CLOSED STRATEGIES

Deep Value Discount Strategy

Objective

The strategy 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.

Investment Approach

The strategy concentrates on exploiting inefficiencies in the market. Market inefficiencies typically arise in the following situations:

• Over-reaction to a short-term negative event, a poor earnings report for example.

  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.”

• A sector that is currently temporarily depressed.
• A business that is in the midst of a turnaround.
• Widespread market dislocation driven by a geo-political/economic shock.
• Institutional imperative of benchmarking that causes portfolio managers to chase businesses with good recent business performance and sell those that haven’t.
• Large corpuses under institutional management that suppress the incentive to seek out small companies that aren’t widely followed or understood.
• Institutional reluctance to purchase, and disclose, companies with recent “negative” headlines.
• Indiscriminate selling e.g. a margin call on a promoter pledge.
• Corporate restructurings such as demergers or spin-offs.
• High-uncertainty but low-risk situations.

Universe

The strategy’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 strategy 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 strategy may also consider opportunities outside of this range.

Investment Risks

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:

• An issue that had been assessed as being temporary morphing into a long-term fundamental deficiency
• Erosion of a moat that had previously been assessed as being durable
• Value-destroying acquisitions
• Change in business strategy/management behaviour that are at odds with prior communication

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.

Portfolio Structure

Unifi’s core competency lies in conducting deep bottom-up fundamental -oriented research to curate client portfolios. Basis our investment philosophy, our portfolio construction framework prioritizes a balanced mix of stocks across sectors based on our investment thesis and conviction, ensuring adequate diversification amongst such quality businesses. The portfolio’s concentration at any time purely reflects our sectoral or stock-specific investment thesis. While maintaining responsible diversification by limiting company/sector level exposure is an important priority, we do not have rigid allocations. When we evaluate a business, we are not biased about its market capitalization but are concerned more about the size of opportunity that the business can offer. Hence, our portfolios are generally market cap agnostic.

Our typical portfolios endeavor a good balance between diversification and concentrated exposure. We periodically review the portfolios to maintain an appropriate portfolio mix depending upon investment objective, market conditions, risk tolerance and liquidity requirement to ensure diversification.

Benchmark: S&P BSE 500 TRI