The leader's advantage | Value Research "We define leaders based on profitability metrics and not on revenues or market share," says Vetri Subramaniam of Invesco India Business Leaders Fund
Fund Manager's View

The leader's advantage

"We define leaders based on profitability metrics and not on revenues or market share," says Vetri Subramaniam of Invesco India Business Leaders Fund

"We define leaders based on profitability metrics and not on revenues or market share," says Vetri Subramaniam of Invesco India Business Leaders Fund.

The leader's advantage

What is the investment strategy of your fund? (Including internal rules on investment universe, capitalization orientation and maximum cash allocation)
The Business Leaders Fund consists of companies that are leaders in their sector or sub sector. We define leaders based on profitability metrics and not on revenues or market share. Due to this preference for Leaders, the fund is significantly invested in large capitalization companies, which typically exhibit such industry leadership characteristics. The weighted average market of the fund at ₹172,759 cr compares to weighted average market cap of the Benchmark (Nifty 50 index) at ₹183,928 cr.

The fund has a strong bottom up orientation due its focus on picking leaders in every sector.

We do not use cash as a lever to generate alpha. Our target is to remain almost fully invested (average >95%) over time. Our typical portfolio is a concentrated set of about 30-40 companies.

What are the essential attributes for the stocks to be in our portfolio?
These companies typically exhibit the better than average return on equity in the sector in which they operate if not the best. The stocks also typically score very well on Cash flow and Balance sheet metrics.

What kind of stocks never enter your portfolio?
Companies which are mere size or market share leaders, but do not display fundamental characteristics of a leader like superior and sustainable return on invested capital, are avoided. Stocks are evaluated on both quantitative & qualitative factors and either of these could result in exclusion of a company. We also stay away from companies which don't exhibit characteristics of sustainable growth. We prefer not getting into companies where there are some concerns on balance sheets and cash flows. Qualitative factors could include among other issues accounting transparency and attitude towards minority shareholders.

What will you attribute the relatively consistent performance of your fund in recent years?
The fund has a significant growth bias and that has certainly helped performance in the recent past. In addition, having underweight positions in companies with balance sheet challenges or poor return on capital delivered positive attribution.

The major source of Alpha over the last eighteen months has been stock picking; particularly stock selection in Financials and Consumer discretionary and Energy. In financials, our top stock weights have not changed much over the past few years and our sector weight is overweight benchmark. In Consumer discretionary, we are overweight and our auto sector stocks have contributed strongly.

Any tactical miss you regret (not having, or not having enough or holding something) in your portfolio?
The fund has stayed away some companies, largely in the consumer sector, that qualify as leaders but where we found valuations very rich. Potentially investment in these names could have added to returns. But our decision to stay away from these names was not a tactical view.

Please click here to read the analysis of this fund.


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