ITUS Capital Fundamental Value Fund

The objective is to build and manage a portfolio of growth-oriented companies to compound capital by achieving an alpha of 5-8% over the index. The team at ITUS are growth investors who are prudent about the price they pay to own businesses.

The portfolio looks for companies that are growing their Free Cash generated from the Operations. This is done with thorough research and fundamental analysis of the company and its growth cycle.

The portfolio, with a DCF Valuation approach, invests in a portfolio of around 20 companies. The investment style is a bottom-up with an investment horizon of over 3 years. The fund invests across market capitalization with a focus on free cash flow growth. Understanding the business model and breaking down the unit economics of the business is an essential part of the due diligence done by the fund. There are businesses that the fund manager and the investment team do not understand, and such companies would never be part of the fund.

At ITUS, they follow the GPCG Framework: Growth, Price, and Corporate Governance. The investment approach is top-down (global & thematic) and fundamental research driven bottom-up approach. To put it differently, the four steps to investment include: Macro analysis, Thematic analysis, Bottom-up a analysis, Portfolio construction & risk.

The pride is in the framework of portfolio construction and the adherence to basic guidelines as an investment firm. Portfolio Manager is looking for well-managed, scalable business models, and the valuation framework within this is governed by intrinsic cash flow calculations.

It prefers not to use extended forecast based modeling for projections. Follows a basic checklist for businesses and risks it does not want to take in the portfolio. Finally, it’s important for the portfolio manager to evaluate the net free cash flow the business generates, net of reinvestment cost of capital.

The nature of businesses that are avoided matters and following is a guide to that :

• Siphoning of cash
• Poor returns on incremental capital (state-owned enterprises, conglomerates, airlines)
• Businesses with existential threats ( print media, wind energy businesses, etc.)
• Related party investments into other businesses

Basic assessment checklist that is followed :

• Too many related third party transactions
• Differing ownership in ‘ventures’
• Promoter pledged stocks
• Aggressive accounting policies – increasing accounts receivables with an increasing sales trendline
• Auditor change frequency
• Capitalizing expenses

What do we look for in growth?

The nature of the businesses that enter the growth portfolio bucket would need to demonstrate FCF growth of   10%+ over the last 5 years preferably with an increasing EBIT margin, and with growth coming in without adversely impacting the balance sheet in the form of additional debt. Such companies are rarely available cheap, but we do not mind paying a premium selectively depending on the industry nature, and if the ROCE > 20% ( For Banks, we would look at ROA as a measure).

When we look at companies, less than 10,000 Market cap, it’s important for us to expect a higher return profile as we are sacrificing on liquidity. If our estimate of return does not compensate us for the liquidity loss, we would be weary of investing in smaller market cap companies.