For investment houses and asset management companies, discussing their investing approach and rationale in a transparent manner is not just a duty but also something of a hallowed tradition: think of Warren Buffett’s famous letters to Berkshire-Hathaway’s shareholders.
Vinit Sambre (Head- Equities, DSP) upheld that tradition in a recent interview, in which he discussed the investment framework that he espouses and has believed in for many years. Here are some key perspectives from that interview that investors of all stripes are likely to find illuminating.
Note: Vinit has always shared his investment philosophy openly for investors to consumer and decide whether they’re aligned with it or not. This article is a summarized version of the video interview, which you can watch below.
What is Vinit’s investment framework, in a nutshell?
The two most fundamental principles that Vinit swears by are:
- Long-term wealth generation is far more important than taking advantage of short-lived trends.
- It’s vital to steer clear of companies and management styles that he isn't comfortable with, thus reducing the likelihood of sub-optimal investments.
A core idea of this framework is that you should buy a particular company’s stock only if you actually intend to buy into that company’s business. Given that Vinit’s team holds on to its buys for a long time, it should come as no surprise that its churn ratios are among the lowest in the industry.
This long-termism has a clear vision behind it: experience has shown Vinit that solid businesses take a long time to flourish and fully come into their own. Thus, he firmly believes that detailed research needs to be backed by patience if you’re serious about putting yourself in a position to earn solid gains.
What metrics does Vinit use to assess stock quality?
There is a wide range of investing styles out there, with each style assigning different weights to different relevant criteria.
Vinit’s style reflects a potent blend of pragmatism and experience. As far as quantitative criteria for investment-worthy businesses are concerned, he holds the following to be especially important:
- These business should have gone through several market cycles, not only surviving them but also growing despite them, demonstrating that they have some sort of moat.
- Their management tends to make wise capital allocation decisions; this is a key determiner of the future prospects of any business. Companies should not diversify into areas that are likely to produce relatively poor returns.
- They have good margin profiles and cash flows, typically indicative of their management teams utilising working capital well.
- Their past and projected numbers should be realistic and hold up well under scrutiny.
There are, of course, more than a dozen additional quantitative and qualitative criteria that Vinit’s team takes into consideration. However, of all these criteria, the three that he considers to be absolutely non-negotiable are:
1. Great corporate governance
In Vinit’s view, this is what determines whether the business can fulfil all the potential it has. Governance teams must have a clear vision, maybe lofty goals but with a realistic way to achieve them. Moreover, they must formulate a sound growth strategy and stick to it: deviations from stated plans need to be looked upon as red flags.
2. Wise capital allocation
This plays a major role in shaping the profits (or losses) of companies in the medium term. As mentioned above, Vinit does not look favourably upon businesses that try to enter domains that don’t look very promising.
3. Return on the capital allocated
The return on the capital employed (ROCE) indicates the profits generated per unit of capital deployed. In other words, it is a measure of the yield on an investment that went into the business. While it might seem relatively simple, Vinit believes this factor to be absolutely key.
Like all successful fund managers, Vinit knows that there are always some wildcards out there, and that taking smart but cautious bets on them can be a good idea. Thus, while 75% of the portfolio that Vinit’s team has built up at DSP consists of stocks that adhere rigorously to the framework laid out above, up to 25% can be more tactical decision. In other words, they could be relatively high-risk opportunities that fall outside of the framework, but carry the potential to deliver outstanding returns.
When does Vinit sell?
Given that Vinit’s portfolios have a reputation for long-termism and lower than usual churn rates, it is worth asking: under what circumstances does he sell?
As you would expect, Vinit’s take on this is simple and pragmatic. Typically, there are three main kinds of situations that can lead him and his team to reconsider their investments, and perhaps sell some of them off:
1. Adverse regulatory changes
Stricter regulations can often ring the death knell for certain businesses. Moreover, it’s relatively rare for such regulatory changes to be reversed or blunted quickly. Thus, it makes sense from Vinit’s perspective to let go of business impacted by such transitions.
2. When the core thesis breaks down
If the main reasons a particular stock was bought become invalid, then it doesn’t make much sense to hold on to it. For instance, if a company starts to face excessive competition that's going to have a permanent negative impact on its pricing power, then Vinit’s team will probably disinvest from that company’s stock.
3. When valuations are great
If a stock in Vinit’s portfolio is valued at a price that reflects a fair intrinsic value for it, then he is likely to sell it. In other words, he doesn’t recommend being overly greedy. If he’s getting a fair price for a stock, he’d rather pull out and see if another great opportunity to buy it arises in the future.
So there you have it: the success of Vinit’s team comes down to the simple but powerful framework it adheres to.
How can you benefit from Vinit’s principled pragmatism? By considering DSP’s equity funds here.
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