Activism and Alpha: Himanshu Shah’s blueprint for long-term success at Shah Capital

From Novavax to global equities, Raleigh, NC -based Shah Capital’s founder shares his investment philosophy and strategy

By Feras Ismail

Himanshu Shah’s journey into the world of finance started early. As a teenager in India, he made his first investment with a small amount of money gifted by his father. His instincts led him to buy shares of Asian Paints. He almost tripled his investment in just one year, fueling his passion for the markets.

Today, Shah Capital is one of the largest shareholders of Emeren, a global solar power projects developer; Novavax, the covid vaccine maker; VEON, one of the largest emerging market telecom and digital operator; Yuchai, Asia’s largest diesel engine manufacturer in terms of units produced.

It is also a leading investor in Marius Pharmaceuticals, which developed Kyzatrex, an FDA-approved drug for testosterone deficiency. Shah Capital has not only been closed to new capital or investors since 2021 but has been returning capital to its limited partners. According to Hedge Fund Research, his fund has averaged over 18% annual return over the last 10 years and has returned almost 700% since his fund’s inception.

In an exclusive interview with The American Bazaar, Shah discussed his firm’s investment philosophy.

American Bazaar: Can you provide an overview of Shah Capital and how would you describe your investment strategy and current investment landscape?

Himanshu Shah: I founded Shah Capital in 2005, and today we manage over $600 million in assets following a two-fold investment mantra: first, identifying the disconnect between a company’s intrinsic value and its current value, and second, focusing on “the qualitative aspects” of a business. Our focus is on deeply understanding the business dynamics and employing a pragmatic and research-intensive approach to achieve long-term success. Our investment strategy also capitalizes on market dislocations. Shah Capital is sector-agnostic and often follows companies for a very extended period before investing. In today’s bifurcated market, characterized by the “Haves and Have Nots” and increased government and Central bank/s intervention across, we are finding more attractive opportunities in undervalued small to mid-cap companies as well as non-U.S. equities.

You are known as an activist investor. Can you explain that term?

Public Activism often serves as a catalyst to unlock the true value of the business when a company’s board and management are unwilling to engage in a constructive dialogue even with their significant underperformance in both relative and absolute terms. Shah Capital, being a long-term shareholder, prefers soft activism, that is, collaborative discussions with the management where we can add value based on our deep understanding of both the sector and capital markets. We also like to call this “Suggestivism.” Our goal is to be thoughtful, constructive contributors to strategic conversations for the benefit of all public shareholders. We only resort to public activism when absolutely necessary as it is time-consuming for both parties.

One notable example of your activism was your involvement with Novavax, where you successfully pushed for changes. Could you elaborate on that experience?

Being one of the largest shareholders of Novavax and after a year of soft activism, the share price had significantly underperformed even with its proven vaccine science. We also believed there was a strong chance of success in this activist effort, especially with their past marketing and regulatory blunders. We took our campaign public urging shareholders to vote against the re-election of three directors and opposing executive compensation proposals. In a proxy fight, we nominated two highly qualified independent board members and suggested many avenues for better sales and marketing efforts, and better traction on regulatory affairs to unlock its vaccine’s side effects advantage compared to its mRNA competition.

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Following Novavax’s lucrative licensing deal with Sanofi bringing in $500 million in cash and billions of future royalty payments after our campaign, we withdrew our proxy fight. Sanofi also brings a huge global marketing and regulatory infrastructure that Novavax lacked, making this deal an ideal fit. We also think Novavax eventually will be taken over by one of the big Pharma especially if their combo vaccine (Covid and Flu) Phase 3 trial generates good efficacy and safety in Q2 of 2025.

You are also known for running a focused portfolio of less than 15 companies, why?

A focused equity portfolio has the potential to generate significant returns as you are concentrating your efforts on your most high-conviction ideas. A deep understanding of both company and sector is a must for this strategy to succeed. Managing a concentrated book can bring challenges, particularly around liquidity with small capitalization equities requiring tremendous patience. To effectively navigate this illiquidity issue, it is essential to manage long-term capital that is not leveraged.

READ: Novavax receives FDA Emergency Use Authorization for updated Covid-19 vaccine (September 4, 2024)

The key to the success of following a focused investment strategy lies in balancing conviction with the flexibility to withstand market downturn while maintaining a keen focus on the underlying business fundamentals.

Why have U.S. equities performed better? And how can you be more successful in your focused approach as opposed to very diversified or index-based strategies?

Today’s investors often operate under the assumption of a “Fed Put” where the U.S. Federal Reserve steps in to stabilize conditions. This has contributed to massive capital inflows in equity indexation strategies disproportionately benefiting U.S. large and mega-capitalization equities. U.S. large-cap equities also have performed well being perceived safe in a higher interest rate environment plus a big liquidity premium, and from very meaningful equity buybacks driving strong earnings per share growth. However, this prolonged outperformance has led to extremely elevated valuations, particularly among the “Nifty Hundred and the Magnificent 7.”

Shah Capital anticipates a reversal of this trend as we transition into a lower interest rate environment, alongside a softer global economy that may bring profit growth disappointments. In contrast, small- to mid-cap stocks and non-U.S. equities present significant opportunities, with stronger balance sheets and reasonable valuations. I also believe many of these companies are poised to deliver better profit growth in 2025, offering better return potential. The real opportunities often lie in uncovering stocks that have the potential to outperform indices due to their undervaluation and can grow earnings due to their new products or services.

The highly leveraged nature of the U.S. economy presents unique opportunities for those who can conduct deep, firm-specific analysis. Over the next few years, we expect passive investing to underperform for aforementioned reasons. By focusing on individual companies and drawing from historical insights, a valuation-driven, bottom-up investment approach can generate significant returns.

(This interview was originally published by the American Bazaar.)