Mastering Megatrend Investing with Nimesh Chandan
Summary
TLDRIn this podcast, Nish Chandan, the architect of the Bajaj Finserv Flexi Cap Fund, discusses the concept of megatrend investing, a strategy that has shown significant success in the fund's first year. Chandan explains that megatrends are long-term economic and business changes that can act as tailwinds for growth in certain sectors. He outlines six sources of megatrends: technology, regulatory, economic, nature, demographic, and social changes. The conversation highlights the importance of active monitoring of these trends for long-term investment success, contrasting the proactive megatrend approach with the more passive buy-and-hold strategy. Chandan also shares insights into current megatrends in India, such as financialization, digitization, pharmaceuticals, and real estate, which are driving growth and offering exciting investment opportunities.
Takeaways
- 📚 The concept of megatrends dates back to 1982 with John Naisbitt's book 'Mega Trends', which discussed long-term economic and societal changes.
- 🌐 Megatrends are global shifts impacting businesses and economies, not limited to a single country, and can act as a tailwind for growth in certain industries.
- 🔄 The idea of 'Buy and Hold' investing has evolved into 'Buy and Watch', emphasizing the importance of monitoring trends to ensure the reasons for investment remain valid.
- 💡 Megatrends are identified through six sources: Technology, Regulatory, Economic, Nature/Sustainability, Demographic, and Social changes (TRENDS).
- 🚀 Megatrend investing focuses on future winners and losers, contrasting with index funds that are typically backward-looking and based on past performance.
- 💼 The fund manager, Nesh Chandan, discusses how megatrends can be a powerful tool for long-term investors to identify and capitalize on significant economic shifts.
- 💹 The podcast highlights how certain Indian companies benefited from megatrends like offshoring in IT and retail lending boom, leading to substantial wealth creation for investors.
- 🏦 The financialization and digitization trend is a current focus, with increased investments in financial savings and advancements in banking and financial services technology.
- 💊 The pharmaceutical sector, particularly contract research and manufacturing, is another megatrend, influenced by regulatory changes and a shift in drug development from China to India.
- 🏡 The real estate sector is undergoing a megatrend due to consolidation, with branded developers gaining market share and the market showing signs of recovery and growth.
- ⚡️ The power sector, especially renewables, is a megatrend with significant growth potential, as India moves towards cleaner energy sources and infrastructure development.
Q & A
What is the concept of megatrends in investing?
-Megatrends are long-term changes in the economy and businesses that have an impact on everyone. They are not country-specific and can act as a tailwind for businesses that align with them, aiding in growth, or as a headwind for those against them, necessitating adaptation or change for survival.
How old is the concept of megatrends?
-The concept of megatrends dates back to 1982, with the publication of the book 'Megatrends' by John Naisbitt, which discussed the benefits of investors looking at trends happening in Asia.
How has the perception of Buy and Hold investing changed in the context of megatrends?
-The perception has evolved from a passive Buy and Hold strategy to a more active 'buy and watch' approach. Investors are encouraged to monitor the trends impacting businesses to ensure the reasons for their investments remain valid.
Why should an investor be concerned about megatrends?
-Investors should be concerned about megatrends because they can significantly influence a company's profit growth over the long term. Identifying and investing in companies that benefit from these trends can lead to substantial wealth creation.
What are the six sources of megatrends?
-The six sources of megatrends are technology changes, regulatory changes, economic changes, nature or sustainability, demographic changes, and social changes.
Can you provide an example of how megatrends have benefited investors?
-In the late 1990s, technological innovations and the growth of the telecom industry enabled remote work, leading to the offshoring boom. Indian IT companies benefited from this megatrend, becoming multibagger stocks for investors.
How does one construct a megatrends portfolio?
-A megatrends portfolio is constructed by first identifying megatrends from various sources, then overlaying these trends on sectors to find companies that are on the right side of the trend. Further bottom-up analysis is done to assess the business quality, management, capital requirements, and valuations of these companies.
How is megatrends investing different from index investing?
-Index investing is typically backward-looking, focusing on past winners, while megatrends investing is forward-looking, identifying future winners and losers. Megatrends portfolios also assign weight to companies based on their return potential and valuations, rather than their market cap size.
