Post on 18-Dec-2021
IndiaLarge CapFund
1
Investment Philosophy
We have identified the BSE-200 as the broad
universe from which company wise
investments will be determined post
identification of the right sector. More often
than not, our stock selection will be from the
BSE-30 with the BSE-200 giving us greater
bandwidth in stock selection.
The Indian benchmark index, Sensex,
consists of leaders in their respective
industries, and are broadly representative of
the relative importance of each industry to
Why BSE-30?
the
command the highest market capitalizations in
their respective industry and are known as
Largely Capitalized Companies, or, Large Caps.
They constitute approximately 36% of the entire
market capitalization (BSE) in India. The
average market capitalization of BSE-200
companies in India is Bn.
Out of the approx. Rs. 2 Lac Crore worth of AUM
of mutual funds in India, approximately 70%
of the same is invested in large cap companies
that are a part of the Sensex or the Nifty.
economy. By virtue of their leadership, they
US$ 5
History emphasizes that only a few sectors drive market performances at any given point in time.
In other words, across a period of time, a few sectors depending upon macroeconomic conditions
find favor with market participants and carry with them the performance of the market as a whole.
Thus, an investment in the right company and sector at the right time is a definitive means of earning
superior returns compared to the benchmark indices.
Weight of BSE 200 relative to BSE (Updated till 30th November, 2011)
Particulars Value (Rs. Mn.) Percentage
Market Cap – BSE 58,638,807.5 100%
Market Cap – BSE Sensex 13,343,511.0 23%
Market Cap – BSE 100 18,937,234.9 32%
Market Cap – BSE 200 21,316,671.8 36%
Large Cap Allocation relative to Total Mutual Fund Industry AUM (Rs. Mn.)
Particulars Value (Rs. Mn.) Percentage
Total Equity Mutual Funds AUM 193,284,750 100%
Large Cap schemes as a % of above 135,299,330 70%
Unifi Capital Pvt. Ltd.
Table No. 1
Table No. 2
Source: www.bseindia.com
Source: AMFI, www.amfi.com
2
Pedigree of BSE 30
The benchmark indices evolve over time and only the most resilient of companies manage to stay in
the same. For instance, since inception in 1977, till date only 4 companies have managed to be a part
of the original sensex. On an average, every 10 years, around 10 companies move in and out of the
index, thereby assuring only industry leaders constitute the barometer of the country’s economic
performance.
Companies that moved in and out of the index
Companies that moved out Year Companies that moved in
Reliance Communication, 2011 Coal India, Bajaj Auto, Jindal Steel
Ranbaxy 2010 Hero Honda
Ambuja Cements, Satyam 2009 JP Associates, Sun Pharma
ACC, Grasim
It’s far better to buy a wonderful company at a fair price than
a fair company at a wonderful price.”
- Warren E. Buffett, Letter to Shareholders, 1989
Unifi Capital Pvt. Ltd.
Table No. 3
Source: Unifi Research
3
Merit of investing inLarge CapsLarge Cap stocks have long reigned supreme in the portfolio of sovereign funds, non-profit
foundations funds and conservative individuals; often residing at the core of India’s business.
Some of the characteristics they exhibit due to which they have emerged as constituents of India’s
benchmark indices are as follows:
• An established record of high quality earnings across time periods (Example: ITC, RIL)
• Strong balance sheets with little or moderate debt burden (Infosys, ITC, RIL)
• High credit ratings in the bond and commercial paper markets (HDFC, HDFC Bank)
• Large size relative to Indian businesses as a whole in terms of revenue and market
capitalization (TCS, ICICI, HDFC, L&T)
• A competitive advantage in the market place due to cost efficiencies, franchise value or
distribution control (all the companies mentioned above)
• High liquidity and high levels of corporate governance
• Frontline performance leaders in times of market rally
Given these resilient characteristics, large caps have the best of abilities to manage
downturns. The market’s rally around the competitive advantage of such companies and is
the first to lead performance when the markets turnaround after periods of under performance.
Keeping this in perspective and the fact that markets are trading at an attractive valuation
(FY 12E PE of 14x; Sensex 16,500)* hitherto commanded by mid-cap companies, it provides a great
opportunity to take exposure to large caps for the medium to long term.
