Fund Snapshot
| Year of Inception | 2018 |
| Number of Stocks | 22-25 |
| Investment Horizon | Medium to Long Term |
| Fund Managers | Manish Sonthalia |
Investment Philosophy
The Business Opportunity fund from Motilal Oswal is a focused multi-cap strategy that tries to keep the number of stocks in the portfolio to 20-25.
Motilal has a well-defined investment philosophy that focuses on long-term investments in high-quality firms that match their QGLP investment requirements. They’ve stuck to this method for over two decades, with just minor changes in style.
Investment Purpose
The strategy’s investment goal is to achieve long-term capital appreciation by primarily investing in equity and equity-related securities across market capitalisation.
Portfolio Management Strategy
- The PMS Strategy invests in a concentrated portfolio of at least 20 stocks with high conviction.
- The portfolio is based on extensive research, leading to bottom-up stock selection with a three-year time horizon for equities.
- Portfolio with high conviction that invests across market capitalisation and will mainly focus on the following.
Consumer Discretionary: Winner of Per Capita GDP Doubling
Private Banks and NBFCs: Capitalise on Value Migration from the Public to the Private Sector.
Agriculture: A Bet on Increasing Rural Income
Affordable Housing Solution: Governments are focusing on achieving Housing for All by 2022.
GST Beneficiaries: Unorganised to Structured Business Migration.
Why is ‘Buy Right: Sit Tight’ important for investment?
- Real wealth is created by riding out most of a quality company’s growth curve rather than trading in and out in response to buy, sell, and hold recommendations.
- This philosophy lets investors and managers stay focused on their businesses rather than distracted by share price movements.
- A strategy of purchasing high-quality stocks and retaining them for the purpose of long-term wealth creation results in significant cost savings for the end investor.
- While the ‘Buy Right’ method relies heavily on the portfolio manager, ‘Sit Tight’ requires both the portfolio manager and the investor to participate. It requires greater accountability from the manager while also requiring greater involvement and understanding from the investor, resulting in better education for the former.
- Long-term wealth multiplication is only possible by sticking with the winners and abandoning the losers.
Description of Securities Types:
Equity Securities chose as part of the investment strategy: To invest in high-quality Indian equities in growth-oriented themes across market capitalisations via a high conviction portfolio.
Portfolio allocation across asset classes:
The strategy’s mandate is to invest in equity and equity-related instruments across the whole market capitalisation continuum, including large, mid, and small-cap companies.
Benchmark:
Nifty 500 TRI is their optimal benchmark.
Investment Tenure:
Medium to long-term tenure or investment horizon.
Importance of The ‘Buy and Hold’ Strategy
- This strategy results in low burnout, lower costs, and higher returns.
- A company is wisely chosen for investment after thoroughly examining its underlying hidden long-term potential.
Key Features And Portfolio Attributes
- BOP is a multi-cap strategy with a balanced allocation to large, mid, and small caps.
- Index agnostic: 80% deviation from the benchmark Nifty 500.
- 13-stock concentrated portfolio with high earnings growth
- The portfolio has been segmented into well-chosen themes, with a focus on consumer and financial services businesses, which are anticipated to perform comparatively better in an open economic ecosystem.
High quality consumer discretionary
Distinctive and durable market leaders likely to benefit despite short term headwinds
India’s growth potential remains intact
- India, despite facing multiple challenges over the years; has a track record of ~14% nominal GDP growth over the last 4 decades.
- We believe the basic building blocks to this long term growth remain intact;the pandemic should be a passing event.
Economic environment to accelerate consolidation
- Every downturn tests the survival of the fittest.
- Weak players in an industry suffer the most (especially the unorganized, and players with weak balance sheets).
- Consequently, in the recovery that ensues; the strong get stronger.
Focus on market leaders
- Accelerated formalization of the economy to benefit market leaders
- High stress economic environments necessitate that the strongest will be able to not just survive, but thrive.
Look beyond the short term
- Template for multi-baggers; vision to see, courage to buy and patience to hold
- Patience is the rarest of the three attributes. We believe; today as we’re still in the middle of the pandemic; our patience is being tested.
- However, as the dust settles; we believe we will be well rewarded for our patience.
Unique Feature
- Fair Strategy: focused exposure to a small number of key concepts through a targeted strategy. We value the degree of portfolio concentration Motilal employs (well below 20 stocks, major exposure in 2 sectors of financiers and consumption)
- Strong Investment Process: The long-term investment strategy of investing in high-quality firms is well established.
- Stable Investment Team: Individual fund managers with a fair amount of experience, supported by robust processes, driven by the top and internal research group knowledge.
- Performance: Business Opportunities Portfolio’s performance has been inconsistent, with just one out of every five calendar years seeing an improvement.
- Real wealth is not built by trading in and out in response to buy, sell, and hold suggestions, but rather by riding out the majority of the growth curve of high-quality enterprises.
- This mindset helps both investors and managers to maintain their attention on the companies they own rather than becoming sidetracked by changes in share prices.
- A strategy of purchasing high-quality stocks and keeping them for the purpose of long-term wealth accumulation substantially lowers expenses for the investor.
Q.G.L.P in a Nutshell
Quality of business x Quality of management
- Stable business, preferably consumer facing
- Huge business opportunity
- Sustainable competitive advantage
- Competent management team
- Healthy financials & ratios
Longevity – of both Q & G
- Long-term relevance of business
- Extending competitive advantage period
- Sustenance of growth momentum
Growth in earnings
- Volume growth
- Price growth
- Mix change
- Operating leverage
- Financial leverage
Price
- Reasonable valuation, relative to quality & growth prospects
- High margin of safety
A structural growth story that comprises 11% of the portfolio
Little to no risk on the asset side
- Within BFSI; we believe non-lenders; especially life insurance players are unique plays on structural growth;with little to no risks on the asset side of the business.
- This is unlike the lenders; where growth is fraught with NPA risks.
Deeply moated brands
- Barriers to entry: Brand and distribution play a crucial role
- Top 5 players account for ~90% of total industry market share.
- We expect most of the growth to accrue to Top 5 players as they continue to build on their existing strengths.
Capital efficient Businesses
- A capital efficient business with ~25% RoE for the successful players
- Growth funded internally without shareholder dilution.
- This ensures that all growth flows in to existing shareholders; a classic recipe for long term compounding.
Multi-decadal growth opportunity
- Long growth runway: With 83% protection gap (as per Swiss Re)
- We see life insurance as a structural play
- 16% allocation to life insurance companies is a testimony of our very high conviction on this sector.
Top 5 banks command 47% market share in India, versus 80% as seen in countries globally
Top 5 banks in India to consolidate market share
- The five bank concentration ratio in India stands at ~47% level; vs ~80% being the median for 30 large economies globally.
- We believe the top banks in India; especially the top 4 private banks, are very well positioned today to consolidate market share.
Strong liability franchises
- A very strong liability franchise, and good underwriting discipline are the key tenets of sustainable compounding in a lending business.
- The banks we own in the fund are the ones which clearly lead on these metrics.
PSU to PVT value migration to continue
- PSU banks have structural shortcomings of a promoter whose interests are not aligned with minority shareholders, weak underwriting capabilities, being capital starved, etc.
- Hence, expect value migration from PSU to PVT to continue.
Attractive valuations
- Financial stocks were badly hit during the sell-off caused by COVID-19
- Unlike other sectors, stock prices for banks are yet to reflect their full potential
- Believe this is a temporary mispricing for larger, well run private banks with good liability franchises and underwriting capabilities.
