There were lots of good sporting references in this week's episode as we reflect on the career statistics of one of the all-time tennis greats, Roger Federer, and discuss the read-across of his win ratio to that of investment management. In addition to learning more about an approach to constructing portfolios which can perform equally as well when the ball is swinging both ways on an opening morning at Lord's as well as on a spinning day five wicket in Bangladesh, we were delighted to be joined by Prashant Khemka, founder of White Oak Capital Management and an experienced and hugely successful investor within emerging markets. Welcome to the Investor Insights podcast, hosted by Killick & Co. My name is Gordon Smith, and in each episode I'll be interviewing portfolio managers from across the investment industry to gain from their expertise in the specialist areas in which they invest and to question them on topical issues. You can access the full series of interviews via the playlist on the Killick & Co YouTube channel or by searching for Killick & Co's Investor Insights on Spotify, where you can subscribe and be notified of future episodes. We hope you're enjoying the discussion so far, and you can get in contact with us about any of the topics discussed via the email address
[email protected]. Killick & Co is an independently owned wealth manager which opened its first office in 1989 and provides services to help families save, plan and invest. And you can find more details on the unique ways in which we do that at our website killick.com. In this week's episode, we were joined by Prashant Khemka, who founded White Oak Capital Management in 2017. White Oak is an investment management business which runs a range of investment funds and managed accounts on behalf of clients focused on India and the broad emerging markets, and a business which has grown successfully to around six billion sterling of assets under management over the last six years. Prior to founding White Oak, Prashant was the CIO and lead portfolio manager of the highly successful and award-winning GS India Equity strategy at Goldman Sachs Asset Management, a company which he joined in 2000, initially as a research analyst, but rising to become a senior portfolio manager and co-chair of the investment committee. White Oak is also responsible for running the investment portfolios of two London-listed investment companies: the 480 million pound market cap Ashoka India Equity Fund, ticker AIE, which IPO'd back in 2018, and the Ashoka White Oak Emerging Markets Trust, AWEM, which launched in the middle of last year. The Emerging Markets Trust is small in size at only 40 million sterling, but alongside the India fund has managed to grow modestly through share issuance over the last 12 months, making it two of only a very small and rare handful of UK investment companies able to do such a thing over this period, given the prevalence of discounts across the sector. The tighter share price rating of these two trusts is, in our opinion, a function of three primary factors combined. The strong performance of the strategies is clearly helpful. However, the attractive fee structure, which charges no base management fee but only a performance-related payment to better align the management team with shareholders, is combined with the annual redemption facility enabling an exit at close to par each year. In this week's episode, we spend some time talking through investment process, more so than our usual conversations in this series, before moving on to discuss a number of topical issues related to emerging market investments. The analysis of investment process plays a critical role in assessment and selection of active fund managers. It enables us to set expectations for both risk and return to monitor against given any market environment. It also aids portfolio construction and provides metrics which we can track over time. Our written research publications go into far more detail on process, investment philosophy and style, and please do get in touch if you'd like any further detail on any of the funds featured on the series so far. But the investment process devised by Prashant at White Oak is well considered, and given these are relatively new entrants to the London-listed investment company sector, it's well worth spending some time to learn more about, in my opinion. We hope you enjoy the discussion. Prashant, good morning, thank you so much for spending some time today. How are you?
Good, doing good, Gordon. Thank you. How are you?
Yeah, very well, thank you. So we've got this standard opening question that we've been asking in the discussions, and the aim of it is really to get a bit of an insight into you, really, or kind of how you go about your work. And I wondered if there was an anecdote you could share from a recent trip or a meeting, or just an insight into a research project maybe, or even just an article or book. We've had some book recommendations in here. Anything you can share to just give us a bit of an insight into you?
Certainly, but first of all, thank you for having me here, and thank you to all the listeners. So you mentioned from recent times, I think that my favourite of late that I've been talking about externally with clients as well, as we've had a lot of discussion on, well, when I say a lot, we at least dedicated one of our investment forum sessions internally on the team on that one, is the quite famous Roger Federer tweet that he's won 54% of points in his professional career. You've seen that one, Gordon?
I haven't actually, but I will look it up.
Not yet. Okay, yeah. But he has, which came as a bit of a surprise to me, that he's only won 54% of the points. To me, his winning percentage would have been a lot higher than 54% for him to have ruled the world of tennis the way he did for over two decades.