What are some of the exciting megatrends that Bajaj Finserv Flexi Cap Fund is currently investing in?
-Some exciting megatrends include financialization and digitization, pharmaceuticals and contract research, premiumization in consumer discretionary due to economic changes, and the real estate sector, particularly the power and renewables opportunity.
What is the role of valuation in megatrends investing?
-Valuation in megatrends investing helps to determine whether the trend is already fully priced in by the market and to decide the appropriate weightage for a company in the portfolio based on its potential for long-term growth and current valuation.
Outlines
📈 Introduction to Mega Trend Investing
The podcast begins with an introduction to Mega Trend investing, highlighting its significance in long-term investment strategies. The concept dates back to 1982, stemming from John Naisbitt's book 'Mega Trends'. It emphasizes the importance of observing long-term economic and business changes that affect global investments. The discussion clarifies misconceptions about Mega Trend investing, distinguishing it from mere macroeconomic forecasting. It underscores the necessity for investors to adapt to these trends to identify businesses that will thrive or struggle, adjusting their strategies accordingly.
🌐 Sources and Impact of Mega Trends
This section delves into the origins of Mega Trends, which are identified through six key areas: Technology, Regulatory, Economic, Nature, Demographics, and Social changes (TRENDS). It discusses how Mega Trends can create cycles and trends within themselves, influencing various sectors and companies. The conversation provides historical examples, such as the rise of remote work and offshoring in the 1990s, driven by technological and demographic shifts. It also touches on the evolution of Mega Trends, from the IT boom in the late 1990s to the growth of retail lending post-2008, illustrating how investors can benefit from aligning with these trends.
🏦 Constructing a Mega Trends Portfolio
The paragraph outlines the process of constructing a portfolio based on Mega Trends. It starts with a top-down approach, identifying companies that are positioned to benefit from current Mega Trends. The subsequent bottom-up analysis examines each company's ability to capitalize on these trends, their management quality, and the potential for monetizing the trend. The discussion also covers the importance of valuation in Mega Trend investing, aiming to avoid overpaying for stocks and ensuring that the investment rationale remains valid over time. The approach contrasts with traditional index investing, which is more backward-looking and size-based.
💊 Current Mega Trends and Investment Opportunities
In this part, the podcast focuses on current Mega Trends that present exciting investment opportunities in India. These include financialization and digitization, which are driving growth in banking and financial services, particularly with the adoption of technology. The pharmaceutical sector, especially contract research and manufacturing, is also highlighted due to global regulatory changes and the potential for India to become a hub for drug development. The discussion also covers the premiumization of consumer discretionary spending, the real estate sector's consolidation, and the power sector's growth, particularly in renewables. These trends are seen as catalysts for wealth creation in the coming years.
Mindmap
Keywords
💡Mega Trend
💡Mega Trend Investing
💡Buy and Watch
💡Financialization and Digitization
💡Pharmaceuticals and Contract Research
💡Premiumization
💡Real Estate Consolidation
💡Power Sector and Renewables
💡Top-Down Universe
💡Net Net Beneficiary
Highlights
Bajaj Finserv Flexi Cap Fund celebrates its first year with a focus on megatrend investing.
Megatrend investing concept dates back to 1982 with John Naisbit's book 'Mega Trends'.
Megatrends are long-term changes in businesses and economies impacting everyone, not just specific countries.
Megatrends act as a tailwind for businesses that align with them, aiding growth.
Buy and Hold investing is evolving into 'buy and watch' due to changing trends.
Active long-term investors should consider megatrends for picking winners over decades.
Profit growth, influenced by megatrends, is a key factor in a company's stock price.
Nifty50 index saw 104 changes in its first 25 years, indicating companies with strong megatrend backing.
Megatrends originate from six sources: Technology, Regulatory, Economic, Nature, Demographic, and Social changes.
Investors have benefited from megatrend investing, with examples from technology and telecom in the 1990s.
The offshoring and outsourcing industry boomed due to technological and demographic changes in India.
Regulatory and economic changes led to a boom in retail lending in India from 2008 to 2018.
Megatrend portfolios are constructed by identifying companies on the right side of megatrends.
Bottom-up screening assesses business quality, management, capital investment, and cash flow generation.
Valuation in megatrend investing helps avoid overpaying and determines portfolio weightage.
