We believe that the ability of a business to generate steady and predictable cash flow is valuable. Not only is this metric a truer representative of the health of the underlying business, but it also tends to be undervalued by the market. Our ideal economic entity is one that has robust cash flow and has the potential to deliver reasonable growth. We tend to invest across the capital structure of a firm (equities/ bonds) and try to ensure that our clients enjoy the highest seniority in claim on the underlying cash flow of the business, acquired at the right price. The ability to evaluate across the capital structure not only helps us satisfy different risk-return profiles of our clients but also helps our managers understand the businesses dynamics of our investments better than the compartmentalized market place.
We believe in investing in businesses that are predictable and clearly understandable. The market often tends to undervalue “predictable” and “understandable”. This creates opportunities for patient investors to discover undervalued assets that can consistently deliver returns due to the robustness of their underlying business.
We believe that management quality and alignment of its interest are the most important soft parameters that determine the optimal return for our clients.
We believe in focusing our investments in geographies, sectors and companies which have a solid, structural long term growth potential.
The four pillars of our investment philosophy are cash flow, business predictability, management quality and growth potential. We believe that an equal focus on all four of these pillars provides the best forward insight into expected long term returns.
Core Investment Strategy
Our investment strategy is underpinned by our philosophy. In addition, there are a few facets of our Investment strategy worth highlighting.
We have an underlying macro belief of low growth and low interest rates
We believe that globally we are in a period of relatively low growth with low interest rates. Our view of the world recognizes the fact that global growth for the past few decades has been boosted by rising leverage, as interest rates came structurally down. This tailwind for growth has now run out of steam. Structural drivers of growth like productivity improvement and improving demographics are also not as favourable as they were before. Combining this low growth view with the current high level of global debt, we expect central banks to be forced to maintain low interest rates for as long as they can.
We focus on businesses with strong and growing cash flow
This macro environment will throw up an increasing number of companies with improving cash flow. Also, such companies tend to be undervalued compared to pure growth companies. Hence a larger chunk of total returns will come directly from the company and reduce our exposure to the price discovery mechanism, and hence the volatility, of the stock market.
We focus on Asia as a universe of relatively higher growth
In a low growth environment, Asia will remain the highest growth geography. As Asia continues to benefit from better demographics, huge potential to improve productivity and a lower economic base, its relatively higher growth rate is expected to be maintained for at least a few more decades.
We invest across the capital structure
We look at debt and equity as simply labels. Our aim is to secure a high claim on the underlying cash flow of the company and obtain a commensurate return for this risk that we take.
We are investors not traders
This means we have time on our side. We have the ability and advantage to wait patiently till the market recognises the value we recognize in the stocks we own.
We manage risk by avoiding permanent loss of capital
We define risk as the underlying risks in the business that we own and not the short-term ability of the market to price an asset correctly. Hence we focus on avoiding a permanent loss of capital from a poor underlying business rather than a temporary loss caused by volatility in the market’s pricing mechanism.