When a management with a reputation of brilliance tackles
a business with a reputation for bad economics, it is the
reputation of the business that remains intact.”
- Warren E. Buffett
Unifi Capital Pvt. Ltd.
* (EPS Estimate: Rs. 1178)
The most important decision of a Fund Manager should be Sector SelectionThe importance of fundamental research in selecting the right sector that will lead the growth
cannot be over estimated.
It can be seen above how the exclusion of IT Sector, ITC and Baking Sector would have led to
considerable underperformance of the portfolio. One the other hand, it also shows how a
considerable overweight stance on the bottom performers would have dented portfolio returns.
The table below ranks sector performances over the last 10 years. (RED – Underperformers; GREEN –
Performers). It may be noticed that NO Performer stays in the same rank for more than 2 years.
Index Performance (April 2009 – September 2011) 69%
Index performance excluding performers
• IT Sector, ITC Limited and the Banking Sector
Index performance from Bottom 6 performers
• Realty, JP Associates, Metals, Power, Pharma and HUL
For instance, the period of high growth exhibited post 2009, have the following characteristics.
4
2001 -02
2002 -03
2003 -04
2004 -05 2005 -
06 2006 -07 2007 -
08 2008 -09 2009 -
10 2010 -
11
Auto 1 6 4 12 2 10 11 8 2 4
BFSI 9 1 6 4 10 3 6 5 4 3
Capital Goods 7 2 2 5 1 5 1 9 6 9
Cement 4 10 8 2 4 8 8 10 5 13
Chemicals 12 4 14 - - - - - - -
FMCG 8 11 13 8 3 12 5 1 11 1
Diversified 5 3 1 7 7 7 7 6 7 12
IT 11 8 12 1 11 4 12 3 3 2
Media 2 13 5 9 13 - - - - -
Metals 10 5 3 3 12 11 2 12 1 7
Oil and Gas 13 7 7 11 6 2 3 4 9 6
Health Care 3 9 11 10 9 9 10 11 8 11 Power - - 10 13 8 6 4 2 10 8
Real Estate - - - - - - 13 13 13 10 Telecom
6
12
9
6
5
1
9
7
12
5
45%
5%
Unifi Capital Pvt. Ltd.
In Summary
As demonstrated in the previous table, it may be concluded that SECTOR SELECTION and SECTOR
ROTATION are key to achieving superior portfolio performance. This is further elucidated by the
following two illustrations:
a. Effect of missing out on OUTPERFORMING Sectors: As the chart below showcases, it can
be seen that if bottom 2 or 3 sectors are identified, returns are significantly higher than the
benchmark
b. Removing UNDERPERFORMING Sectors: As a corollary to the above, the chart below
showcases how avoiding underperforming sectors leads to returns over and above the
benchmark.
5
0%
5%
10%
15%
20%
10 year 5 year 3 year 1 year
Sensex
Removing Top 2 sectors
Removing Top 3 sectors
0
200
400
600
800
1000
1200
1400
1600
1800
Sensex
Removing Bottom 2 sectors
Removing Bottom 3 sectors
Equal Sector Weightage
Unifi Capital Pvt. Ltd.
1-Jan 2001
1-Jan 2002
1-Jan 2003
1-Jan 2004
1-Jan 2005
1-Jan 2006
1-Jan 2007
1-Jan 2009
1-Jan 2010
1-Jan 2011
1-Jan 2008
In the above analysis, it is clear that the only piece of consistency is the inconsistency of the same
sector’s performance over a one year period. Individual sector performances are driven by economic
events and business cycles. Given that (a) changing economic climate is a constant and (b) business
cycle occurs with material periodicity, it is of utmost importance to identify sectors on the basis of
business cycles that will be at the cusp of performance.
