Motilal Oswal BOP

The strategy’s investment goal is to achieve long-term capital appreciation by primarily investing in equity and equity-related securities across market capitalisation.

• The PMS Strategy invests in a concentrated portfolio of at least 20 stocks with high conviction.
• The portfolio is based on extensive research, leading to bottom-up stock selection with a three-year time horizon for equities.
• Portfolio with high conviction that invests across market capitalisation and will mainly focus on the following.

Consumer Discretionary: Winner of Per Capita GDP Doubling

Private Banks and NBFCs: Capitalise on Value Migration from the Public to the Private Sector.

Agriculture: A Bet on Increasing Rural Income

Affordable Housing Solution: Governments are focusing on achieving Housing for All by 2022.

GST Beneficiaries: Unorganised to Structured Business Migration.

• Real wealth is created by riding out most of a quality company’s growth curve rather than trading in and out in response to buy, sell, and hold recommendations.
• This philosophy lets investors and managers stay focused on their businesses rather than distracted by share price movements.
• A strategy of purchasing high-quality stocks and retaining them for the purpose of long-term wealth creation results in significant cost savings for the end investor.
• While the ‘Buy Right’ method relies heavily on the portfolio manager, ‘Sit Tight’ requires both the portfolio manager and the investor to participate. It requires greater accountability from the manager while also requiring greater involvement and understanding from the investor, resulting in better education for the former.
• Long-term wealth multiplication is only possible by sticking with the winners and abandoning the losers.

The Business Opportunity fund from Motilal Oswal is a focused multi-cap strategy that tries to keep the number of stocks in the portfolio to 20-25.

Motilal has a well-defined investment philosophy that focuses on long-term investments in high-quality firms that match their QGLP investment requirements. They’ve stuck to this method for over two decades, with just minor changes in style.

• Fair Strategy:    focused exposure to a small number of key concepts through a targeted strategy. We value the degree of portfolio concentration Motilal employs (well below 20 stocks, major exposure in 2 sectors of financiers and consumption)

• Strong Investment Process:    The long-term investment strategy of investing in high-quality firms is well established.
• Stable Investment Team:    Individual fund managers with a fair amount of experience, supported by robust processes, driven by the top and internal research group knowledge.
• Performance:    Business Opportunities Portfolio’s performance has been inconsistent, with just one out of every five calendar years seeing an improvement.
• Real wealth is not built by trading in and out in response to buy, sell, and hold suggestions, but rather by riding out the majority of the growth curve of high-quality enterprises.
• This mindset helps both investors and managers to maintain their attention on the companies they own rather than becoming sidetracked by changes in share prices.
• A strategy of purchasing high-quality stocks and keeping them for the purpose of long-term wealth accumulation substantially lowers expenses for the investor.

Quality of business x Quality of management

• Stable business, preferably consumer facing
• Huge business opportunity
• Sustainable competitive advantage
• Competent management team
• Healthy financials & ratios

Longevity – of both Q & G

• Long-term relevance of business
• Extending competitive advantage period
• Sustenance of growth momentum

Growth in earnings

• Volume growth
• Price growth
• Mix change
• Operating leverage
• Financial leverage

Price

• Reasonable valuation, relative to quality & growth prospects
• High margin of safety

Little to no risk on the asset side

• Within BFSI; we believe non-lenders; especially life insurance players are unique plays on structural growth;with little to no risks on the asset side of the business.
• This is unlike the lenders; where growth is fraught with NPA risks.

Deeply moated brands

• Barriers to entry: Brand and distribution play a crucial role
• Top 5 players account for ~90% of total industry market share.
• We expect most of the growth to accrue to Top 5 players as they continue to build on their existing strengths.

Capital efficient Businesses

• A capital efficient business with ~25% RoE for the successful players
• Growth funded internally without shareholder dilution.
• This ensures that all growth flows in to existing shareholders; a classic recipe for long term compounding.

Multi-decadal growth opportunity

• Long growth runway: With 83% protection gap (as per Swiss Re)
• We see life insurance as a structural play
• 16% allocation to life insurance companies is a testimony of our very high conviction on this sector.

Top 5 banks in India to consolidate market share

• The five bank concentration ratio in India stands at ~47% level; vs ~80% being the median for 30 large economies globally.
• We believe the top banks in India; especially the top 4 private banks, are very well positioned today to consolidate market share. 

Strong liability franchises

• A very strong liability franchise, and good underwriting discipline are the key tenets of sustainable compounding in a lending business.
• The banks we own in the fund are the ones which clearly lead on these metrics.

PSU to PVT value migration to continue

• PSU banks have structural shortcomings of a promoter whose interests are not aligned with minority shareholders, weak underwriting capabilities, being capital starved, etc. 
• Hence, expect value migration from PSU to PVT to continue.

Attractive valuations

• Financial stocks were badly hit during the sell-off caused by COVID-19
• Unlike other sectors, stock prices for banks are yet to reflect their full potential
• Believe this is a temporary mispricing for larger, well run private banks with good liability franchises and underwriting capabilities.