For a long time, the investment ideas amongst the advisors/distributors for making allocations were on the basis of capitalisation band. Large capitalised companies, which essentially figure in the top 50 by market value amongst the listed companies of the country: Mid-caps – those companies that ideally are in the next layer and amounting to some 200-250 odd organisations and lastly the small-caps which are the next 250-350 odd that make up the lower end of the market value spectrum. Companies below that rarely figure in the mutual fund investment list as they are too small to make allocations to and exit from these counters are typically a whole lot more difficult than others due to their low daily volumes.
Although the capitalisation basis is a broad swathe bunching of companies, it has been observed that the movements are very different within categories. And as the investment eco system develops and matures, the familiarity with this cap-based system gets a limited interest from both the fund houses as well as the investors.
So what is the next step in the investment process??? STYLE BASED INVESTING. And we are outlining a few major ones.
Value Investing: This is the famous Benjamin Graham model. Implies that markets provide a more than necessary upside or downside to stocks or sectors, depending on the momentum. Instead, the fund manager focusses on an intrinsic bunch of indicators and these indicators provide an estimate of the “right” price for the stock/sector. If the “right” price of the stock is above the current market price, then it qualifies as a buy and if it is lower then it qualifies it for a sell or a don’t buy signal. Essentially the oldest of the portfolio creation mechanics and very popular amongst investors as well.
Momentum Investing: Buy high-sell higher. This will be easier to understand than the others. It implies that fund managers go majorly into the flavour of the season concept. Whatever is doing well now qualifies to be in the basket of holdings. Irrespective of sector or stocks. The entry stocks or segments is the easy part. The difficult part is the exit modes to be employed when the winds turn. And the bigger funds will have a problem employing this strategy throughout because of their size.
Factor Investing: The fund house or manager makes a list of factors and their weights that will qualify stocks to figure in the portfolio. It is not important that everyone has the same list or the same weightage, but the list and weightage ought to remain consistent across the creation of the portfolio of the same fund manager. The factors could be numeric like turnover, profitability, growth rate, capital formation etc. or qualitative like perception, familiarity, promoters’ quality etc. A largely dependable system for stock picking.
Quality Investing: This refers to the efficiency parameter in the company. Efficiency implies how quickly the company is growing, how unique is its’s product/service and how difficult it is for others to replicate (the moat theory), how efficiently the capital in the company is used and so on. Once the fund manager is convinced of the company that passes through the filters set by him, the company will become a part of the portfolio, irrespective of what the price is. The focus is not on the current price but on the efficiency factor within the organisation.
As investors evolve and markets mature here, there will be many more new theories that will be thrown up. But for now, if you are looking to discover fund management beyond the capitalisation band, these outlined above might help you in understanding the product better.
