Quality companies that can stand the test of time

Quality speaks volumes

“Quality investing” is an investment strategy that seeks to invest in good quality companies. The strategy is implemented by screening for companies that match specific fundamental criteria that indicate the quality of the company.  Such companies are considered to have superior business models and sustainable edge against competitors. Investing in quality companies can help portfolio returns especially when market conditions are not benign.       

The Quality – Smart Beta smallcase provides investors an opportunity to invest in high quality businesses. The smallcase picks its constituents from top 150 market cap stocks listed on NSE. Criteria like earnings variability, return on equity,  gearing ratio etc. are used to select consistent performers. A mathematical model is used to come up with portfolio weights, that seeks to maximize returns while reducing volatility.      

The smallcase has returned 66.8% returns over the past 5 years compared to Nifty returns of 34.1%.

Recession-proof investing

The All Weather Investing smallcase is a recession proof long term investment strategy. The smallcase, via exchange traded funds (ETF), invests in 3 different asset classes – equity, debt and gold . Investors can invest in the All Weather Investing smallcase regardless of market conditions. By investing part of the corpus in debt and gold instruments the smallcase reduces fluctuation in the short term, however the equity component allows the smallcase to generate wealth steadily over the long term.  

The weightage of different components is derived via an algorithm that seeks to maximize the sharpe ratio of the smallcase. Sharpe ratio denotes the returns earned for every unit of risk. The higher the ratio, the better the performance of the smallcase. 

The strategy has been backtested across different stock market conditions since 2007.  Since June 2007 the smallcase has generated absolute returns of 250.6% vs Nifty returns of 151.1%. 

Markets Update

Weaker than expected GDP growth during the 2nd calendar quarter of 2019 weighed on investor sentiment this week, with benchmark indices closing in the red. Sensex lost 0.94% closing at 36,981.8, while NSE’s Nifty50 index dropped 0.69% to end at 10,946.2.

Infrastructure output during July 2019 grew by 2.1% compared to the same period the previous year. The growth rate was above street estimates of 0.9%. Manufacturing PMI in Aug 2019 was 51.4 compared to 52.5 the previous month, indicating slowing expansion in manufacturing activity. Services PMI for the same period was 52.4 down from 53.8 recorded in July 2019, indicating modest weakening in service sector activity as well.