|Product name||Style/ Factor||Sector||Licence|
|Long-term Equity with Concentrated Portfolio||Growth||Multi-cap||PMS|
About the AMC
- The sanskrit mantra “ Vasudhaiva Kutumbakam ” is promoted by Purnartha Investment Advisors as their guiding philosophy. Translating the phrase as- what is good for me and my family is what is good for my clients, Purnartha aims to assure clients of the firm’s loyalty in their investment service offerings.
- Purnartha is an independent equity research and advisory company which provides both investment advisory and portfolio management services. Co-founded by Rahul Rathi and Ragu Sundaram, Purnartha was initially incorporated as Capmetrics Technology Solutions Pvt Ltd in March 2011. It underwent a name change to Capmetrics Investment Advisers Pvt Ltd in July 2015. Finally the entity was renamed Purnartha Investment Advisers Private Limited in September 2017. It was in 2020 that the memorandum and articles of association were amended to include portfolio management services.
- The company is a licensed Investment Adviser and Portfolio Management Services provider by the Securities and Exchange Board of India.
- Across the entire firm, Purnartha has assets under advice of almost USD 1 billion in 2021.The total employee count of the firm is in the range of 201-500 based on their LinkedIn page as of April 2021.
Rahul Rathi – Founder, Chairman & Fund Manager, (March 2011 to present). Rahul began his career as a risk analyst with a global hedge fund, Schroeder New Finance Capital. His interest in portfolio risk analytics led him to form Capmetrics to provide research and portfolio risk analytics services to global hedge funds, fund of funds and other stakeholders in 2002. Over the years he has applied his experience to build Purnartha instilling their unique practice of not only meeting with company management but also suppliers, clients and distributors during their research process. He has a master’s degree in Industrial Administration from Carnegie Mellon and a bachelor’s degree in Polymer Engineering from the University of Pune. LinkedIn
Raghu Sundaram – Co-founder (2011 to present). Raghu is Dean and Edward I. Altman Professor of Credit and Debt Markets at New York University’s Leonard N. Stern School of Business. He joined NYU Stern in 1996 and was appointed Dean in January 2018 having previously served as Vice Dean. His academic work in finance covers a number of areas including agency problems, executive compensation, derivatives pricing, credit risk and credit derivatives. He is the author of two books; A First Course in Optimization Theory (Cambridge University Press, 1996) and Derivatives, Principles and Practice (Mc-Graw Hill, 2010). He holds a bachelor of arts degree in Economics from the university of Madras, India. Raghu has an MBA from the Indian Institute of Management and a PhD in Economics from Cornell University. LinkedIn
Devendra Phadke – Principal Officer, Investment Advisory (August 2013 to present). With more than 18 years of experience in finance, Devendra serves as portfolio manager and is the customer facing flank of research at Purnathra. He holds a bachelor of Commerce degree from the university of Pune and is a Chartered Accountant. LinkedIn
Anand Doshi – Investment Director and Fund Manager (October 2018 to present). Anand is a Chartered Accountant and CFA charterholder. He has 16+ years of experience in equity and credit research, deal-making and investment management. At Purnartha he helps structure and monitor portfolios backed by in-depth research and investment insights. Prior to joining Purnartha, he led the Fundamental Research team at Credit Capital, a New Jersey-based long-short hedge fund. Subsequently, he led the buy-side equity efforts on joining Capital Metrics and Risk Solutions. Later on he joined Brand Capital where he executed several private equity, venture capital and angel investment deals. LinkedIn
Hemant Ashok Vispute – Managing Director (Dec 2012 to present). Hemant has over 20 years of experience in consulting, strategic planning and operations. He leads, strategizes and drives business initiatives at Purnartha, helping to conceptualize blueprints related to business development, institutional tie-ups and enterprise expansion. Prior to joining Purnartha, he worked at IBM Global Services in the United States and was a Director at Hitachi Consulting Services. LinkedIn
Investment Philosophy (for firm)
In a few words, Purnartha expresses their investment philosophy as “ … invest in quality businesses for the long-term and hold on… [ whilst ] the business is performing..”
The firm follows five principles around growth to identify non-cyclical companies for long-term rewards. The five foundational principles of their investment philosophy include-
- 1st principle- Minimum of 11 years of operating history
To appraise the performance of the firm across natural calamities, economic and political regimes. Purnartha believes it is within periods like this which reveal the true character of the company and the quality of the promoters behind the business. The firm appreciates that it is not about how hard a business falls but how fast it recovers.
