Purushothaman S.S.
AFTER A spectacular run in the previous couple of years, the equity markets hit the skids from September 2024, which extended for a six-month period as FPIs hit the exit button. But market volatility and a weak corporate as well as economic cycle may continue.
Reciprocal tariffs announced by the US is set to result in lower growth not just for that country, but for many other economies around the world.
Time for quality
In the post-COVID period, aided by fiscal and monetary stimulus, the broader markets did well as did several factor investing styles. Quality as a theme has been a relative underperformer over FY21-FY25. This has made valuations reasonable for quality companies and make them reasonable propositions now.
It is however important to understand how to make the most of the quality theme. The investing process starts with defining quality and using the right filters.
What qualifies as quality: Quality factors include economic moats, barriers to entry, brand image, product or service excellence, reinvestment potential, sustainably strong profitability, optimised cost structure and strong customer base.
Applying the filters: Once the investment universe is shortlisted with the application of the above factors, the quantitative filters are to be applied. So, return on equity (RoE) and return on invested capital (RoIC), financial leverage, cash balances and capital allocation filters are applied to get the optimal quality pack.
Taking note of valuations: Investing in quality names does not mean buying at any price. It is important to factor in valuations as well. Therefore, quality at the right price is essential for a rewarding investment experience.
Flexibility: Quality investment also needs to be flexible. There must be no restriction in moving across market cap segments―large, mid or small―while choosing the right names. Investment must also allow for concentrated exposures to sectors that are seen to benefit from market preference for quality. Finally, flexibility must be available for taking both bottom-up and top-down approaches while filtering for quality stocks.
Busting myths: One misnomer about quality investing is that high RoE and RoIC companies are available only in defensive segments such as IT and FMCG. However, quality names exist in many segments such as banks, cement, pharmaceuticals, retail etc.
This ability to limit downsides has meant that the quality index has been able to deliver superior over the long term.
Investors looking to incorporate the Quality theme into their portfolios can consider ICICI Prudential Mutual Fund’s latest offering―the ICICI Prudential Quality Fund, an open-ended equity scheme based on the Quality factor. The scheme provides an opportunity to strengthen portfolios with high-quality stocks at reasonable valuations, aiming for long-term wealth creation. The New Fund Offer (NFO) is open from May 6, 2025 to May 20, 2025.
The writer is founder, Nila Investment and Services