Accordingly, the factors that go into building a portfolio that will merit the right sector as well as
rotate between sectors as and when deemed appropriate are as follows:
a. Understanding the phase of economic cycle
b. Understanding and anticipating business cycles
c. Identify sector leaders, and
d. Determine sector allocation
Keeping in perspective the above, Unifi has constructed a model portfolio that seeks to deliver alpha over the benchmark BSE-30
The table below shows various sectoral performances at various market cycles:
Mar 2001 – Mar 2003
Mar 2003 – Mar 2006
Mar 2006 – Dec 2007
Dec 2007 – Mar 2009
Mar 2009 – Mar 2011
6
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25.53% 104.56% 92.21% -4.79% 77.90%
11.51% 82.82% 84.23% -28.72% 69.73%
10.41% 74.35% 76.07% -35.01% 66.03%
6.31% 72.23% 57.29% -38.41% 65.92%
3.22% 67.88% 41.72% -43.75%
2.57% 57.81% 38.66% 39.03%
-5.02% 57.50% -47.12% 30.52%
33.76% -47.42% 25.57%
-8.27% 50.14% 19.13% -48.92% 21.93%
-9.15% 46.65% 6.58% -51.02% 21.34%
-13.55% 42.99% -1.70% -51.67% 17.73%
-14.18% 32.89% -6.00% -59.25% 15.08%
-14.79% 32.47% -6.56% -66.35% 0.34%
-28.31% 30.60% - -77.41% -13.50%
- - - - -
- - - - -
41.52%
-44.54%
34.11%
-8.03% 53.99%
Auto
BFSI
Capital Goods
Cement
FMCG
Diversified
IT
Media
Metals
Oil and Gas
Health Care
Power
Real Estate
Telecom
Chemicals
Sensex
Fund Objective
Investment Strategy
Methodology
Our objective is to build a long term portfolio of large cap stocks that will seek to generate superior
risk adjusted return relative to the benchmark (SENSEX). While the Sensex has 30 stocks across
11 sectors; we will build a portfolio of around 25 stocks across sectors that will outperform the
relative constituents of the Sensex over the long run. The universe for this purpose will be BSE 200.
The investment strategy will be to manage differential sector exposure levels to constituents of
BSE 200, relative to the Sensex. Alpha will be generated by maintaining an overweight stance on
sectors expected to lead the market and by going under weight/ avoiding sectors that are expected
to lag the market.
In the sections above, we have seen that no two sectors lead the market performance in
consecutive years. Meaning, at different points in time, different sectors drive the markets.
As India’s economy grows, certain sectors will enjoy growth rates faster than the others due to their
inherent strengths, industry cycles and other macro-economic factors. Portfolio weights will be
decided on the basis of two parameters:
a. Current Economic Indicators, and
b. Company Fundamentals
Sector weights will be determined on the basis of companies expected to benefit the most from the
current economic indicators (for instance, interest rates, foreign exchange movements, global
economic health and others) and business cycles. Individual stocks will be identified on the basis of
their underlying fundamentals, the extent of positivity of prevailing economic indicators relevant to
them and the comfort levels on the quality of their earnings, growth and valuation.
Unifi India Large Cap Fund
7
Great investment opportunities come around when excellent
companies are surrounded by unusual circumstances that
cause the stock to be misappraised.”
- Warren E. Buffett
Unifi Capital Pvt. Ltd.
Market Top
EarlyExpansion
MiddleExpansion
LateExpansion
EarlyContraction
LateContraction
Energy
Consumer Staples
Drugs
Utilities
Financials
Consumer Cyclicals
Basic Materials
Capital Goods
Services
Technology
Transportation
At markettops, basicmaterials,
energy andconsumer
staples sectors are
the strongest
At market lows,the transportation
sector normallyleads first
followed bythe technology
sector
For instance, in FY11, the Sensex generated a return of 11% as against 24% and 33% generated by
Banks and the FMCG sector, while, the real estate sector posted negative returns of 27%. A significant
out-performance to Sensex can be obtained by maintaining an overweight stance on Banks and
FMCG and avoiding exposure to Realty. Capital reallocation will occur every time an industry finds or
falls out of favor.
Unifi Capital Pvt. Ltd.