Right, that's very insightful.
And I got that as a social media forward from one of our teammates, and then I quite promptly decided let's make it a topic of discussion. And what it did is it gave some very good insights for the world of investing. Our team was feeling quite happy that their strike rate is higher than that when measured in terms of the number of stocks they've got right over time from an alpha perspective. But the real point here is that besides the fact that even 54% can get you to the top for so many years, is that every point he has to play as if the game depended on that point. Only then can you win 54% or have a shot at winning 54% for someone like Roger Federer. And to the team, that was the key takeaway, that we can't be complacent. Just like no sportsman or sportsperson can be complacent with a better than 50% strike rate, every single point you have to play, just like every single investment we make, we have to make as if that is the investment on which our performance depends. And then if all goes well and we get something like Federer's strike rate, then that would take us to the desired place of being the top performer in the peer group. There are many other insights, but I would just leave it at this one from this tweet, but that has been something that I've thought about quite a bit over the last few months.
Yeah, no, absolutely fascinating. Yeah, and for someone who's been so consistently good as well, his career doesn't seem to have kind of ebbed and flowed. He was consistently good for someone to have a hit rate like that.
So that is another one of the insights, yeah, absolutely.
Thank you for that. Thank you for that. I wanted just to kind of frame the discussion. Whether I could ask you to kind of briefly summarize, if you can, your kind of fairly distinctive approach to dissecting a prospective holding for your portfolios, that opco-finco framework that you've termed. I think it would just kind of help things, and some of our listeners may not have heard it from you, certainly kind of how you go about things. Could I ask you to kind of summarize that?
Certainly, thanks Gordon. Some of our clients have over time asked us whether that's our secret sauce. I actually always say that, you know, it's to continue the sporting analogy, which I do believe investing is a form of sport, a very serious form of sport. In any of the sports, you know, be it tennis or cricket or running a marathon, these are centuries-old sports. There is no silver bullet. You have to do a variety of things right in a very consistent manner, as you pointed out, Gordon, and to the highest level. And in our way of doing things, I believe our team does a lot of these in a very consistent fashion. Yes, one of the tools or one of the strands that we have is our analytical framework, which is a bit different than the usual, but it is very much aligned with our investment philosophy, and it is basically the most fundamental approach. The opco-finco is basically an enhanced DCF, if you will, and I do believe, as most investors would agree, that value is nothing but the present value of future cash flows. We've just added a few enhancements to align it with our philosophy. So our investment philosophy, very simply put, is that outsize returns are earned over time by investing in great businesses at attractive valuations. Again, no great rocket science here. Most people would agree with that. What makes a great business is one that has these key attributes. We think superior returns on incremental capital, one; second, scalability; and third, strong management, both in terms of execution and governance. Now, all three of these are born out of the fundamental value equation. The value of any business is present value of future cash flows, because to sustain future cash flows, it's imperative that your returns on incremental capital be sustainably higher compared to the cost of capital, else there's no sustainable cash flow generation. Scalability is really about the growth of those cash flows over time, and when you have the opportunity for the first two, you need strong execution DNA at the organization to be able to deliver over time. And above all, or I should say first of all, adequate governance at the company so that the fruits of the enterprise would be shared in a fair manner, in a proportionate manner with minority shareholders, else it may be a great business for controlling shareholders, but not for minority shareholders. So these are the key attributes that we look for, and when you find companies that possess these attributes, it's important to value them logically and invest only if and as long as there's substantial upside to fair value. That brings us to our valuation approach and the opco-finco framework. So valuation is very critical, but having said that, we don't look at P/E multiples or EBITDA multiples or such, but focus on a first-principles-based approach, DCF adapted to opco-finco. Any company, without going into details on this forum, what I'll say is any company, let's take a British company, GlaxoSmithKline Pharma, for example. Through our framework, we would split it into two entities for valuation or analytical purpose: a finco and an opco. Glaxo finco, Glaxo opco. Finco is where plant and machinery and working capital would be housed, all the operating assets that is, and the opco would be assigned the revenue and EBITDA. And from the EBITDA of the opco, it would be deemed to pay an operating lease cost for the use of plant and machinery to the finco, as well as a working capital financing cost to the finco.
Yeah, so basically the operating entity, which is the opco, is paying the financing or leasing cost to the financing entity.
