As a steward of your capital, I think it’s essential that I explain in a transparent way how I invest. As I highlighted on the Ashva Capital website one of the main reasons a majority of fund managers under-perform is due to “closet indexing.” As a result our focus is on finding great businesses and not tracking our benchmark.
My investment success depends on my ability to accurately assess the prospects for the companies in our portfolio and what is discounted in their share price. My focus is on valuation and risk-reward drivers from a bottom-up fundamental level. At times companies in our portfolio may be benchmark constituents. However, the method by which they arrived in portfolio was purely driven by bottom up analysis and not the need to reduce tracking error with any given index. The process outlined below allows us to follow a patient and disciplined investment strategy even at times when it’s emotionally difficult.
Screening for new ideas
I follow a three step screening process that narrows down the approximately 5,000 publicly listed companies in India to a targeted list of potential investments. The first stage of the screening process involves excluding companies with excessive leverage. The second step requires screening for high Return on Equity as measured over a 5-year average and calculating earnings stability using a proprietary methodology. The final step is to rank the list of high quality targets by various valuation criteria such as earnings yield and price/book.
The research process
The primary goal of the research process is to assess whether or not a company identified through our screening process has a sustainable competitive advantage. As I discussed in an earlier email, high return on capital will eventually translate into total returns for shareholders. However, high returns on capital can only be sustained if the company has a defensible niche. I also attempt to discern the quality of management by determining whether they are honest, minority shareholder oriented and most importantly good capital allocators. According to William Thorndike, author of The Outsiders: Eight Unconventional CEOs and their Radically Rational Blueprint for Success, all great CEOs view capital allocation as their most important job. Thorndike’s empirical evidence confirms my own personal experience and thus finding management teams who take capital allocation seriously is a central part of my investment process.
The maintenance process
Once a stock is placed in the portfolio our financial models are updated on a quarterly basis and I continue to monitor both the underlying trends in the business and the overall industry dynamics. Although I follow a long-term approach, it should never be misconstrued as buy-and-forget. In my experience, deterioration in a company’s core business doesn’t happen in an instant rather it happens gradually over time. By staying abreast of both the company and competitors you’ll get a good feel about future prospects.
The selling process
I generally don’t sell a position unless return on equity is permanently impaired or the valuation becomes egregious. Finding great businesses that trade at a reasonable valuation is exceedingly difficult. Taking a long-term approach allows your capital to fully benefit from the power of compounding.
The goal of our investment process is to systematize the method by which we identify, research and invest in stocks. I’ve consciously chosen to focus on factors that impact long-term performance. With holding periods continually shrinking we are able to obtain a competitive edge by taking the long view. A long-term outlook is not only part of our investment philosophy but built into our investment process. Finally, by taking emotion out of the investment process I’m better able to capitalize on opportunities when the markets are ensnared in a panic. Great businesses rarely go on sale and you want to be prepared to act when they do.
Ashva Capital Management LLC
I know that I spent the majority of this email focused on our unique investment process. I also emphasized how we construct the portfolio from a bottom up fundamental perspective. However, there is a macro case to be made for investing in the Indian equity market and why you should dedicate a portion of your global portfolio to India. I’ll plan to go into more detail in my next e-mail.