What determines consistency in performance of equity funds? The answer lies in 3 factors. Let us look at them:
Focusing on quality
It is advisable to focus on a portfolio that is likely to deliver consistent performance rather than laying emphasis on superlative performance.
Research by Union Mutual Fund reveals that high-quality businesses consistently deliver superior returns and outperform the broader market over the long term. Business quality can be gauged through RoE (Return on Equity).
Estimating the future value fairly
Share prices of companies typically track their fair values over time. Hence, fair value is a key factor in determining a stock’s return potential.
Fair value is a function of four factors - earnings growth, return on equity, riskiness of business and risk-free rates.
Adopting the fair value approach helps in making a reasonable estimation of the future fair value. However, since the dynamics of the business environment keep changing, it is imperative to revisit these assumptions periodically.
Accounting for the quantitative and fundamental factors
Quantitative and fundamental factors can guide in creating an optimum portfolio. The blend of these two gives rise to the Quantamental approach of portfolio construction.
Under fundamental factors, parameters like market capitalization, concentration, asset allocation and sector positioning are reviewed. While quantitative factors take into account growth as well as valuation of stocks.
Using a process-driven approach, Union MF blends various parameters (including the above three) to create a quality portfolio. The fund house strives to carve out a niche from the investible universe of more than 1000 companies having a market capitalisation exceeding Rs. 500 crore.