Megatrend investing differs from index investing by being forward-looking and weightage-based on potential.
Current megatrends in India include financialization, digitization, pharmaceuticals, premiumization, and real estate.
The power sector and renewables present exciting opportunities within the infra sector.
Nish's book on megatrend investing is available for download on Bajaj Finserv's website.
Transcripts
[Music]
hi and welcome to very special
podcast as you know Bajaj finser flexi
Cap Fund has just completed its first
year so we thought it would be a good
time to look at the year gone by and
focus on something that the fund is very
specifically known for megatrend
investing now who better to quiz on
everything megatrends then the man who
built this unique strategy Mr Nesh
chandan morning NES morning hi and thank
you for taking the time to speak to us
about Mega Trend I have caught you well
before the opening bell so I think we
have time on our side but let's begin uh
so nsh if you could tell me uh you know
the very basic concept of megatrends
what's that all
about actually the concept dates as far
back as
1982 uh there was a book by John nasit
called Mega Trends and it spoke about
how a lot of investors can benefit if
they look at the trends happening in
Asia and how the Asian tigers would do
and a lot of money actually flowed to
Asia at that time uh following the
trends at that time so the concept is
about 40 years old with uh a lot of work
then being done to refine it further
when I came across Mega Trends as a
concept
naive that I was I first thought it's
about uh like you know forecasting a
macro for a country and then investing
in that and I an Indian investor so why
should I bother about Mega Trends but
then slowly and steadily uh as like I
researched more about it I found out
that this is not just about one country
it's about the changes that are going on
in businesses economies and that have an
impact on everybody that's true and
there are certain business businesses
where these Mega Trends act as a
Tailwind okay and help them in growth
and there are certain businesses which
are against these Mega Trends and they
either have to change their business or
do something else to survive so the
concept is about forecasting long-term
changes in the economy and businesses
and that may not be country
specific in one of the conversations I
was having with some of the good
investors uh we decide I mean we started
talking about a topic of Buy and Hold
investing and uh to my
surprise all these investors started
saying the Buy and Hold strategy is
dead and I got me a bit worried like you
know when we are talking about Equity
investing we are talking about Buy and
Hold investing then I understood the
perspective a little better they were
not against long-term invest right but
the concern was that because of these
Trend changes right a lot of businesses
the way the reason that you invest
invest in them that reason may not
survive so it's better to keep watching
these Trends and then invest so what I
took away from that was that Buy and
Hold investing has actually turned into
buy and watch you buy for a longer term
sure but you keep a watch on the
important Trends impacting businesses to
ensure that the reason that you invested
in that business stays the same
understood very interesting but n tell
me you're a fund manager and and and
this makes a lot of sense why should an
investor be uh you know concerned about
Mega Trends that's a very interesting
question if you are a true active
long-term investor and you want to pick
winners over many decades or many years
it is important to invest on Mega Trends
right there are a lot of factors affect
a company stock price but in the longer
run one of the most important factors is
the profit growth of that company
and profit growth depends on whether the
company is able to capitalize on the
opportunity that it has those
opportunities are created by Mega Trends
if you see from 1995 or
96 when nifty50 index came right every
year almost there are four to five
changes so in the first 25 years they
had 104 changes which means about four
average a year which are the companies
that actually survive through these
decades and stay in the index or create
wealth over a longer term for investors
you'll invariably find that many of
these companies have a strong Mega Trend
backing them which gives a Tailwind to
their growth which ultimately leads to
profit growth and wealth creation for
the investors interesting now that you
say that um about these companies having
a mega Trend backing them in today's day
and age uh Mish it's very easy to
classify anything as a trend right what
in your mind are the real sources of
Mega Trends so that's very interesting
uh Mega Trends uh need to be longer term
and in fact Mega Trends create Trends
within themselves right uh a short-term
move around the average is called a
cycle right uh a cycle when it is in a
direction it becomes a trend right a
mega Trend actually create many cycles
and Trends within them so we identified
six sources of Mega Trends and we have
put an acronym called TR ndf for that's
like know easy recall on that right but
these six sources of Trends are
technology changes regulatory changes
economic changes for example changes in
standard of living of a
population uh nature or sustainability
which is very becoming very important
now absolutely uh demographic changes
whether your population is Young or
aging and and uh social changes which
actually Encompass say consumer
