Email Print

Unpredictable economics: The new strongmen politicians dont have any fixed economic ideology. They are willing to do whatever it takes to lift growth and subdue inflation, and in the first 4-5 years of their tenure, they seem to be able to pull it off.

However, as their rule endures, the economic impact becomes more mixed and the lack of structural change in these economies is more obvious. In this regard, this brand of strongman economics is not only less predictable than what the East Asian nations practised or what Margaret Thatcher and Ronald Reagan practised, its longer-term economic credentials are also more suspect.

Familiar investment constructs So, how should one invest in our brave new world where familiar political constructsat home and abroadare breaking down and where economic ideologies are no longer the path markers that they used to be?

Alphonse Karr, the editor of the Parisian newspaper Le Figaro. famously said that the more things change, the more they remain the same. That adage works well in the field of investment.

My study of the best-performing Indian portfolios over the past 15 years suggests that a sensible way to invest in stocks for the long run hinges around investing in companies (a) whose business models are easy to understand; (b) which generate healthy levels of return on capital employed (RoCE); and (c) which have a healthy revenue growth.

Indian companies which generate healthy RoCE and healthy revenue growth over long periods of time are very hard to find. But the good news is that when you pack your portfolio with such companies, you usually get market-beating returns.

So, for example, if on June 30, 2000, you had invested in seven companies which had in the preceding 10 years generated RoCEs greater than 15 percentand revenue growth above 10 percentevery year then, over the next 10 years (2000 to 2010), your portfolio would have compounded annually at 16.7 percent versus the 14.1 percent that the Sensex delivered over the same period. Had you repeated the same exercise a year later, you would have had six stocks in your portfolio. And in the 10 years from June 30, 2001, your portfolio would have generated 21.7 percent per annum versus the Sensexs 18.5 percent. In fact, my colleagues at Ambit find that this approachdubbed the Coffee Can Portfoliohas outperformed the Sensex fairly metronomically over the past 15 years.

For the patient investor who wants to earn healthy returns from equities in an uncertain world, I believe the Coffee Can Portfolio is close to being an ideal construct. Using the last 10 years financial data, my colleagues have created a Coffee Can Portfolio for the next 10 years containing 16 stocks (see table).

With that, I wish you the best of luck in life and in business in 2015.

(Ambit and its associates have managed the QIP issue of City Union Bank and have received compensation from them. Ambit and its associates have financial interests in Asian Paints, Axis Bank, City Union Bank, HCL Tech, ITCL and HDFC Bank as on December 26, 2014. I have no personal holdings in any of the stocks mentioned in the article.)