'Focussed' investing reaps rich dividends: Motilal Oswal study

Globally, renowned investors like Warren Buffett, Charlie Munger and Phil Fisher have, among others, one thing in common-- they follow or propagate a concentrated investing strategy. Simply put, they invest in fewer stocks, rather than spreading out their investment over a larger number of stocks, in a bid to create wealth for their investors/shareholders.
 
In its 21st Annual Wealth Creation Study (2011-2016), leading domestic brokerage Motilal Oswal (MOSL) has looked at “Focussed investing”, wherein apart from other aspects it highlights the importance of ‘Power of allocation’ in creating wealth, and how investors could fetch phenomenally higher returns by allocating a larger share of money to fewer stocks. After 20 annual studies that focussed on “What to buy”, the latest study also moves a step forward by focussing on “How much to buy”. Using a hypothetical example of 10 stocks, it explains on how allocation could significantly influence the performance of a portfolio. If funds are allocated in different proportion to these 10 stocks, the returns can be as low as -8.5 per cent to as much as 18.5 per cent. A higher allocation to outliers can boost returns and vice-a-versa.

 
“Rakesh Jhunjhunwala made it big because of his three big investments namely Crisil, Titan and Lupin, which have delivered phenomenal returns for him,” says Raamdeo Agarwal, joint managing director, Motilal Oswal Financial Services, explaining how investors can also fetch exceptional returns. He also cites the example of how a bigger allocation in Eicher Motors in Motilal Oswal PMS’ fund helped it deliver significantly higher returns than a scheme from Motilal Oswal AMC, which also owned the two wheeler maker.
 

Focussed investing (15-20 stocks) takes a middle path as compared to diversified (50+ stocks) and concentrated (10-odd stocks) investing strategies. It also takes a lesson from John Larry Kelly Jr, who was a scientist at Bell Labs in the mid-1950s. MOSL’s study says that the key factors to achieving success in focussed investing is to define the portfolio goals (absolute return), superior stock selection capabilities (which is where the previous studies on what to buy comes handy) and rational allocation (bet big on stocks where the odds are better without taking undue risk). And, all these need to be consistently followed and monitored. “Disciplined investment practice should lead to exceptional returns rather than acceptable returns,” says Agarwal.

 
Of course, there are downsides as well. Investors need to avoid common mistakes like over-allocation, staying with winners/losers for longer than desired periods, etc. Also, opportunities to bet big don’t come often.
 
The latest study on wealth creation (defined by MOSL as the difference between market capitalisation over a five year period) shows that the top 100 wealth creators created Rs 28.4 lakh crore during 2011-16. TCS topped the list for the fourth time in a row, followed by HDFC Bank and Hindustan Unilever. For a second time in a row, the fastest wealth creator is Ajanta Pharma. While Asian Paints, Kotak Mahindra Bank and Sun Pharma are among the most consistent wealth creators. Over the past few studies, the consumer facing companies have mostly figured in the top, and between private and public sector the former has done consistently well.

 
On the flip side, companies from the commodity sectors have seen big wealth destruction. The study pegs the wealth destroyed at Rs 1.5 lakh crore during 2011-16 period.

Top Wealth destroying companies

Company	Wealth Destroyed		Price
	INR (Billion)	% Share	CAGR (%)
MMTC	1522	10	-50
Reliance Industries	820	6	-5
SAIL	758	5	-23
NMDC	651	4	-15
BHEL	593	4	-13
Jindal Steel	505	3	-26
NTPC	492	3	-7
Hindistan Copper	435	3	-35
Vedanta	427	3	-17
Tata Steel	293	2	-13
Total of above	6,494	44
Total Wealth Destroyed	15,146	100

TCS is the biggest wealth creator for fourth time in a row

Rank	Company	Wealth Created		CAGR(%)
		INR (billion)	%Share	Price	PAT
1	TCS	2,637	9	16	22
2	HDFC Bank	1,475	5	18	26
3	HUL	1,266	4	25	14
4	ITC	1,197	4	13	14
5	Sun Pharma	1,169	4	30	24
6	Infosys	948	3	9	15
7	HCL Tech	819	3	28	27
8	Kotak Mahindra	760	3	24	17
9	Maruti Suzuki	742	3	24	14
10	HDFC	682	2	10	18
	Total of top 10	11,695	41	18	19
	Total of top 100	28,436	100	19	16