Consistent Compounders

Filter-based approach

We create a list of stocks using a twin-filter criterion of double-digit YoY revenue growth and return on capital higher than the cost of capital, each year for 10 years in a row. Next, we build a portfolio of such stocks and hold them patiently for long periods of time, with very little churn.

Where do we add value?

The Consistent Compounders Portfolio combines our deep-dive stock-specific research with the benefits of the filter-based approach explained earlier,to help generate outperformance of 4-5% per annum over and above these filter-based portfolios. This is achieved via 3 factors:

1. Portfolio concentration: The filters might give a longer list of stocks which dilutes the reliance of the portfolio on outstanding companies. We narrow the portfolio down to 12-15 ultra-high-quality stocks.
2. Identifying the real source of strong fundamentals: Many housing finance companies, for example, cleared the filter-based criteria in 2018 or in 2019, but their fundamentals had been aided by macro factors including low-cost money market funding and a booming real estate sector, which may not sustain in the future. Hence, our research-based approach did not accept most of these housing finance companies despite their healthy historical track record.
3. Identifying one-off blips in historical fundamentals: Nestle India’s Maggi episode, for example, drove revenue growth of Nestle India below 10% in FY15. Similarly, the fall in crude oil prices to below US$30 per barrel caused a 6% product price cut by Asian Paints in FY17 which led to its revenue growth dropping below 10% YoY in FY17. Manual intervention in portfolio construction analyses the nature of these blips and on case-to-case basis we consider the inclusion of such stocks in the portfolio.