Sectoral Returnover the last 10 years
9
31 Mar 2002
31 Mar 2003
31 Mar 2004
31 Mar 2005
31 Mar 2006
31 Mar 2007
31 Mar 2008
31 Mar 2009
31 Mar 2010
31 Mar 2011
Cement
24.39%
-15.42%
84.00%
38.48%
103.82%
-1.28%
12.85% -51.14%
115.62%
-26.78%
Chemicals
-18.99%
1.88%
2.46%
-
-
-
-
-
-
-
IT
-8.72%
-7.82%
33.34%
68.49%
52.50%
24.64%
-27.13% -28.03%
123.09%
29.14%
Pharma 33.34%
-8.57%
40.49%
-1.00%
61.46%
-10.23%
2.61%
-60.12%
73.43%
-14.28%
Consumer Durables -2.04% -24.81% 27.81% 8.56% 113.00% -23.85% 27.58% -6.57% 28.34% 32.74%
Metals -8.69% -1.21% 157.80% 35.38% 37.73% -21.68% 57.28% -65.59% 190.73% -5.19%
Oil -21.70% -4.55% 89.88% -1.39% 70.38% 50.82% 51.89% -30.70% 40.90% -1.62%
BFSI -7.18% 14.77% 111.34% 22.02% 54.51% 26.27% 24.75% -31.28% 122.77% 23.58%
Auto 60.02% -1.53% 152.79% -1.99% 117.54% -16.50% -13.66% -44.69% 159.08% 22.16%
Diversified 15.96% 7.24% 223.39% 13.48% 69.57% 1.62% 23.12% -38.76% 78.45% -17.49%
Telecom 11.45%
-34.86%
68.77%
17.59%
99.58%
81.29%
11.34%
-41.48%
-3.06%
3.85%
Capital Goods
1.59%
11.25%
209.55%
19.94%
135.60%
15.94%
88.80% -48.91%
107.25%
-6.74%
Media
37.99%
-62.75%
114.72%
3.50%
6.52%
-
-
-
-
-
Power
-
-
49.94%
-5.19%
64.92%
10.42%
31.55% -16.87%
40.24%
-5.58%
Real Estate
-
-
-
-
-
-
-30.59% -74.14%
-13.50%
-13.50%
Sensex
-3.75%
-12.12%
83.38%
16.14%
73.73%
15.89%
19.68%
-37.94%
80.54%
10.94%
The basic ideas of investing are to look at stocks as business,
use the market’s fluctuations to your advantage, and seek a
margin of safety in your purchase price. Even hundred years
from now they will still be the cornerstones of investing.”
- Warren E. Buffett
Unifi Capital Pvt. Ltd.
Portfolio Characteristics
Universe
65-80% of the portfolio will be invested in Top-5 sectors of BSE- 30 and the remaining will be invested
in bottom up ideas from BSE 200; all sectors participating in India’s growth is represented in BSE 200.
The average market cap of companies in BSE 200 is US$ 5 bn. and the median market cap is 2.5 bn.
Our Universe will be limited to BSE 200. BSE 200 companies consist of front line leaders in their
respective industries and are companies that have the best operating levers, financial metrics and
governance norms to perform. Among the BSE 200, BSE 30 stocks (SENSEX) will likely have a majority
of the exposure.
US$
CAGR Returns generated by various sectors
10
Industry 5 year
Banking and Financial Services 24.40%
Oil and Gas 17.08%
Capital Goods 16.67%
IT 13.50%
Sensex 11.51%
Power 9.84%
Consumer Durables 9.11%
Auto 4.76%
Telecom 3.52%
Metals 3.16%
Diversified 2.44%
Cement -3.01%
Pharma -11.39%
Industry 3 year
IT 27.21%
Banking and Financial Services 23.41%
Auto 20.29%
Consumer Durables 16.58%
Sensex 7.44%
Power 3.22%
Capital Goods -0.41%
Oil and Gas -1.32%
Metals -1.73%
Diversified -3.36%
Cement -8.25%
Pharma -15.84%
Telecom -16.02%
Real Estate -41.84%
Unifi Capital Pvt. Ltd.
Limits and Risk Management
Investment Risks
Structure
The Portfolio will comprise of approximately 25 stocks. Exposure per company will range between
2-5% except when the company’s weight in the Sensex is above 5%. Typically, we will
underweight/overweight a sector to the extent of 25%-200% of its weight in the Sensex. In any case,
no sector will constitute more than 40% of the portfolio. The average market capitalization of the
portfolio will be more than the median market capitalization of BSE 200. While the portfolio focuses
primarily on a buy and hold strategy, we will balance the same with a rational approach to selling
when fundamentals have deteriorated or valuations become too demanding even in the face of
reasonable growth prospects in the long run. Cash and Cash equivalents shall not exceed 20%
of Portfolio. Derivatives will typically not be used except on rare occasions as a hedge, but
never for leverage.
