PGIM India Phoenix Portfolio

“Regression to the mean is the most powerful law in financial physics: Periods of above-average performance are inevitably followed by below-average returns, and bad times inevitably set the stage for surprisingly good performance.”— Jason Zweig, Wall Street Journal

Product Positioning

  • The Strategy seeks to invest in companies that are close to an inflection point in their lifecycle.
  • To identify opportunities amongst companies that are experiencing or expected to see an upturn in their respective sectors/businesses.
  • The strategy seeks to benefit from structural changes in the economy and/or markets.

Portfolio Build Up Strategy

Theme 1: Reversion to Mean:

Theme 2: Special Situations:

At least 75% of the investments will be in these two categories

Investment Process

The flow chart diagram of the investment process

The investment process consists of

  1. Screening all possible choices to create an investment universe of acceptable quality
  2. Further filter the Universe on the basis of growth prospects and management quality
  3. Construct the portfolio using filters of valuation levels, and sector exposure limits.

Selection of the Investment Universe (about 350-380 companies)

The investment universe consists of companies that meet the following criteria:

  1. Average ROE for the last 10 years is greater than 8%

    The ROE measures how efficiently the equity capital of the company is being used. The higher the ROE, the better it is for the investor, but the basic idea is to verify whether the company is efficient enough to consistently earn more than its cost of funds.

  2. Positive Operating Cash Flows is more than 6 out of the 10 last years

    Net profits can be "adjusted" with clever accounting, or with lenient trade terms, but the cash flows of a company indicate how smoothly the business is being run. Just as we would expect any individual to live within his/her means, a company generating positive cash flow indicates that the company is living within its means.

  3. Market Cap between Rs. 750 crore to Rs. 20,000 crore

A mathematical model comprising the above variables is used to arrive at the investment universe.

At least 75% of the investment would be made in mid and small cap companies

Portfolio Construction

Determining the growth prospects and management quality

While a good track record of a company is a necessary condition, it is not sufficient to be included in the portfolio. We seek to satisfy ourselves about the following:

  1. The ability of the company to grow its sales and profits over the next 3-5 years
  2. The ability of the company to do this without consistently resorting to additional external funding
  3. The track record of the management in capital allocation

Price filters

The inclusion in the portfolio happens when the company, apart from qualifying on all of the above criteria is as available at valuation which is lower than the expected growth rate in earnings over the foreseeable future

Buying when the future is “uncertain”

  1. A stock is available cheap only when the general market does not expect it to do well in the short term
  2. Therefore, if an investor wishes to “beat the market” he/she should purchase the stock before the market does (i.e., buy when the fear caused by the uncertainty still exists in the minds of most investors)
  3. If one is confident about the quality of the company and its long-term earnings power, then its short term price movement should be of less importance

An investment process that seeks to reduce the incidence of these 3 mistakes automatically increases the chances of success

When do we sell a stock?

  1. When the assumptions with which the stock was purchased in the first place are no longer valid
  2. When the stock's price goes well beyond what we think it is worth*
  3. When for the same perceived level of risk, we spot a superior opportunity*
  4. When there is a redemption request

Cash strategy

The holding of cash is a residual strategy, i.e., the portfolio manager does not pre-decide the extent of cash. If suitable investment opportunities are not available at that point, cash is held to that extent.

Product suitability

This product is suitable for all equity investors who wish to invest in portfolio of quality companies bought at reasonable prices.

It offers a qualitative diversification compared to the mainline mutual funds. It is suitable for investors with a time horizon of 3 years.

PFI of the United States of America is not affiliated in any manner with Prudential plc, a company incorporated in the United Kingdom .

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