behavioral changes that what consumers
prefer at one point of Time Versus the
other so we look at these six areas as
sources of our Mega Trends right and
then we try to map that at this point of
time which are the trends we are seeing
in each of them right so that's how we
come to long-term changes so tell me n
have investors really benefited from
investing in megatrends
let's take decade by decade some
examples um let's say 1998 right um You
had Innovations in technology and the
Telecom industry which made remote
working possible so you can be uh
present as a developer of a software in
US versus you can be in India uh because
of good Telecom connectivity reducing
costs uh you are able to perform the
same function as if you were sitting in
the client's office in us so offshoring
took off as a way of new way of software
development
yeah and at that time the business
started moving to countries where you
had a large English speaking
population and who could be trained to
do this coding to look at uh uh it
development India at that time was the
most favorably positioned na we had a
large demographic benefit uh large
English speaking population and a young
population and we were able to deliver
value to customers in it at a very good
value now the changes in technology
combined with changes in demographics
actually led to a jump in the offshoring
business in the country and uh offshore
Outsourcing obviously a lot of Indian
companies took benefit of that
uh large it companies if you see became
10 Baggers 12 Baggers over this decade
of 1998 to 2008 that's right when the
Nifty returns were not much but you were
able to get benefit of uh the trend
changes in one or two particular sectors
let's take forward from there uh from
2008 onwards India's per capita income
started Rising very quickly we cross, of
per capita income for the first time uh
because of changes in the banking sector
you had more data available about the
loans that you giving about the Creditor
or the credit worthiness uh of the loans
and that led to Improvement in lending
standards right uh so regulatory changes
availability of data and changes in
economic front where per capita income
started Rising led to Boom in the retail
Lending
and uh you see companies nbfcs who were
on Consumer Finance or Retail Finance uh
Banks which were more retail oriented
they had a fantastic growth over that
decade between 2008 and 2018 absolutely
and uh you saw multibagger returns from
some of these companies which were able
to benefit or were on the right side of
this Mega Tren right interesting so how
does one really go about constructing a
mega Trends portfolio well this is
actually interesting Mega Trends
actually helps you create a top down
Universe right of companies that have
the potential to grow when we screen
companies on Mega Trends uh first we
identify the mega Trends from these six
sources of TR and DS right we overlay
each of these Trends on each sector okay
and from this SE uh these sectors we
find out which are the companies on the
right side of the Trend and which are
the companies on the wrong side of the
trend clearly the companies on the right
side of the trend have the Tailwind for
growth are the beneficiaries of changes
that are happening in the economy and
the businesses and they have the
potential to do well so that's our top-
down screening and that gives us the
universe of uh megatrend now there are
many companies where the potential may
not necessarily translate into business
or profits so then our team takes over
in terms of looking at the bottomup
screening of these companies how good is
the business how good is the management
here we look at four different points
one you should be a net net beneficiary
of the trend if you are benefiting from
one Trend but you are against the other
your business prospects get neutralized
or growth prospects get neutralized so
you have to be a net net beneficiary
second you have to have uh ability to
monetize that trend if you're providing
a product whether a good or a service
and your customer is not allowing you to
make even a single rupee of profit of
that then that business is not worth
being in uh I'm not saying you ignore
companies which go through a investment
phase sure but in the long run there
should be visibility of monetizing that
the third then we look at for capturing
that growth what kind of capital
investments will be required and
ultimately what kind of cash flows uh
will that business generate so it is
like doing a financial analysis of that
sure and last and also the most
important step is valuation right so
here we get two things uh from Mega
Trends investing style valuations tell
you whether the crowd has already
discounted that Trend so if uh you know
about the hype cycle right that many of
times people people get excited about
the technology change or so and they pay
exorbitant amount for that stock now we
want to avoid overpaying for that Trend
so we look for areas where the trend is
not fully discovered or it has gone
through that hype curve where the
potential for long-term growth is there
but the crowd is not really anticipating
or exciting they are underestimating the
growth uh with valuation the second part
that we get is how much weightage we
should put in the portfolio for that
company
uh if the upside is much higher that is
valuation is attractive we put a higher
weightage on that company in the
portfolio so nsh could you tell me how
different is Mega Trends from the
