Transcript:
Karen Watkin: Welcome to AB Alpha Females, the Multi-Asset Investment Podcast. I'm Karen Watkin, and I'm a fund manager in the Multi-Asset Solutions team here at AB. As a Multi-Asset investor, I love the challenge of looking across the capital markets to deliver the best outcomes for our clients. I work closely with colleagues across all areas of the investment universe to tap into their research and expertise along the way. The Alpha Females are those women who have developed these unique areas of expertise and made their mark in the investment industry. We'll also discuss their career journeys, the challenges they faced, and the lessons they've learned along the way. So stay with me as we uncover the stories of these impressive and inspiring women and gain a deeper understanding of the multi-asset investment landscape.
In today's programme, we're taking in two seemingly opposite ideas that are captured within the experience of one person. In short, when it's focused thinking good, When is it best to think more broadly? These two questions speak to the professional as well as personal experience of Arpita Bhabhera, who is an investment analyst working on AllianceBernstein's concentrated growth equity portfolios. Unlike other areas of investment, Arpita's role is to find the best narrow band of stocks in which to concentrate to get the best return for her clients. It's a challenging approach to investment and requires careful and in-depth research. Alongside her regular work, Arpita has been broadening her professional perspective as a recent graduate of a new programme to promote greater diversity within financial services, focused on increasing the number of female fund managers. She was in the inaugural cohort of a programme run by the Diversity Project, a cross-company initiative championing an equitable and inclusive UK investment and savings industry. As we will hear from Arpita, diversity for her is not just about gender or nationality, it's also about thinking differently and taking an alternative approach to personal and professional challenges. Arpita, welcome to the podcast.
Arpita Bhabhera: Hi, Thank you for having me.
Karen Watkin: So, Arpita, given you a role, can we perhaps start by you explaining what it means to take a more concentrated approach to investing?
Arpita Bhabhera: A concentrated portfolio refers to one that consists of only a few companies, the number could be as low as 20 to 30, for example. The objective would be to find companies that can deliver attractive returns and earnings growth consistently year after year and invest in those for the long term. When you go to find these companies, you will find that the number of these companies are very few. The strategy would be to find these companies, go do deep research, get comfort on the earnings growth or returns it offers, and then who will the best select few names in a meaningful way to drive alpha.
Karen Watkin: It sounds like taking a more concentrated approach could actually be quite a big challenge, right? You can start with an investment universe, say across global equity markets of more than 2,000 companies. How can investors narrow that down? Can you perhaps give some examples of how you might come up with the ideas on where to focus that research effort?
Arpita Bhabhera: Yes. When adopting a concentrated approach, an investor can look for companies with particular characteristics, like companies with strong competitive advantages or high barriers to entry, companies that have a strong brand or a strong market position, a number one or number two in different regions, companies which are gaining share. It's also important to find companies in industries that are facing structural or secular regular growth trends. One could think about how is the management of the company, what customer concentration risk is like, what supplier concentration risk is like. One should also look at how strong the balance sheet is. When you put in all these filters, the number of these companies quickly trickles down from the thousands of companies in global equity markets to a select few.
Karen Watkin: You talked about how investors might focus in on finding those quality companies that they believe can continue to deliver Attractive earnings growth, for example. But can you also explain a bit more about the importance of managing risk? Because one of the things we always learn when we first start learning about investments is that diversification is your one free lunch. But given a more concentrated approach, that obviously gives you a much more narrow band of stocks that you're ultimately investing in. How can investors think about managing risk with that concentrated approach?
Arpita Bhabhera: Of course, diversification helps, but I have two points to make here. One, research shows that the benefits of diversification trickle down as you add more and more companies. Risk in a concentrated portfolio is also diversified by investing across sectors which have strong structural growth trends. So yes, there may be times when one sector is not performing well, but the fact that these concentrated portfolios are invested across sectors helps them diversify risk even in a concentrated portfolio.
Karen Watkin: I'm interested to hear your views as we think about the market backdrop, particularly most recently, when we look back on 2023, for example, where broad stock market returns actually ended up being far better, I think, than most people initially anticipated when expectations were that we could be heading for a recession. But actually, that broad stock market return belies what was really happening underneath. We know that actually it was really being dominated by just a handful of stocks last year. Could you talk a little bit about what was really driving that underlying trend and why it was that we saw so few companies last year beating the broad stock market?
Arpita Bhabhera: On narrowness, I have one stat to share. Only one out of four companies in the index beat the S&P 500 Index last year. That is the lowest number in the past 30 years. That really speaks to the narrowness in the market. If you think of why that happened, inflation was high. There was uncertainty when the Fed would stop hiking rates. There were concerns that the economy would go into a recession. Then what happened was the booming business of supplying chips for AI development. That led to a lot of enthusiasm around tech stocks. In a backdrop of uncertainty, in most spaces, you had one theme which was reassuring you about growth, and that perhaps led to the narrowness in the market.
