Research Process

The first 'P' focuses on the process followed by a particular investment product. For instance, there are around 44 mutual fund companies with more than 2500 mutual fund schemes in the market. It is very important to assess if a particular asset management company follows robust process for stock/bond selection. We rank these companies on the basis of the following criteria:

• Consistency: Does an investment product follow its mandate consistently? For example, an investment product may have a stated objective to invest using momentum strategy, however, on closer scrutiny, we observe that they have invested based on some other parameter like value / quality as well. Similarly, some PMS provider may buy stocks that are going up without any fundamental reason. Then such kind of investment products will get filtered out in our 4P1R research framework.

  Key Metric: % Deviation from investment philosophy.

• Compliance: How much do they comply to industry best practices and SEBI guidelines? Do they follow them in-spirit or tend to find some workaround? For example, even though SEBI mandates a max. 10% exposure in a particular stock for a particular scheme, some fund houses may find a work-around to increase the exposure beyond 10%, thereby exposing their investors to unsystematic risk.

  Key Metric: Max. exposure to a particular group company.

• Quality: What is the quality of bonds that they are selecting? Are they taking low credit bonds to chase returns? For example, a debt mutual fund can invest a significant portion in lesser than AA rated bonds that may increase the investment risk significantly.

  Key Metric: %AA & above paper.

The second 'P' focuses on the risk adjusted performance of a particular investment product. Following criteria are considered:

• Past returns: We look at long term performance of a given investment product. We filter out products which are not consistent in their performance and give temporary spikes which is generally unsustainable. We like products that outperform in longer duration which should be at least three years.

  Key Metric: 3 year return, 5 year return, 10 year return

• Comparative performance: A key factor under consideration is the comparative performance with the benchmark and peer group of the respective investment product.

  Key Metric: Sharpe ratio.

The third 'P' focuses on the management pedigree of a particular investment product. High quality management team is one of the most important factor for any investment product to outperform in the long run. There is significant churn in the portfolio management industry and it is very important to keep a track of the changes in the management team of a particular investment product. Following factors are considered:

• Fund manager experience: A well qualified & experienced fund manager who has seen various market cycles is in a much better position to take right investment decisions. She has the wisdom to not get carried away in a bull market and has the courage to buy quality companies in a depressed market.

  Key Metric: Fund manager qualification & experience.

• Peer comparison: A fund manager is good if she can perform better than her peer consistently. Using few advanced research tools, we compare the fund manager performance against her peer group.

  Key Metric: Alpha generated in 3 year and 5 year compared to peer group.

• Upside and downside capture: It is the ability of the fund manager to capture more upside when the markets are at an upswing. At the same time limit the downside when the markets head down.

  Key Metric: % Upside capture, % Downside capture.

The fourth 'P' focuses on the investment portfolio for a particular risk profile of an investor. The investment portfolio is a mix of various investment products like MFs, PMS, P2P, Real Estate products etc. Following factors are taken into account to design the final investment portfolio:

• Risk profile of an investor: Portfolio creation is based on investor's risk profile. There are three broad categories of investors viz. Aggressive, Moderate and Conservative. Portfolio composition for each category will be different. The investment portfolio is created in such a manner so as to reduce the investment risk with lesser impact on return potential.

  Key Metric: Risk category

• Portfolio composition: The investment portfolio will comprise of various sectors like large caps, mid caps, credit risk, real estate etc. Care has to be taken to create a proper mix so as to reduce the risk with optimum diversification. When choosing multiple investment products, we need to ensure that there is not much overlap in the underlying holdings of such investment products.

  Key Metric: % of Large vs mid vs small vs sector, % Overlap in the portfolio.

• Return potential: The portfolio has to be created keeping in mind long term return potential based on prevailing market conditions. Eventually, the investment portfolio should deliver higher return for each unit of risk taken.

  Key Metric: Portfolio sharpe ratio.