index oh that is a very very interesting
question let's see how the index works
first index typically is backward
looking sure it looks at businesses
which have been winners in the past
right and that's why they are at a large
size and then they are included in the
index some of the it companies actually
came into the major indices in the year
2000 right lot of infra property
companies came into the index in
2007 much after they had become
multi-baggers right and uh index also
treats losers the same if the company
has been losing for many many years uh
ultimately it becomes a small smaller
size in market cap and it is taken out
of the index some of the infra companies
these companies which corrected by 70
80% ultimately went out of the indices
in 2011 after 3 and a half four years of
extreme pain for the investors so index
is typically backward
looking uh if you want to look at Future
winners you need to have mega Trends
which actually focuses on looking
forward at which are the companies which
will be future winners and losers and
marks them from there in a way you can
say in many of these Mega Trends you
will find companies that will ultimately
come into the sure index the other way
is index is market cap or free float
market cap
weighted Mega Trend investing actually
aligns or assigns weight to the company
based on the return potential or their
valuations so that's how it is better
than invest uh index because it is
forward-looking and it puts the right
weightage is based on the potential of
companies rather than their size very
interesting so you know N I have one
final question I'm sure our audience
would love to know given the strong
performance of maaj fins flexi Cap Fund
in the last one year what are the kind
of Mega trends that we are
investing uh there are very very
exciting opportunities at this stage in
India we are talking about this in
decade being India's decade and there
are many Trends which are very exciting
to invest in which have a lot of growth
potential uh within the overall basket a
couple of them I'll mention so one of
them is financialization and
digitization where you see uh increasing
Investments uh towards say Financial
savings compared to physical savings by
the crowd that is leading to some of the
Capital Market businesses doing well uh
say Banks and financial services doing
well insurance companies doing well so
these are the exciting spots and in
India compared to some of the other
markets you are seeing financials at The
Cutting Edge of innovation also in terms
of it's not the finex just like you know
doing good business but it's the banks
and financial services companies
actually being ahead in digitization and
um adopting technology so that's a mega
Trend that we are excited about the
other trend is of a very defensive
looking sector which is Pharmaceuticals
okay contract research and Manufacturing
or custom drug development is an area
which is very exciting for uh growth
right now especially there are
regulatory changes which are impacting
this we are seeing uh us talk about the
bioc secure act where they want to
reduce their dependence on China for a
lot of drug development and clinical
research or uh contract research so this
is going towards uh India because India
is again best place like in it uh in the
'90s where this business can be done in
a fantastic way third if you look at
economic changes we are seeing a sharp
rise in per capita income more young
population participating in the
workforce household incomes are growing
faster we are seeing premiumization
lifestyle spending by uh the consumers
and that upgrade is leading to benefit
to so many companies in the consumer
discretionary sector the last one I'll
highlight is real estate real estate
typically has a cycle of 78 years right
in the last few years especially in the
last decade what we've seen is
consolidation within real estate so
number of developers have gone down uh
branded developers or developers which
are large have actually gained market
share right uh last year we also sold
the largest number of houses uh ever in
the country and in fact we are
surpassing only this year then that
means there's the benefit to a lot of
these listed property development
companies um they are also benefiting or
helping the downstream players which are
into sanitary wear Ceramics uh wires
cables consumer discretionary like uh
white goods and so on so that's an
exciting theme that again we are looking
on oh I must actually add one more uh
Power sector in India within infra we
are excited about the power sector and
the Renewables opportunity especially
here you will find in our portfolio we
have a investment in some of the most
significant power related players in the
country and those companies are seeing
fantastic growth they have visibility
for the next 3 to 5 years in terms of
revenue and profit growth and we have
invested at the right valuation with
them wow that's really interesting Mish
uh I think it's only matter of time
before you know Mega train investing
becomes mainstream and the whole
industry is adopting it because I think
the science and the logic is there to be
seen um you know and for our audiences
if they'd like to know even more about
Mega Trends we have a book authored by
nes that's available for download on our
website so thank you once again Nish for
taking the time and I leave you to now
going and actually investing in meat
Trends thank you thank you pleasure Ro
thank you so much mutual fund
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