I have been reading and following BusinessLine for the last 12 years. Your investment advice has helped me with a 16 per cent CAGR over the last 10 years. Over time, I’ve learnt that quality-oriented investments are the best. Can you tell me if we have any fund that invests only in moat companies with high growth and consistent Return on Capital Employed? What is your view of SBI Quality ETF? I’m looking at a 20-year horizon.
The quality style of investing revolves around buy-and-hold investing in a basket of companies that deliver predictable and secular growth, while ensuring high shareholder returns. You are right to say that such companies usually manage these metrics by virtue of a strong moat — a durable competitive edge over others in the industry that makes for high margins and strong pricing power.
Most AMCs in India do not strictly adhere to one style across their funds and may have some quality-style funds, some value-styled ones and some following a Growth at a Reasonable Price strategy. In our view, one fund house that explicitly states its belief in the quality style and also walks the talk, while managing a solid track record in actively managed funds, is Axis Mutual Fund. Axis Long Term Equity is a good fund to SIP. Parag Parikh Mutual Fund doesn’t explicitly promote the quality style, but its stock selection process does focus on strong shareholder return metrics, so you can consider Parag Parikh Flexicap too.
Index funds tracking quality-oriented indices may be an option too for fans of this style. There are two ETFs you can consider — SBI Quality ETF, which picks quality stocks from the Nifty 200 and Edelweiss Quality 30, which picks quality stocks from the Nifty 100. But you should be aware that these quality indices pick stocks based on pre-set quantitative criteria and may not consider non-numerical factors such as good governance or management which too, in our view, are essential to assessing ‘quality’.
The ETFs also do not select stocks from the entire listed universe and pick their candidates from the underlying index alone. However, they do come with very low costs and you need not worry about the fund manager using his discretion to stray away from the quality style of investing.
A final word of caution. Different investing styles outperform in the markets over different time periods. The quality style has been the most successful style in the past decade, but this doesn’t mean that other styles won’t work. It would be advisable to diversify across quality and value funds for your long-term portfolio to smoothen out the journey.
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