The fund seeks to achieve above-average returns with below-average risk by exploiting inefficiencies. Few segments of the market tend to be mispriced in spite of visible growth prospects, resulting in such stocks trading at a deep discount to their intrinsic value. Reasons could vary from inadequate understanding of a business by most analysts, low relative market cap and liquidity or the lack of correlation to benchmark indices.
The Fund concentrates on exploiting inefficiencies in the market. Market inefficiencies typically arise in the following situations:
From Contrarian Investment, Extrapolation and Risk (Lakonishak, Schleifer and Vishny):
“Putting excessive weight on recent past history, as opposed to a rational prior, is a common
Judgment error in psychological experiments and not just in the stock market.”
The Fund’s primary source of investment ideas will come from a custom screener that is designed to filter companies whose stock has underperformed relative to the business over a 5-year time period by a significant margin (20% or greater). Benjamin Graham and David Dodd’s text titled ‘Security Analysis’, often labelled the Bible of Value Investing, starts with this Horace quote that is appropriate in this context: “Many shall be restored that are now fallen and many shall fall that are now in honour.” Another source of ideas will be news flows of disclosures made by insiders/companies under Clause 7&8 (Substantial Acquisition of Shares and Takeovers) and clause 13 (Prohibition of Insider Trading) of SEBI Regulations. The Fund will also source ideas from spin-off announcements from companies that have been disclosed to the exchanges. All ideas that have been so sourced will be subject to the rigorous, bottom-up, fundamental analysis that Unifi Capital has been practicing over the last decade.
Stocks in the portfolio will be predominantly within the market capitalization range of Rs.1000 cr and Rs.30,000 cr. The fund may also consider opportunities outside of this range.
While the approach itself is rooted on buying at a discount to conservative valuation, there nevertheless exist possibilities for negative surprises in individual securities including, but not limited to:
However, the emphasis on price paid for each individual security should protect the overall portfolio from the possibility of a significant permanent loss of capital.
The portfolio is likely to have around 15-20 stocks in the PMS platform. The investor's assets will always remain in the investor's name with a SEBI registered custodian. While tracking and monitoring of investments will be active, there’s likely to be low turnover in the fund.