Investing in weak sectors, poorly-governed cos does not pay off: CEO, CWT Asset Management Company

Investing in companies that represent weak industries or have a lacking in terms of corporate governance does not pay off ultimately, CWT Asset Management Company CEO Md Tareq Ibrahim has learned in his decade-long investment career.

"In the early days of our careers, we often ignored the corporate governance factor while looking for investment opportunities. And it was a mistake; we realise that now looking back, even if we had profitable exits," he said in a recent interview with The Business Standard.

The asset manager, who successfully generated an average annual return of around 25% for investors of three mutual funds under his management cares, even more about the industry potential from where he picks stocks from.

His far reaching sight guides him even when it comes to what appears to be safe bets on the surface.

For example, he said the textile sector is growing but the industry is highly fragmented and generates a comparatively low return on equity. Steel and cement companies, which depend on imported raw materials, also generate low returns on their assets.

On the other hand, the consumer sector keeps growing due to the nature of demand for their products and firms are capable of securing much higher profit margins, he explained.

The CWT has invested as much as the regulator allows in the consumer sector as the mutual fund regulations don't allow a mutual fund to pour more than 25% of its total assets into a single sector and more than 10% into a single stock.

Return Performance

All three of his open ended funds – collective investment schemes that can issue and redeem shares at any time – have beaten the market benchmarks.

The first CWT fund, "CWT Emerging Bangladesh First Growth Fund", which began in August 2019, has increased investors' wealth by 90.9% till date. Against Tk13.94 in net asset value per unit, investors got Tk2.25 in cash dividends per unit last year.

Over the lifetime of the fund, DSEX, the broad-based index of the Dhaka Stock Exchange (DSE), has generated an envious 21.4% net return.

The second fund, CWT Shadharan Bima Growth Fund, which started in September 2020, grew the net asset value by 50% against the 25.64 % positive return by the DSEX and paid Tk1.7 cash dividends for 2022.

The third fund, CWT opportunities, beginning in June 2021, generated 5.4% total return against that of 4.52% by the DSEX and its unit holders got 6% cash dividends.

How he invests

Tareq Ibrahim believes in the investment philosophy of Warren Buffet and his partner Charlie Munger.

"Our approach is a value- and growth-based investment strategy. We buy growth potential at the right market value," he said.

He keeps observing the same growth parametre as companies with significant market share, edges in business and those capable of securing a good profitability.

From time to time, "We wait to buy their shares at a cheaper price if they fall due to any unusual economic circumstances."

For instance, biscuit market champion Olympic Industries has an intact growth story over the last one decade.

But, due to some temporary challenges that squeezed its profit margin in recent years, its stock price dropped to a multi-year low a few months ago.

Ibrahim calculated the risk and the return potential and found it to be a good bet.

He kept buying the stock and as soon as the company posted higher earnings for the July-December period, its stock started to turn around to let him enjoy a decent capital gain in an otherwise dull market.

Similarly, when hair care market leader Marico Bangladesh's shares dropped to below Tk400 in 2013 – with the company going through some temporary problems – Ibrahim saw an opportunity like few others.

Then at his previous institution, Ibrahim picked the stock to bag a tremendous return later and he feels that was the best investment decision in his life.

Marico keeps earning more each year and the stock is priced at over Tk2,400 now.

In different circumstances, he does switch stocks for the sake of higher return and growth potentials.

Investing with the economic cycles

Economic cycles that are significantly associated with rising or falling interest rates give good opportunities to buy or sell stocks.

For instance, in 2012 when interest rates were rising, Ibrahim invested in state-owned oil distribution companies -- Padma Oil, Meghna Petroleum and Jamuna Oil, which have gigantic cash floats because a large portion of their sales proceeds remain parked at banks.

The investment paid off as rising interest helped the cash rich firms earn more interest income.

Now, he anticipates a rising interest regime again and is avoiding companies with significant leverage as higher interest may increase their financial cost, while the case is opposite for the firms having huge cash in hand.

He said a 100 basis point hike in interest rates might help increase the state-owned oil distributors' profits by 30%.

Also, the largest drug maker Square Pharmaceuticals has around Tk5,000 crore in cash or cash equivalent assets and a 200 basis point hike in interest rates may help surge the company's annual profit by Tk100 crore, he explained his investment rationale.

In an opposite scenario, in 2015-16 when interest rates were falling he chose highest quality companies with maximum loans and ACI Ltd was his stock pick then that paid off.

2023: A year of opportunities

With so many reasons to hit the economy as well as the stock market, he believes 2023 is going to be the year of opportunities for entry in good stocks at good prices and in the coming years the investment should pay off again.