Karen Watkin: As you think about that type of market backdrop, it clearly becomes very challenging for any active stock picker, essentially. But how can investors tackle that, particularly when taking a more concentrated approach to trying to find those winners in the market?
Arpita Bhabhera: Intentional diversification within a concentrated portfolio definitely means that narrowness hurts performance. But there are likely to be other sectors which offer growth as well. Performance usually does broaden out. If a concentrated portfolio stays disciplined to its process of finding those companies across sectors that give you that growth, they will see performance broaden out and recover some or all of their lost performance. Now, when I say that the Magnificent Seven, which are the seven companies in the US that were driving most of this rally, the likes of Apple, Microsoft, Tesla, Amazon, I'm not calling for their collapse because these companies do offer growth. But what I'm saying is that there are other sectors which also offer growth, and they should begin participating in performance as well.
Karen Watkin: As you think about building conviction the ideas that you're putting forward. What do you do when you find it's being challenged? How do you think about that when you're building your investment thesis for a particular stock?
Arpita Bhabhera: I think any form of challenge and debate is great for an investor because it means that you get the opportunity to go back to your investment thesis and check whether that still holds true or not. To be able to do that, it is essential that I understand my business and I understand the company extremely well to begin with. It's important that I understand what are the key growth drivers or what is the largest profit contributor for the business. There could be two outcomes. One, you could be more reassured of your investment thesis, or you may realise that there's something that's changed, which is also great to know so that you can take action.
Karen Watkin: So, Arpita, you talked earlier, before you do the deep dive into a particular company, at a sector level, you're trying to identify what those secular growth trends might be. Can you talk a bit about how you try to identify those trends?
Arpita Bhabhera: I think ideas can come out of anywhere. As an investor, you need to be switched on all the time. To give you an example from your daily life, perhaps. I remember coming back to work after COVID and noticing the footwear of all the commuters, and everybody has switched to sneakers to work. That led me to think that casualisation is a real theme. Within spots where you always had an increased focus on fitness, but wearing sneakers to work, I thought, was a new trend. Again, during COVID, you must have read articles about how chips are the new oil, because for AI, you need semiconductor chips. That's a That's the actor that's seeing strong structural growth trends as well, because you need chips everywhere. Rising geopolitical tensions means that all the countries wanted chips being manufactured in their own region. That's another trend that's driving growth in that industry. Really, ideas can come out of anywhere.
Karen Watkin: I think that's fascinating. It really speaks to that juxtaposition, actually, between the fact that you can end up taking a more concentrated perspective in terms of the final portfolio of stocks that you may have with this type of approach. But actually, you're taking a very broad perspective when you're looking across the investment universe to find your ideas.
Arpita Bhabhera: That's right. Our team is based across US, London, and Asia, and every analyst on the London team is a generalist. That means that I'm researching stocks in the consumer space, the luxury space, the semiconductor space. It's across a range of sectors, which makes it fun and interesting because that means that I'm learning something new on an everyday basis.
Karen Watkin: Arpita, I'd love to hear more about how you got to this point and perhaps what put you on the pathway to a career in investment management to begin with?
Arpita Bhabhera: My background is that I'm from India. I was born and brought up there. My family runs a stock-broking business in Mumbai. So growing up, I think I might have seen as much CNBC as Disney. The red and green tickers used to really fascinate me. My parents and my grandparents would be discussing different businesses. So I just grew up thinking that I want to pursue a career in finance and investments and understand businesses. But it's only after I started doing the job that I realised how much I enjoy the process of learning on a day-to-day basis. I've always been a curious child. I liked knowing different things. I started investing passively when I was 13 or 14. I think I've always wanted to do this.
Karen Watkin: So, Arpita, I think that's fantastic that you were exposed to the financial industry growing up and that you clearly had those role models in your family in terms of building a career in investment management. We know, particularly from a gender diversity perspective, it's so important for women to have those role models to see what they can aspire to be. I know quite recently, you were involved in a ground-breaking programme looking at increasing the number of female fund managers by the diversity project. I'm keen to hear a little bit about your experience with that and how that's perhaps shaped your view of diversity across investment management?
Arpita Bhabhera: I had the privilege of participating in Diversity Project's Inaugural Pathway programme. That programme had a range of courses across a 12-month period and participants from different investment management firms. There were technical courses, there were courses on soft skills. I thought what it gave me was the opportunity to build a support network with bright, like-minded women from across the industry. I've always believed that diversity and diversity of thought is extremely important. So the programme didn't really change my perspective on the importance of diversity. But what it did make me I realised was that imposter syndrome is common across people, whether you're an entrant, whether you're in the industry, or whether you're extremely successful. And that was reassuring because it made me feel like it's not just me. It shed light on softer skills like the use of your voice and body language while pitching. I think that's very important because when you pitch an idea or when you're in investments, knowing what you're pitching is important, but pitching it in the right way to get your team's buy-in, to get your portfolio manager to be comfortable is equally important. Communication skills plays a huge role in that. It also gave me the opportunity to meet some really bright, like-minded women, some of whom have become friends now. I think that's great to have that because you can bounce off ideas, they can be your support network. My team is amazing, but sometimes you want people outside your team to just act as your support group as well.
