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Active equities

Our investment process has strict investment guidelines that ensures that we contain portfolio risk within specified levels and run a diversified portfolio to deliver consistent risk adjusted returns to our investors. On a bottom-up approach, we believe that company fundamentals are the primary determinants of stock performance.

We highlight below some key parameters that we use in our investment process;

  1. We seek to invest in companies that in our view have sustainability of business growth and are trading at a substantial discount to their true business (intrinsic) value.
  2. We believe that, over time, the price of a stock could rise to reflect the value of the underlying company. As such, we are patient investors and not market timers.
  3. We believe that this approach to investing is capable of generating consistent investment returns over the long term through power of compounding.
  4. We adopt a blend of value and growth strategies for stock picking.
  5. Asset allocation is driven primarily by the portfolio mandate. In long only portfolio mandates, we believe that stock picking abilities and patient investing are capable of generating better and consistent returns as compared to market timing.
  6. Across equity portfolio themes, it's a pre-dominantly “buy and hold” strategy.

In evaluating potential equity investments, we focus on the following fundamental characteristics:

  1. Sustainability of Business growth and its ability to generate free cash flows and higher Return on Equity (RoE).
  2. Quality of Management on the basis of track record of commitment to objectives, delivery of the same over time and display of shareholder orientation and cognizance of ESG values.
  3. Value of business and whether the market price is at a significant discount to our estimate of underlying business value. Also, the number of price-value mismatches is taken into account to ascertain if it would be able to offer reasonable margin of safety, with an endeavour to reduce the level of risk.

In arriving at the value of business or company, we look at a variety of factors. Key focus is on trends in returns on equity and capital, EV/EBITDA multiple, P/E multiple, Price to book and PEG ratio. We examine these on an absolute as well as relative basis. While looking at these parameters we closely monitor market expectations as well to identify potential positive / negative surprises. We evaluate companies on the basis of its cash flows discounted at an appropriate rate (DCF- discounted cash flow methodology). We believe that the valuation of a company is nothing but the cash flow it can generate over the life of its business. In addition we also use other tools like P/E, ROE, ROCE and qualitative criteria like management quality.

HSBC has a proprietary investment framework based on profitability as measured by ROE versus valuation as measured by Price to Book ratio. The portfolio construction process will use this framework to screen for investment opportunities in the relevant universe and then use fundamental analysis to fine tune the inputs to arrive at an optimal mix based on sector analysts recommendations and fund manager views.