Risks include general market risks, sector selection risk and valuation downgrade risks.
The fund will operate on the PMS platform where the investor’s assets will remain either in cash with
HDFC Bank/Axis Bank/Liquid Fund (pending deployment) or in the form of stock with CDSL, both in
the investor’s name. While the tracking and monitoring of the investments will be active, the activity
at account level will be passive, resulting in lower transaction costs and better post-tax return. The
fund manager will be paid a management fee of 2% p.a. of the funds managed or 20% on profits
generated above 10% p.a. on the investor’s capital. While the fund will be open-ended, it would be
advisable to keep an investment perspective of 18-24 Months.
11
Unifi Capital Pvt. Ltd.
Unifi Capital Pvt. Ltd.
Unifi’s successful approachto Client Management
Reporting
Audit
Unifi’s Back Office operations are equipped
with appropriate technology and processes to
handle accounting, settlement, custody and
reporting in a totally secure environment.
At the end of each working day we have the
capability to provide a 100% up-to-date
statement to the customer. While interim
reports are available on request via e-mail,
Unifi maintains a monthly reporting cycle for all
customers. The monthly report, containing a
transaction statement, bank statement and
securities custody statement, provides
confirmation of holdings as well as a
comprehensive and up-to-date status of an
account’s performance. Confidentiality of
client information is assured through multiple
levels of security.
All customer accounts are audited annually by
Brahmayya & Company – one of India’s oldest
and most reputed C.A firms. An audit
certificate with detailed financial statements is
provided to the client by Brahmayya &
Company – Unifi’s statutory auditors.
Performance Review
Process
A quarterly meeting is scheduled between the
client and RM to review the performance for
the quarter and the year to date. Significant
transactions and positions are discussed.
Unifi’s market view and its near term plans are
presented. Customer feedback and specific
requests can be recorded and handled. If the
customer is located abroad, the review will
happen over a call. Unifi believes that nothing
can replace human contact and strives to
do in-person meetings to the extent feasible.
Unifi provides a wide range of customized
solution to help address a variety of situations
but many things are common.
• We leverage technology and best
practices for providing high quality service
• We make decisions and advice based on
research, never on hearsay and tips
• Safety of capital and low risk approach is
our prime concern
To keep things simple for the customer, we assign ownership of each customer to a Relationship
Manager (RM). It is the RM’s responsibility to co-ordinate internally to exceed service requirements
of the customer. Unifi’s Relationship Managers have proven track record in capital markets and are
capable of experienced advisement in line with Unifi’s market view and investment philosophy.
While the RM is accountable on day to day basis, the CEO retains overall accountability and is
available to assist in any situation.
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About Unifi
Unifi Capital was established in 2001 as a
specialized Portfolio Management company,
offering unique investment strategies into the
equity markets in India. Unifi manages a total
asset under management (AUM) of about Rs.
500 crores, and offers investment advisory
services for domestic as well as international
clients.
Unifi’s Fund Management expertise has been
built through a dedicated in-house research
function that is supported by relationship
managers committed to offering continuity in
relationships and the best levels of customer
service.
Unifi Capital manages funds for several
high networth families in India and overseas.
Unifi also advises institutional capital managed
by its investment management subsidiary
in Mauritius.
At Unifi, safety of a client’s capital assumes
utmost importance and is rigorously enforced
through a disciplined investment process and
robust risk management controls.
To know more: Visit us on www.unificap.com
Chennai: Hyderabad: Bangalore:th 11, Kakani Towers H.No. 6-3-346/1 511, 5 Floor
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www.unificap.com
Disclaimer:
This information has been compiled from sources we believe to be reliable, but we do not hold ourselves responsible for its completeness or accuracy. It is not an offer to sell or solicitation to buy any securities or any financial instruments mentioned in the report. Unifi Capital Pvt. Ltd. and their officers and employees may or may not have a position within or with respect to the securities / other financial instruments mentioned herein. Unifi Capital Pvt. Ltd. may from time to time, have a consulting relationship with a company being reported upon. All opinions and estimations included in this report constitute our judgment as of this date and are subject to change without notice.
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