The investment objective is to achieve capital appreciation through investment in a diversified portfolio of strong businesses, purchased at reasonable valuation.
The entire approach of the O3 Core Value PMS is to mitigate the three major risks that lead to permanent loss of capital for the client, and these are:
The key portfolio constraints as a part of the Risk Management Process are: –
(i) Stock concentration risk – Not more than 10% of the portfolio is invested in any single stock
(ii) Sector concentration risk – Not more than 30% of the portfolio is invested in any single sector
(iii) Liquidity risk – The 3-month average traded volume of the stock should be large enough to sell our intended holdings within 5 trading days.
Investment Philosophy: The security selection process flows from the Investment philosophy. Their stated philosophy is to buy strong businesses when they are quoting at reasonable valuations. Therefore, the research process and stock selection process is towards choosing strong businesses purchased when their stock valuations are reasonable. These should also be within measurable parameters (so that ambiguity is reduced).
They begin with filtering out companies that do not meet their criteria of what they mean by a strong business. A strong business should have the following characteristics:
Cumulatively, on the two points above, any company can score a maximum of 20 points.
Their cut-off is 14.
The Investment Universe for the Core Value Strategy would be companies that qualify on all three parameters (a) a track record of 15 years or longer (b) recorded revenues of Rs.500 crores or higher and (c) a score of 14 out of 20 or higher on parameters (3) and (4).
Their commitment is that at any point of time, at least 75% of all investors’ funds would be invested in companies from this Universe.
A maximum of 25% is earmarked for companies that do not qualify to be in the Universe, primarily to accommodate (i) financial sector companies (ii) companies with revenues of less than Rs.500 crores and (iii) other companies who, because of the nature of the industries they compete in, cannot generate free cash flow or high RoCE consistently, but are strong competitors in their industries nevertheless.
After these initial filters, they see whether:
It is on point (c) above that they place special emphasis. A stock’s valuation is considered acceptable enough for purchase if:
In any case, they will not buy any stock if its valuation of today is greater than 1 standard deviation higher than its 10-year average valuation.
These processes are consistent with their basic investment philosophy of buying strong businesses at reasonable valuations.
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