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    An HNI fund that returned 20% in a bad year shows how to survive a down market

    Synopsis

    Clean businesses deliver through thick and thin.

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    New Delhi: Amid concerns over deteriorating corporate governance, falling accounting standards and a selloff in stocks across the board, a bunch of stocks provided limited opportunity to investors as well as money managers to make money in last one year.

    One common thread among these stocks is their clean accounting and governance practices.

    Stellar performance of a PMS product focused only on companies known for clean accounting and governance standards bears this out.

    At a time when midcap and smallcap funds on an average plunged up to 8 per cent, this product – Ambit Good and Clean (G&C) Fund – delivered 20 per cent return to investors for last one year till May, data available with PMS-AIF Online portal showed.

    The returns were way ahead of top performing midcap and smallcap funds, such as Axis Capital Fund (up 8.91 per cent), Tata Midcap Growth Fund (up 8.02 per cent) and Axis Midcap Fund (up 5.74 per cent).

    Ambit Good & Clean (G&C) is a product for high-networth investors, where the minimum ticket size is Rs 25 lakh. As of May 2019, the fund had 40 per cent exposure to midcaps, 35 per cent to smallcaps and 20 per cent to largecaps. It held about 5 per cent cash.

    In the PMS space itself, the Ambit fund outpaced best performers such as Renaissance Midcap (up 4.70 per cent), Sundaram Midcap (up 1.20 per cent) and Tata Capital Emerging Opportunities Strategy (up 1.11 per cent) funds.

    “Our research over the past years showed over and above company-specific competitive advantages, three factors essential for a company to outperform consistently are clean accounting, efficient capital allocation and good governance,” said Aishvarya Dadheech, Fund Manager at Ambit Asset Management.

    The fund’s stock-picking strategy revolved around two key parameters; (a) businesses that have a good capital allocation track record and shows improvement in financial metrics over the past six years; and (b) which have clean accounting and corporate governance standards.

    The fund had an asset under management of Rs 106 crore as of May 31, 2019.

    Top investments

    The fund is betting on businesses that have a structural earnings growth story, where return on equity (ROE) is sufficiently higher than cost of capital and where there is a high conviction on the company’s management capabilities and intention.

    “We were upbeat on the specialty chemicals sector and have sizeable exposure to this segment. We have a couple of stocks that are market leaders in the specialty chemicals segment, which have performed handsomely over the past one year. We were also positive on consistently performing corporate private banks and select NBFCs and housing finance companies, which have been massively re-rated over past six months. We also have exposure to home building and consumer segments, where we have a conviction on brands, distribution and management capabilities. These segments have fared well for our portfolio,” he said.

    Ambit is positive on specialty chemicals, private banks and select midcaps and smallcaps from the consumer discretionary space.

    With an annualised return of 14.50 per cent and 18.10 per cent, for last 2 years and 3 years, respectively, this fund has been a top performer in its category.

    On a long-term basis, the fund has outperformed Nifty Midcap100 as well as Nifty 50 indices by 6.1 per cent and 5.9 per cent, respectively, on a post-fee CAGR basis since its inception four-and-a-half years ago.

    Dadheech claims the fund draws down less than the market in a correction.

    Portfolio churning

    Dadheech said the fund has a proprietary ‘forensic accounting’ framework, which weeds out companies with poor accounting processes, while a proprietary ‘greatness’ framework helps it identify efficient capital allocators.

    The fund has a concentrated portfolio of 15-17 stocks with a very low churn rate, which is not more than 15-20 per cent of the portfolio, meaning 2-3 stocks in any year.

    Take on midcaps and smallcaps

    The fund manager says it is the right time to invest in the broader market. Nifty50 returned 14.9 per cent in FY19 but more than 75 per cent of this performance was on account of six-seven stocks.

    “This happened because investors tried to hide in a few perceptibly quality stocks, as there was uncertainty with regards to the general elections. Over the next one year or so, this polarisation of performance will unwind as money will start getting deployed in good quality midcap and smallcap names, as valuations of these segments have now become very attractive,” he said.

    The Nifty Midcap100 index, which traded at over 40 per cent premium to Nifty50 in January 2018 now trades at a 20 per cent discount. The worst discount in recent history was 40 per cent, around the time of the global financial meltdown in 2008.
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    2 Comments on this Story

    amalesh bhattacharya451 days ago
    this appears an effort to boost our morale which has turned very low on mutual funds,same method is being adopted by dhirendra kumar,suggesting debt funds now
    Anonymous 451 days ago
    it is really difficult to predict the right share ... no one knows whats happening behind the screen .. by just reading the cooked up balance sheet no one can be sure.
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