- Fundamental bottom-up approach
- Circle of competence
- Investment screening
- Risk minimization
- Ignore market timing
Fundamental bottom-up approach
At Alder Capital, our core approach of fundamental investing is driven by in-depth research of business, management, industry and competition. We don’t mind spending disproportionate time on doing on-the-ground research to identify businesses with enduring and scalable moats. We believe great businesses, with disciplined management, would create value over a longer period of time, irrespective of market cycles. We typically invest with a 3 to 5 year investment horizon and tend to concentrate our holding. We like small businesses in scalable niche as much as large businesses with sustainable industry leadership.
Circle of competence
Indian consumerism is expected to demonstrate secular growth over the next decade driven by income effect, demographic dividend and rising aspiration levels. We expect all business from basic necessities, discretionary products and financial services to benefit from this mega trend. We intend to focus our investments into 3 baskets – consumer staples, consumer discretionary and branded B2C businesses. Our knowledge advantage built over years of understanding consumption related businesses, industry dynamics, competitive rivalry and managements enables us to reduce portfolio diversification and increase prospects of consistent returns. Plus the benefit of specialization is it eliminates surprises and results in performance in line with our investment decisions.
Seek high quality consumption centric businesses which are able to perform one or more ways better than its competitors and can improve their advantage over the long-term. Our investment framework has four key elements – management, quality, scalability, and value. These attributes are central to value creation in the long term.
- Seek leaders that have not let short term slowdown undermine the structural opportunities. At times of adversity they drive innovations, provide tremendous value to consumers and demonstrate agility cum execution capabilities.
- We prefer high-quality businesses, rather than just good businesses, as the former has sustainable competitive advantages i.e. cost structure, branding, network effect, switching cost and culture. Determining the source and longevity of these advantages is quintessential in understanding the likelihood of sustainable value creation.
- Good corporate governance and behavior is essentially built on the foundation of compliance, transparency, accountability and trust. Business owners who stitch these qualities in their value systems, have positive effect on all stakeholders. Market participants have heightened sensitivity towards misadventures of business owners and an elephant’s memory that may result in a permanent devaluation of business franchise.
- Sustainable growth at reasonable price: Businesses with excess returns over cost of capital and low re-investment rate tend to generate more value than low capital efficient business even at similar growth pace.
We believe in risk-adjusted return versus pursuit of just superior returns. Avoiding investments that could have higher probabilities of absolute loss, would not only minimise portfolio volatility but also results in outstanding returns over extended period of time. We are agnostic to any market capitalization or liquidity criteria, as we believe true value of a business with scalable, predictable and profitable business models will eventually be discovered irrespective of such limitations. We do not believe in hedging or leverage strategies.
Ignore market timing
Consumption related businesses tend to have sufficient internal accruals to growth at a normative pace. Cyclical slowdown in such structural growth businesses causes asymmetries in risk-to-returns. Thus we seek these bargains which generate disproportionate returns for seemingly low level of risk. We also believe in a passive investment strategy with low churn, as we feel outstanding businesses are capable of generating compound growth and difficult to come by.