HEAD-TO-HEAD: Alquity versus Fidelity

123456

Investment approach

The Alquity Indian Subcontinent Fund is a “high conviction fund but it invests in companies lower down the market cap spectrum than the Fidelity fund and is therefore slightly higher risk,” said McDermott.

“In line with the wider Alquity approach, the manager looks for companies best connected to the growing domestic Indian market,” he said.

The process starts with ESG exclusions, showing how integral these are to the process. There are limitations on revenue generated from industries or practices deemed unsuitable, which will lead to some excluded companies, most notably Reliance Industries which is one of the largest companies in India, according to McDermott.

“This will have an impact on relative performance, and manager Mike Sell also screens for company size and free float for liquidity risk purposes.”

After establishing what not to invest in, Sell actively looks for three core themes in the stocks he does want: monetisable structural growth, cyclical positioning, and sustainable competitive advantage.

“This will help identify firms which have quality franchises and are well positioned to capitalise on the wider tailwinds in the region. This phase will create a core list of potential companies to take forward,” said McDermott.

The next phase is to narrow down this core list. Sell tries to separate out the best, well-managed companies trading on attractive valuations, and he will perform deep-dive fundamental analysis to understand the current picture of the company, as well as modelling forward to help understand the inherent value of the company, and what it could be worth in the future.

“Company meetings are an essential part of the process, and the team will take several trips a year to the region, which will include factory tours and investor days,” said McDermott.

Stocks are held for around three- to five-years and active share is likely to be considerably above 70 for the fund.

Meanwhile, the Fidelity fund is a “core offering”, which is backed by a strong research team based in Singapore, Mumbai and Delhi, noted McDermott.

The focus is on quality management and manager Amit Goel particularly looks at how management behave: the history of how they create culture and how their capital decisions have been made. “They will often be market leaders with competitive advantages and enjoying structural growth,” said McDermott.

When it comes to sustainability, Goel believes that it is becoming a bigger differentiator between companies, and that this is feeding into returns. Therefore, he is looking for companies that are improving their sustainability, and encouraging others to do so too.

Goel travels extensively and visits companies on the ground in India. The team also uses social media data searching to track and see how consumers are reacting to companies.

“Focused, prudent and patient is the fund’s mantra,” said McDermott.

The strategy is focused because it is concentrated in around 50 (mainly large-cap) stocks and has an active share of about 60%. The top 25 names account for around two-thirds of the total assets. The “prudence” part focuses on capital preservation and sustainability going forward. It is “patient” because Goel has a three- to five-year investment horizon for each stock, with an expectation to doubling an investment in this period, according to McDermott.

Fund characteristics

Sector allocation:

Source: Fund factsheets, 31 Jan 2022

Top 10 holdings:

Source: Fund factsheets, 31 Jan 2022

123456