DAILY VOICE | Prateek Pant of White Oak reveals OpcoFinco's framework for stock selection

Prateek: According to us, it is impossible to time the market. It is only in hindsight that we will know whether we are at all-time highs or have a significant runway from here.

Interestingly, we have seen many such ‘lifetime highs’ over the last two decades and will continue to see many such ‘all-time highs’ over the next two decades as well.

Each time the markets have scaled new highs, similar questions have been raised whether this is a euphoria.

In this context, I would like to state that we are a very bottom-up stock selection-driven team. Our investment philosophy is such that we consciously avoid market timing or sector rotation or other such top-down bets.

We stay fully invested with a bottom-up approach of investing in great businesses at attractive valuations, and always maintain a balanced portfolio construction to hedge against macro risks.

Q) What is your investment mantra before picking stock for investment?

Prateek: Our investment philosophy is that outsized returns are earned over time by investing in great businesses at attractive values. It is a stock selection-based approach of investing in businesses rather than betting on macro. The two critical elements of our philosophy are business and valuation.

We want to invest in the companies that present the most compelling combinations of these two elements. To be considered great a business should possess three attributes: (a) superior returns on incremental capital, (b) scalable, (c) well managed in terms of execution and governance.

These attributes are rooted in the fundamental value equation where value is a function of cash flows and growth. Most importantly, the governance DNA of the company should be robust.

The team strives to buy these businesses when they are available at a substantial discount to their intrinsic value. Our proprietary, OpcoFinco™ analytical framework provides insights into economic cash flow generation characteristics and the intrinsic value of a business.

Q) US Fed minutes caused a knee-jerk reaction on D-Street in the week gone by. The world has got use to easy money now. How will it impact equity markets across the globe including India?

Prateek: By our style of investing, at White Oak we maintain a balanced portfolio and ensure that the portfolio is not susceptible to any such macro development, more so than the market.

But having said that, some degree of volatility can be expected as and when some of the extraordinary measures are rolled back by global central banks but from India’s context though, external sector vulnerabilities are far lower than what was seen in 2013 during ‘Taper Tantrum.’

Q) The recent price action suggests that smart money has started moving from small & midcaps towards largecaps? What are your views?

Prateek: There will always be higher alpha-generating opportunities in mid and small caps due to greater inefficiencies that exist in this area.

However, in the recent past, we have also seen some of the companies with questionable governance move up sharply & the challenges will be felt over there.

At White Oak at any point in time, half of our portfolio is largecap while the other half of our portfolio is roughly in small and midcap.

But, the way we look at it is that even within the small and mid-cap, what we own is the leadership of any sector or sub-sector of the industry.

Q) Warren Buffett will celebrate his 91st birthday on August 30. This legendary investor has been an inspiration for most value investors. Has he also inspired you in one way or the other and is value investing losing sheen in a high beta market?

Prateek: While Warren Buffet has been a legendary investor, it is his perspectives on risk management which is unique. I would like to cite one of Warren Buffet’s most relatable quotes ““Risk comes from not knowing what you are doing.”

This is a very important tenet of investment which I personally believe in and at White Oak we believe that the most fundamental risk is not knowing or fully understanding the idiosyncratic business risk of each company that we own in the portfolio. The team manages this risk through in-depth fundamental research.

We believe it is a prudent risk management approach to maintain a balanced portfolio with an aim to ensure that performance is a function of stock selection capabilities of the team rather than being driven by non-stock specific macro risk factors such as market timing, sector, currency, or other such factor exposures.

It is not that such top-down bets are always wrong, but it is just that they are right as often as they are wrong, no different than a game of coin flips.

Q) So where are the money-making opportunities in this market?

Prateek:  India provides a structural investment opportunity with its strong domestically driven growth profile and a profitable and diverse corporate universe. Thus at any point in time, we continue to find opportunities across sectors.

For example, we continue to find opportunities in private financials. Well-run private sector banks are quite profitable and remain scalable businesses as they continue to gain market share in the credit market.

Financials itself is a diversified sector and apart from banks, there are also opportunities in insurance and asset management industry which offers a long runway for growth.

Production Linked Incentive (PLI) scheme for 13 key sectors is a multi-year theme that is just beginning to play out. If implemented well, PLI can transform India’s manufacturing capabilities over the next decade.

Consumer tech businesses are an attractive opportunity in India given the favourable demographics, low penetration in most categories, and an engaged, mobile-first, convenience-first audience.

We believe that these companies will become a larger part of the market over the next decade and, given the heterogeneous nature of business models, will create large winners and losers.

As investors, we focus on identifying dominant companies with large and fast-growing markets, positive unit economics, and strong management teams.

In addition, India has established globally competitive IT Services and Pharma sectors. The US$150bn Indian IT services industry has grown to 3x over the past decade and is a beneficiary of the accelerated technology adoption by businesses and consumers globally due to the pandemic.

Q) Given the fact that we are trading in unchartered territory – should investors consider rebalancing their portfolio? What is the ideal portfolio allocation at this point?

Prateek: As stated above, we do not believe in top-down or factor exposures and believe in remaining fully invested at all times.

Having said the same, investors should rebalance their portfolios at regular intervals and in consultation with their financial advisors, decide the right asset allocation to align with their risk appetite.

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