We exploit opportunities that larger managers don't: G. Maran, ED, Unifi Capital

Shadowing company insiders for cues, betting on upcoming open offers and identifying delisting candidates — these are some of the offbeat strategies employed by Unifi Capital, a specialised discretionary Portfolio Management firm based out of Chennai. The company's Executive Director, Mr G . Maran, talks toBusiness Lineabout how a compact size has helped Unifi unearth opportunities in low-profile stocks to make good money for its investors.

Excerpts from the interview:

What value can a Portfolio Manager add, in such a crowded market with so many mutual funds and wealth managers?

Mutual funds are a scale game. Successful funds typically have assets under management in excess of Rs 5,000 crore. With a Rs 5,000-crore fund, the fund manager may hold up to 30-40 stocks in the portfolio. Average exposure to each stock is around Rs 20 crore.

With such high exposures, funds are forced to consider companies with market caps of over Rs 5,000 crore, in order to avoid impact costs. Most professional fund managers chase larger stocks with Rs 5,000 crore-plus market cap.

However, in India, we have only 142 companies in the listed universe that fit into that description. Unifi's view when we started in 2001, was to explore investment opportunities that a large fund manager may not be able to exploit. That's how we came up with thematic investing styles.

Take for instance our Insider Shadow fund. The information on promoter trades is available in the public domain. Anyone can track it. However, larger funds may not use it because they invest in larger companies. We manage about Rs 150 crore in this fund and may be able to scale up to Rs 200 crore, but we can't scale it up to say Rs 500 crore.

How does the Insider Shadow fund work?

We track BSE/NSE filings and SEBI data on insider activity. We track this data on a daily basis. We look for ‘net effective' promoter and employee stake increases.

Over time, we have become very familiar with patterns in promoter activity. If Bill Gates is selling Microsoft shares, that isn't exactly a worry. But, if 30 employees in a mid-sized software company are selling shares they got four years ago, that amounts to a reason to be worried about.

Insider trades, however, should be the beginning of research and not the end.

Typically, information asymmetry is very high in mid- and small-caps. When a company such as TTK Healthcare announces a land sale, the stock doesn't react. When it did a buyback again the stock stayed put.

But the land sale proceeds were large and a year later when the company announced a big dividend and announced an intent to delist a group company, this raised media and analyst attention and the stock shot up to around Rs 400.

You also run a fund that benefits from special situations such as acquisitions. Isn't there a high probability of the deal not coming through?

We bet on events only after the deal is done, what is called event arbitrage. We look at companies where an open offer has been announced and SEBI approval is through. Open offers may get delayed, but deals don't get cancelled in India. Our key criterion is a clear exit route — through a buyback, open offer to the public and so on. The only loose end in an open offer is the acceptance ratio — what proportion of our shares will get accepted. Once we know that, we arrive at the theoretical price for the stock.

Our expectation in Event Arbitrage fund is to make about five per cent in four months. Our most profitable offer was Sah Petroleum, which sells industrial lubricants, where we made 40 per cent flat in three months. In October 2008, when the markets crashed, open offer stocks also fell, despite the fact that the exit price was known (Rs 48).

Sah's promoter had already sold stake to a private equity investor. It shouldn't have fallen but it did, providing us with a clear opportunity to make excellent returns for our investors.

Unifi Capital has completed over 107 transactions under the Event Arbitrage fund over a ten-year period. We maintain a dossier on every open offer made in India in this period. We build a portfolio of arbitrage opportunities and do not invest more than 25 per cent in an opportunity, as a maximum limit. On an average, we only need 10-12 good deals over a year to make this fund work.

Can you share the long-term track record of your funds?

The first fund at Unifi Capital was the Event Arbitrage fund. This fund has delivered over 17 per cent plus in its ten year track record with no negative year. This is a fund for a fixed income investors looking for higher returns with low volatility of returns and without risk to capital.

For instance, since April 2011, markets are down 20 per cent, but Unifi's Event Arbitrage fund is up 6.5 per cent. Over the next three months even if the market is up 20 per cent, we may still deliver only 5-5.5 per cent.

How do your Sector Trend Fund and Special Opportunities Fund work?

The Sector Trend fund is based on Buffett's philosophy that when a management with good reputation gets into a business with bad economics, it is the latter's reputation which prevails. The Sensex has 30 companies from 14 sectors. We need to choose just four-five sectors that will do better than the Sensex to outperform it. We need to look for sectors with strong tailwinds so that they can outperform.

The third fund is the Special Opportunities fund, where we identify stocks we are bullish on. We find the top five or ten ideas and concentrate our entire money on them. This increases portfolio risk but we invest only into high conviction ideas. This is a highly volatile fund. It dropped 55-60 per cent in 2008 but went up 108 per cent the next year. These were our three key strategies until 2009.

What prompted the delisting fund?

In 2009, we began launching investment strategies which raised finite amounts for specific time periods. In June 2009, SEBI brought in a new guideline for delisting based on reverse book building. At Unifi, we felt that this would result in an increased delisting premium and found that many smaller MNCs could also be potential delisting candidates.

The fund bought into 10-12 companies with an MNC background. The fund made a 67 per cent absolute return and we returned the money to investors, as we didn't expect to replicate the same for them.

In all these cases, our investment strategies worked so well because we operate small sized funds with a fee-based on sharing returns with investors. As on date, each of our funds have in fact outperformed their respective benchmarks.

How many clients do you have today?

Unifi has around 340 clients acquired over the last ten years. Our average investment size is Rs 1-1.5 crore. We don't have a minimum ticket size requirement — I have clients who started with Rs 10 lakh and have gone up to investing over Rs 20 crore with us today.

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