2010: The credit crunch hurt us but did not kill us

by Ashik Shah on 31 July 2010

The quarter ended July 31st 2010 was most certainly a very volatile one.  Kurm Investments also experienced this in its underlying portfolios.  Markets were concerned about inflation built up by quantitative easing and deflation as household and business expenditure is cut back to pay off debt, amidst fears of further possible write-downs in the banking sector.  There were concerns about the sustainability of China’s growth, often seen as the driver of any global growth.  Gold is at all time highs, given a real sense of the lack of confidence many feel about the financial sector and fiat money.  This confusing picture has made it very difficult to know how an investor should invest, and how to both preserve and increase the any family’s capital.

When we look at the investments which Kurm has in the USA, out of favour and distressed situations dominate the portfolio, and these are not reliant on any recovery in the Western world.  Nor are their businesses structured in such a way that inflation will erode huge amounts of capital as it would for any capital-intensive business not able to pass prices on.  The portfolio has significant potential upside as perceptions begin to match reality.  In the UK, the situation is similar, where private and public equity investments have seen the underlying businesses remain strong and even improve during the last few years.  For example, XLN Telecoms was recently sold and will generate a multiple of the capital invested in it.

Recent visits I have made to Asia and Africa have shown that large parts of the world have transformed themselves and are on potentially sustainable growth paths, driven by favourable demographics and rising productivity, enhanced by education and access to capital and technology.  People often speak of the BRICs, contrasting them with Europe’s PIGS, and there is even another new term – CIVETs.  India and China has certainly shown outstanding growth, as have other developing nations.  Having said that, Kurm avoided investing in China earlier in the year as it was clear that the property and stock markets were overvalued, and this has been seen in substantial reductions in asset values.  Currently in India, famous investors such as Rakesh Jhunjhunwalla are warning against overvaluation and recent weeks have shown a great many insiders selling off some of their holdings.

While the level of national and global economic growth impacts businesses and welfare in many ways, for a value investor, what matters is whether a business is priced relative to its intrinsic value, or what a well-informed businessperson would pay for it.  When we are able to invest in businesses at a significant discount to underlying value, then we are providing a simple-long term means to preserve and grow capital.  It also means that the value investor is naturally programmed to avoid any speculative excesses.  During the 12 years in which Kurm has been invested, it has avoided the Asian Crisis, the dotcom/ tech bubble, and also avoided dangerously overvalued sectors such as financials in the last few years.  While the credit crunch did impact the market prices of Kurm’s investments, none of the underlying investment cases were undone by the crunch.  In fact, Kurm was able to take advantage of the fear in the first quarter of last year and has generated a substantial recovery in NAVs.

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The views expressed and comments made on this website are not personal advice based on your circumstances. The purpose of this website is to provide information and analysis to help you make your own informed investment decisions. If you are not confident making your own investment decisions you should contact a firm which is authorised and regulated by the Financial Conduct Authority (such as Ashik Shah & Co. Ltd.) so that a qualified financial adviser, after considering your personal circumstances and investment objectives, can make personal recommendations of investments which are suitable for you. Whether you make your own investment decisions or prefer to follow the recommendations of a financial adviser you should always remember that your capital will be at risk and that investments can go down in value as well as up.

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