Russ Kinnel: Hi, I'm Russ Kinnel, director of manager research at Morningstar. I'm joined today by Rupal Bhansali, manager of Ariel International and Ariel Global. Both funds were launched a little over three years ago.
Thanks for joining us.
Rupal Bhansali: Thank you. Good to be here.
Kinnel: Since we're introducing you to our viewers, tell us a little bit about your investing background.
Bhansali: Russ, I have been doing this now for 25 years, but what I think is really interesting about my background is that, unlike most long-only managers, my career started out on the long-short side. My first job was at Soros Fund Management on the buy side, and I think it's really been very instrumental in the way I manage money, with an eye toward both risk management and return management because of the background that I had in my formative years.
In addition, I'm one of the few managers that has covered emerging markets from the get-go, and then moved on to covering developed markets. I cover global and international, as you know, in the flagship strategies. I think it's been very instructive, because there are more crises in emerging markets, and we were very well prepared for the financial crisis of '08 as a consequence.
The third thing about my background is, I'm really a stock-picker at heart, and throughout my career, I have always told people when they ask me, are you a growth or a value manager? I tell them I don't pick styles; I pick stocks.
Kinnel: How long have you been at Ariel?
Bhansali: Three years.
Kinnel: Let's talk a little more about your strategy. What sets you apart? How would you define your buy strategy?
Bhansali: You hit upon a key thing. It's really important for an active manager to differentiate, because people have choices. And I think we differentiate in a couple of ways, the most important of which is, we understand that investors want both capital appreciation from equities--after all that's why you invest in the asset class, for compounding your capital--but they also want capital preservation.
So our investment process has been custom-designed to solve for both risk management, which is downside protection, but also upside capture, which is your capital appreciation. I've done that at my career, and I'm very confident this investment process, which I've implemented for almost 20 years now, is very scalable and repeatable in different market environments, and we have managed to outperform. That's what I bring to the table in terms of differentiation.
It's an all-weather kind of strategy, not something that only performs in up markets or down markets, or only when the drivers are the market or a particular sector or a particular region. We've done this across the globe, across capitalization, across sectors, and I think that's what makes us unique and different as an active manager.
Kinnel: What are your key drivers of selling a stock?
Bhansali: We very much look at our sell discipline as a component and probably the corollary of the buy discipline. When we buy stocks, we look for attractive risk-reward, and so we sell when the risk-reward is unattractive. Really, it's a weighing of the risk and reward. There are times that we'll sell an investment position if there is a better one from a risk-reward standpoint, if really superior alternatives exists. Or, of course, if our thesis is undermined, that's another reason to sell. Finally, if you can take profits in our ideas, that also clicks in the sell discipline. Those are the reasons to sell.
Kinnel: You touched on risk. How do you try and manage that, and what might one expect in a down market from your strategies?
Bhansali: First of all, the way we define risk is not tracking error or simple volatility, but we think of risk as permanent loss of capital. We have built in risk management as part of our investment process. Most long-only managers think about a process for return management: How much will a stock go up and how much will I make? We think about what can go wrong in the business and how much will I lose if that scenario materializes? That's how we think about risk, which is, how do we not lose money?
We think, in any robust investment process, especially one that is targeting capital appreciation and preservation, you need to think about how do you avoid the losers, not just how you pick the winners. And that's part and parcel of our investment process, and that's how we think about risk management and how we incorporate it.
Therefore, because we are so risk aware, in markets when risk assessment becomes very important, like 2008, we've done extremely well in those markets. 2001-2002, which was the post-Nasdaq bubble crash, we also performed extremely well in those down markets. I'm talking about outperformance of several hundreds, if not thousands, of basis points. So this is how risk management and downside protection can really help a portfolio preserve the capital that they have made.
Kinnel: Will you build cash in the portfolios, too?
Bhansali: We tend to be fully invested for the most part. It's generally a single-digit percentage of cash, somewhere between 3% to 5% …
Kinnel: It's about owning defensive stocks, not moving into cash.
Bhansali: Exactly. And also finding ideas that are not correlated with the market. That's how you generate alpha.
Kinnel: I'm also curious about currency risk, because obviously more recently we've seen a rising dollar has meant a lot of foreign equity funds have given back gains. The equities may be rising, but then you lose it on currency translation. How do you approach that kind of risk in your portfolios?
Bhansali: Well, we very much incorporate currency risk as part of the evaluation when we are investing in the equity itself to make sure that we are making good dollarized returns, independent of what the currency might do, because as you know, currencies can go up, and they can down. You need to be prepared for both.
In our research process, we have a scenario analysis where we'll ask, what am I willing to pay for this company, say, in Japan or Switzerland or in the U.S. if the currency does so and so. It's a what-if analysis. We stress test it on the downside; we also stress test it on the upside, which is if the currency were to work in the favor of the company, how much is a business worth? So because we've already incorporated that into our thinking and the numeric analysis we do, when that scenario materializes, we are actually prepared to take advantage of it. That's how we manage it. We incorporate that as part of the analysis.
Kinnel: Rupal, thanks so much for stopping by.
Bhansali: Thank you.