CLOSED STRATEGIES

Insider Shadow Strategy

Objective

The strategy seeks to generate superior risk adjusted returns, in relation to the broad market, by investing in fundamentally sound companies which have repurchased its own shares or where its promoters have acquired additional shares at market prices. Typically, such an action by a company or a controlling shareholder demonstrates their conviction that the company’s growth prospects or inherent value has not been captured in its stock price at that point. Unifi’s proposition is to gain from the eventual balancing of the value-price mismatch in the market by identifying and investing in such companies after a detailed review of their fundamentals and corporate governance standards.

Investment Approach

The basic strategy is to invest in companies where the promoter or the company has acquired additional shares:

• At market prices either through creeping acquisition or buyback route
• That seem to be motivated either by an undervalued stock price or an impending improvement in business prospects that are still to be reflected in the market price and
• Where complete disclosures of stock purchases have been made to stock exchanges.
• The underlying assumption behind this strategy is that the managers and controlling shareholders have a clear advantage over other market participants and are well positioned to make sensible investment decisions especially in case of small and under-tracked companies. By limiting the investable universe to such companies, we believe that we would be able to improve the probability of achieving superior risk adjusted returns.

We find that promoters typically use one or more of the following methods to increase their stake by:

• Preferential issue of shares and/or warrants.
• Merger of promoter owned private/public companies.
• Creeping acquisition in the open market.
• Voluntary open offers.
• Subscribing to the unsubscribed public portion in rights issues.
• Initiating the company to do a buyback either through market purchases or tender offer route.
• While preferential issues invariably enable promoters to hike stake at a price substantially lower than the market price, mergers are also structured to get the same benefit. However, we would focus only on those companies where promoters increased stake by purchasing the shares at then-prevailing market prices or at a premium in any form, be it rights, creeping acquisition, tender offers or buybacks.

Universe

Investment Risks

While research supports the view that insider shadowing works best in the aggregate, in few cases it could result in negative value creation. Lehman Brothers did a USD 10 Billion buyback just a few months before bankruptcy. Even in the Indian context, we have had similar instances as some promoters tend to get carried away in predicting that good times will continue to persist. Few promoters also just use this medium to send a signal without any genuine interest to buy. To address such risks, we will meticulously deploy a second layer of filtering based on the merit of fundamentals and scrutiny of the promoter’s behaviour.

To quote Warren Buffet: “Before investing in a company that is repurchasing its own shares, you should investigate the company fundamentals and its management quality. Overall, if a company purchases its own shares on a regular basis and its fundamentals appear sound, you should consider buying shares in the company”.

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