Karen Watkin: I think that's right. Like you say, actually, that becomes essentially a fundamental part of the investment process because, as you say, when you're trying to pitch a particular investment idea or thesis, a core part of that process, I think for any of our investment teams, is to then have that challenge and debate. How do you see that working in your team and the benefits that you then get from a more diverse team, which perhaps helps foster a bit more of that debate when you're looking at investment ideas?
Arpita Bhabhera: Diversity is not just about gender and nationality or age or what you see on the surface. Diversity of thought is extremely important. Within our team, we're global team across countries. That's amazing because we all have our own experiences, our own perspectives. In any investing team, that's very important because that allows any topic to be viewed from all sides, and it avoids groupthink. And that's very important when you're investing your client's money.
Karen Watkin: And as you think about your experience on the Pathway programme, one of the things you did towards the end of the programme was to think of ways to help pay it forward. And again, I think that's so important as we think about improving diversity across the industry is thinking about how can we really build that pipeline of female talent coming up into investment management. Can you share some of the ideas you had about how we can look to address that going forward and get more women into financial services?
Arpita Bhabhera: My team and I broke it down into three parts. We often talk about how there are not enough fund managers, but we thought that the challenge or the problem is more deep-rooted. Many companies often make the excuse of there not being enough women in the pipeline. I think if you go to the grassroots levels and just plant the seed of finance, basically go to schools, do sessions with students about an introduction to finance that might get so many young boys and young girls to get interested in finance and remove the bias that finance is just a male-dominated industry. Step two would be to help these people with the tools that they require to get into the field of finance. So maybe organise mentoring sessions or help them with their CVs or cover letters. And the third step would be to help women who are already in the industry just thrive in their careers. I think we also need to broaden it out and include men in the conversation as well because allies are equally important.
Karen Watkin: So, Arpita, given all your experience as a research analyst and your role working on the concentrated growth team, what would you say are your three key investment insights from what you've experienced so far?
Arpita Bhabhera: It's very important to be flexible and learn continuously as an investor because the world is evolving, things are changing continuously, and you need to have the mental flexibility and the willingness to keep learning continuously. It's also important to differentiate between what could be noise and what can to actually impact your investment thesis because there's so much information flow and you can get really bogged down. So that differentiation is very important. And one way I do that is by asking the question, so what? Every time there's some news flow. It's very important to be disciplined and avoid emotional bias. Greed, fear. The way to do it would be to just stick to your process. Think about the thesis, think about whether the quality still holds true. Sometimes I think about, if I didn't own the stock already, would I still want to own it? And that gives you the answer and helps you get across your emotional biases. I think the last one would be to understand what's already in the price. You can do that by gaining an edge, by doing some primary research, or just speaking to management, for example, and understanding if there's a change in their body language or tone and take a view based on that.
Karen Watkin: I think they’re all extremely insightful comments, Arpita, and I think it would be very valuable for any research analyst or investor thinking about how to tackle the very challenging process of investing over the long term.
Arpita Bhabhera: Challenging but fun process.
Karen Watkin: Thank you so much for your time today, Arpita. I've thoroughly enjoyed our conversation.
Arpita Bhabhera: So did I. Thanks for having me.
Karen Watkin: That was such a great conversation. I think there was so much to unpack there, actually. There are a few key things that I would take away. The first was that I think she did a great job of explaining that even if you are taking a more concentrated approach to investing. Actually, the real value comes from having very broad perspectives. She talked about how she, as a research analyst, really looks everywhere for those investment ideas. I think That was really key. I think she also then spoke very clearly in terms of her investment insights around the need to have that disciplined investment process then in terms of how you think about focusing in on those stocks that you really believe will outperform the rest of the market, and that ability both to navigate the noise versus what is really going to impact investment returns, as well as the need to be continually flexible and continue to learning. That really spoke to Arpita as a person, and she clearly shows that she has this real intellectual curiosity and excitement at finding new ideas and doing deep research. I think that was so inspiring and refreshing to see. I think Arpita has shown very clearly that diversity, and particularly diversity of thought, is so important when you're an investor, to be able to have that breadth of and depth of conversation when you're building an investment thesis or challenging an investment idea. I think what her participation in the Pathway programme has given her is that broader perspective. Outside of AllianceBernstein, she's been able to build this support network of similar women at similar stages of their career and really be able to benefit from their experience now as well as her own. I think it just goes to serve how important diversity is across the board, not just gender diversity, but actually just continuing to have breadth of perspectives in all elements of your professional life.
That brings to a close this episode of Alpha Females, the investment podcast from AllianceBernstein with me, Karen Watkin. If you've enjoyed this episode, don't forget to tell your colleagues and friends about it. It only remains for me to thank Arpita Bhabhera. This episode was produced by Richard Miron from Earshot Strategies.
