Equity Investment Philosophy

Oct 20211

Our philosophy while managing your money

Our FAIR investment framework helps in identifying Robust and clean businesses available at acceptable price and also keeps us informed on their ESG standings

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Use forensic framework to check accounting quality, board governance standards and ownership background

Focus on reasonably priced businesses with medium term earnings power rather than short term and be value/ growth agnostic

Be informed on ESG factors for businesses that we like to invest and its impact on the environment and humans at large

Pick well managed businesses having scalable opportunities and superior return on capital employed

Forensics

We use a forensic analysis to pick only clean and quality businesses from the available universe

We do forensic analysis in 4 key areas before we like any business

Accounting quality | Board governance | Ownership checks | Management integrity

Forensic Analysis Framework

Management Investors

• Family Representation• Board Governance• Align Shareholder

Interest

Financial Representation

Business Partners

• Aggressive A/c policies

• Earnings Smoothing• Capitalisation of

Expenses

• Stock-price manipulation• Unfair treatment of

minority share-holders• Price-rigging ahead of

placements /insider sales

• Un-related Ownership• Related-party

Suppliers• Related-party

Customers

Acceptable Price

Focus on reasonably priced businesses with medium term earnings power

We analyse stocks and categorisethem under 3 buckets

i. Static Value stocks

ii. Dynamic Value stocks

iii. Risk-management stocks –Stocks we own due to their presence in benchmark

A combination of Static andDynamic investment value makesus Value/Growth style agnostic

Investment value analysis Framework

Static Investment Value Dynamic Investment Value

• We derive static valuebased on % discountcompared to intrinsic valueof the stock

• This bucket includes eventdriven, deep Value andturn-around businesses

• Current Examples ofbusinesses with staticvalue – SBI and IndianBank

• We derive dynamic valuebased on estimated growthin intrinsic value over next 2years.

• This bucket includesconsistent compounders thatare sector leaders andmarket share gainers

• Current Examples ofbusinesses with dynamicvalue – Asian Paints andCrompton G Consumers

ESG Informed

Be aware of ESG factors for businesses that we like

ESG Process

Each sectors is assigned differentweightages for E, S and G factor

They are then evaluated based onmultiple parameters under eachfactor

Companies are then rankedbetween Q1 to Q4 within its sectorpeer group

While investing we have preferencetowards companies falling in theupper quartiles

E S G

ESG parameters that we analyze

1. Resources used2. Assets exposed3. Exposure to stranded

assets4. Pollution reduction

targets5. Product impact6. Environmental

controversies

1. Impact on society2. Cybersecurity risks3. Employee

satisfaction4. Employee safety5. Social regulation6. Treatment with third

parties7. Brand strength

1. Payout ratio2. Treatment to

minority shareholders

3. Management incentives

4. Management quality5. CSR6. Board structure

Robustness

Pick well managed businesses having scalable opportunities and superior return on capital employed

Quantitative factors:

1. 5yr. average core business returns more than 10% to ensure company is earning higher than its cost of capital

2. Current year Sales, EBITDA, PAT should be more than 5yr. average Sales, EBITDA, PAT to ensure we leave out de-growing

companies

3. Higher cash-flow conversion compared to sector peers over last business cycle

Qualitative factors:

Scalability of sector in which the business operates

Ability of business to grow faster

than the sector

growth rate

Capability of the

management to capture the opportunity on

sustainable basis

Risk Management at each level of investment process

Risk management is core to our strategy at each level of investment process

• Quality

• Corp. Governance

• Price

• Liquidity

• Reg. Guidelines

• Sell Discipline

• Portfolio Risk

• Residual Macro Bets

• Best Price Monitoring

• Liquidity Monitoring

Idea Generation/ Research

Portfolio Construction/ Monitoring

TradingInvestment

Process

Risk Management

What we don’t do

Not doing something is an active call and very important factor in investing

Take out-sizedsector bets

Macro calls Cash-calls

Earnings of every sectorgoes through cycles andover longer period it is in-line with broader marketearnings. Hence, we avoidout-sized sector betsunless it is mandate of thefund

Macro calls may not workall the time given dynamicnature of our marketstoday compared to whatthey were in the past

Timing the market isdifficult and hence, wekeep our portfolios fullyinvested

Our investment process

Listed Universe

Quantitative Screening(1) 5 yr average ROIC > 10% (2) Current year Sales, EBITDA, PAT > 5 yr. average Sales, EBITDA, PAT. (3) Revenue growth > Av. Sector growth

Fundamental Framework

ESG Framework

Forensic Analysis

Framework

Attractive Investment Value =Static Investment Value + Dynamic Investment Value

Filter

Robust businesses

Analyse quality using

Forensics

Arrive at

Acceptable price

Be ESG Informed

Know more, www.edelweissmf.com