather than jump in based on guesswork.
We thank you for entrusting us with your money. Do feel free to reach out to us with your questions or suggestions.
Sincerely,
Team QRC