Series 21 – Second State of Business Life Cycle – Exposure

Last week, we displayed an advertisement by newspapers on Tally, which signifies the formalization of the economy. With India witnessing a significant influx of capital and the Nifty index reaching new heights this week, it becomes increasingly crucial to construct portfolios using a bottom-up approach. We at ITUS adopt a disciplined valuation approach, carefully assessing the selection of companies with exceptional management teams who allocate capital wisely. By consistently following this approach, we are able to create portfolios that are well-positioned to capitalize on favourable market conditions and deliver long-term success.

In this continuous process of portfolio construction and business evaluation process, after the first stage BUYING, the crucial second stage is EXPOSURE. Here, we manage the risk of each company in the portfolio by assessing anticipated short-term downside and evaluating management execution. Each business in a portfolio has a role to play, so when we position size them we consider both upside and downside expectations. Below are the three position sizing we consider-

Starting Position (Range Between- 2.5% to 3.5%)– We position businesses in this range where we observe substantial short-term drawdowns but anticipate multiple returns in the long term. These companies have strong promoters, a history of effective capital allocation, and show expanding incremental return on invested capital (ROIC). They possess unique qualities within their industry, with notable improvements in unit economics.

Base Position (Range Between- 4.5% to 6%)– These are companies which are market leaders (Top 1 or 2 in their segment) with strong  management and a good capital allocation history. We study the track record of 10+years for these businesses. The expectation would be a 25% drawdown over short terms and a 20% returns over long terms.

Fully scaled position (Range Between- 8-10%)– We allocate fully scaled positions to businesses possessing a unique moat that provides visibility for high margins. These companies demonstrate clear visibility in terms of earnings and cash flow growth. While short-term drawdowns of around 15% may be expected, they have the potential to deliver returns nearing the higher teens in the long term.

With meticulous care, we curate personalized portfolios for our clients. In upcoming episodes, we will delve into the third stage of portfolio evaluation: Allocation. We are excited to explore more captivating topics that enhance your client interactions. Wishing you a delightful weekend until then.

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