How to Identify & Build High Growth Models?

The economy has recovered to close to pre-Covid-19 levels based on the growth in core industries and other high-frequency indicators. Contrary to the widespread perception that existed in April 2020 that large caps will outperform the mid and small caps, the markets are approaching pre-Covid19 levels, particularly in the mid and small size space. The high-growth portfolio is made up of high-growth companies, predominantly in the small- to the mid-cap range, and focuses on emerging themes in the future economy. In this blog, we brief you about high-growth stock models and strategies fund managers follow to make a portfolio grow in value.

Growth fund managers focus on companies that are still expanding and expected to generate increased revenues, rather than those that pay dividends. Some growth funds are particularly aggressive, so managers must choose stocks based on how quickly the company is expected to expand, rather than its ability to provide long-term sustainable growth. Based on this backdrop conducted a Webinar “Identifying High Growth Models –SISOP”

The keynote speaker was Mr. Madanagopal Ramu, Head – Equity & Fund Manager, Sundaram Alternates. In this webinar session, Mr. Madanagopal Ramu first briefed on the highlights of their SISOP Strategy in brief. He then listed the contributors of SISOP returns and presented their stock selection process.

The key insights of this webinar are as follows

What are high-growth models?
How to build high-growth models?

1. What are high-growth models?

High-growth models are those whose objective is achieving steady, low volatility returns by investing across sectors and asset classes. The base of this approach is tactical and dynamic asset allocation. By investing in a small number of high conviction stocks, you can create capital appreciation overall in market cycles.

The additional overlay within this strategy is multiple asset classes like fixed income, oil, and gold.

Keeping the volatility factor low, the strategy strives to reach a high return profile. These models are designed for investors looking to gain profits through investments in a concentrated portfolio of businesses with enduring competitive advantages and fair prices.

2. How to Build a High Growth Model?

You need to be able to identify new ideas and maintain small-cap space which has been under-researched and not so well discovered by the market therefore it left a lot of value on the table both from an earnings growth per share and valuation perspective.

The stock selection process is a crucial and crucial component of the overall wealth generation process. Even if you are invested in two underperforming sectors, you can still make meaningful returns if you have made the right stock selection. When we talk about growth, we don't mean the next one to two years; rather, we mean the next four to five years. As a result, the stocks we select must be able to grow at least 20% over the next four to five years to have a reasonable chance of doing so.

Next, for a good stock selection process we must ask how big the opportunity size is for that business, for instance, and what will help them to keep gaining market share continuously. The current market share is one of the criteria that you can use, or, what are the adjacent areas they can grow, or, what are the adjacent markets they can grow," because these markets, when added together, create the total addressable market.

Those who follow the markets or specific investments more closely can beat the buy and hold strategy if they can time the markets correctly and consistently buy when prices are low and sell when they are high. This strategy will yield much higher returns than simply holding an investment over time, but it also requires the ability to correctly gauge the markets. For the average investor who does not have the time to watch the market daily, it may be better to avoid market timing and focus on other investing strategies more geared for the long term instead.

You don't need to specialize in many different sectors/industries. Pick a few sectors you understand and that you believe could benefit from long-term trends. Focus on companies you believe have a strong and sustainable competitive advantage. Your core holdings should represent a good portion of your portfolio and should be well-established companies, with a solid business model and consistent top-line/bottom-line growth. Look for businesses in a fast-growing industry that could benefit from long-term trends. These will be smaller companies (think small/mid-cap)

Interesting Question from an Investor & Mr. Madanagopal Ramu’s answer to it:

As in past sectors like specialty chemicals which have already outperformed a lot in the last five years, is it worth still looking at these sectors? Which are the sectors one can consider investing in?

What is important is not what the company has done over the past five years but what matters is what it will do over the following five years. Looking entirely futuristic, the selection procedure that you consider must be to understand the potential for these businesses. How well positioned are these businesses to expand over the next four years? In five years, do they make enough money, and do they have a clear road map for how they want to produce this 20% growth throughout the ensuing four to five years?

Mr. Madanagopal Ramu answered many other questions from the audience on the Macro-Macroeconomics as well as sector-related questions in the webinar session. He also discussed SISOP in brief and discussed the above-mentioned points on the High Growth Model. Relive the entire session & hear the in-depth insights from the speaker with the link appended below -