Classical Aplha


“Bottom-up investment” philosophy refers to an approach of analysing the fundamentals of individual stocks and not being influenced by macroeconomic factors or market cycles existing in the environment where the company operates. It assumes that companies are sector-agnostic and can perform better (relatively) as compared to their broader industry. Bottom-up stock picking lies at the core of the Classical Alpha approach.

Classical Aplha


“Bottom-up investment” philosophy refers to an approach of analysing the fundamentals of individual stocks and not being influenced by macroeconomic factors or market cycles existing in the environment where the company operates. It assumes that companies are sector-agnostic and can perform better (relatively) as compared to their broader industry. Bottom-up stock picking lies at the core of the Classical Alpha approach.

DID YOU KNOW?


Alpha (α) refers to an investment strategy’s ability to beat the market, i.e., offer higher returns compared to its respective benchmark.

In Classical Alpha, the fund manager considers the microeconomic factors first and foremost. These factors include a company’s overall financial health, analysis of financial statements, the products and services offered, supply and demand, and other individual indicators of corporate performance over time. The classical alpha approach is further reinforced and distinguished by E-Qual Risk, our proprietary module used to compare companies on a series of qualitative and quantitative aspects that help us avoid risky stocks from becoming a part of our portfolios.

Three-Pronged Investment Process


Earnings Growth
E-Qual Risk Framework
Purchase Price Discipline

Earnings Growth Potential of the Business


How it Works


E-Qual Risk (Emkay Qualitative Risk Analysis) is the first-of-its-kind risk evaluation model in the country for quantifying and thereby objectively evaluating the governance aspect of management quality. This proprietory model facilitates a comparative analysis of the entire spectrum of stocks and helps avoid low-quality stocks from entering the portfolio, thereby minimizing risk involved with investments. The module has successfully ensured zero blowouts in our portfolios, thereby significantly preserving our clients’ capital.

Under the E-Qual Risk module, companies are scored on aspects like management’s integrity and capability, wealth distribution, investor communication, and liquidity so that companies with accountability issues, ethical violations, conflict of interest and other corporate governance issues are systematically excluded from the portfolios.

Management Integrity (40%)


Management Capability (30%)


More than 70% promoter holding pledged

Undergone Debt Restructuring more than once

No investor communication

Debt: Equity Ratio more than 2.5

A large acquisition (more than 50% net worth) in the last year

A large investment (more than 50% net worth) in non-related businesses

The robust E-Qual Risk module brings in purchase price discipline so that we buy with a margin of safety and avoid timing the market. In the last two years, this module has helped us avoid more than 100 companies that have eventually blown-up, due to management and governance issues.

Purchase Price Discipline


Benchmark Returns (% p.a ) Based on the Overall Parameters
Relative Ranking Large Cap-I Large Cap-II Mid Cap Small Cap-I Small Cap-II
Return Expectation Return Expectation Return Expectation Return Expectation Return Expectation
85% + 16% 21% 26% 31% 36%
70% – 85% 21% 26% 31% 36% 41%
50% – 70% 26% 31% 36% 41% 46%
Below 50% Avoid Avoid Avoid Avoid Avoid
A large cap II stock with E-QUAL score of 75% is expected to deliver minimum 26% return per annum

Target Price / Current Price

Expected Return

BUY

ELSE WAIT

Target Price / Current Price

Expected Return

BUY

ELSE WAIT

Emkay Capital Builder Strategy (PMS Platform) and Emkay Emerging Stars Fund (AIF Platform) are powered by the Classical Alpha approach.

For us, a company categorized as “Large Cap I” with a ranking of 85%+ is expected to earn minimum 16% return. The rational being, minimum return expectation = (10 Year G-Sec Yield) x (2x to 3x).

Three-Pronged Investment Process


Earnings Growth
E-Qual Risk Framework
Purchase Price Discipline