- 2nd principle- Demonstrated volume growth (10%) and sales growth (20%)
To identify companies which have volume growth that is 1.5x to 3x faster than overall GDP growth of India. Also to determine the structural drivers for the volume growth of the company in the future. Purnartha seeks firms with at least 20% sales growth based on the following formula-
10% volume growth minimum + inflation + brand premium = Sales growth
- 3rd principle- Operating cash flow growth (20%)
The firm recognizes that cash is king and looks to find companies whose operations generate operating cash flow growth of at least 20%. They rely on operating cash flow because they believe it is less subject to accounting manipulation as the figures are verified by independent auditors and the bank.
- 4th principle- Low to no leverage
Excluding banking, financial sector and insurance sector companies, Purnartha seeks out companies that do not depend on large borrowings to power their operations. The firm looks for companies that rely on internal funds for growth instead of debt because they believe that such companies are more agile and able to think more creatively without any burden.
- 5th principle- Owners/ promoters who have their ‘skin in the game’
Purnartha looks out for firms in which the promoters invest close to 100% of their professional bandwidth. They determine how invested the promoters are in the company by how much time the promoters expend in operations. As such it is not merely about the promoter’s equity in the company.
PMS process- The firm blends the top-down macro view with a bottom-up research approach to implement a market sector and market capitalization agnostic portfolio. They aim to select securities with promising and sustainable businesses and not just stock performance. Securities are appraised in the context of the socio-economic, political and cultural climates to understand the true sustainable potential of the business. Purnartha follows a highly concentrated strategy as they believe in putting together a high conviction portfolio of 6-8 stocks only. The firm undergoes a five step process to selecting stocks for their portfolio as follows-
- Step 1- Research
Purnatha studies each company’s performance across regimes to obtain insight on its performance and complete business cycle. They do this to measure how GDP growth patterns and business ups and downs have impacted the company and how it has emerged from business challenges.
- Step 2- Understanding the business model
Their research team seeks to understand the business model of target firms and determine how much leverage they use.
The firm believes that companies with little to no debt have a competitive edge in the market because of the freedom this gives them to decide on their future plans and execute them.
- Step 3- Measuring growth and volume
Purnartha’s research team focuses on the structural drivers behind the sales and volume growth of the company. They view consistent growth in sales and volume as a good sign indicating healthy demand for their products.
- Step 4- Valuation
Perform a valuation of the security using Enterprise Value/ Operating Cash flow metrics with the aim of building a portfolio that is cheaper than the index
- Step 5- Thorough channel checks
The firm goes the extra mile to meet with top distributors, suppliers, customers and even competitors to verify findings about the company and obtain insights on company culture.
Purnartha shares that their team comprises two groups of analysts, Fundamental Analysts and Investigative Journalists. Fundamental analysts are responsible for the financial statement analysis whereas investigative journalists go on site to verify the company’s financial facts and operational statements. Both teams meet with the company’s stakeholders including bankers, suppliers, employees and competitors.
Exit process- The firm maintains active research on stocks in their portfolio and sells once there is sustained departure from the five principles of their investment philosophy. When a portfolio company faces headwinds, Purnartha determines if the problem is a demand or a supply issue. The firm views supply issues adversely but is willing to maintain their holding of portfolio firms with demand problems where they envision improvement within 3-5 years. They have an average holding period of 3 years, with lower and upper limits of 18-24 months and 7-8 years respectively.
Fund structures & fees
- Focused Equity (Option I) and Long-term Equity with Concentrated Portfolio (Option II)
These two funds have a fixed management fee with premature exit loads of 3%, 2% and 1% of NAV, if exited before 12, 24 and 36 months respectively. Below is an excerpt with details of Purnartha’s hurdle rate, fixed management and performance fees.
- Wealth Approach (Option III)
A PMS product in which the total assets of each client is segregated into two parts-
- ‘Emotional Capital at Risk’ portion- the amount or percentage of assets under management arrived at based on Purnartha’s proprietary model which will be invested in the units of schemes of mutual funds registered with SEBI including liquid, money market schemes or debt securities.
- Balance portion- the rest of the assets under management after sectioning out Emotional Capital at Risk which is actively invested in equities in line with the firm’s investment philosophy.
Below is an excerpt showing Purnartha’s fee structure for the Wealth Approach PMS.
Introduction of new strategy by Purnartha PMS. AIF & PMS Experts India, 3rd November 2020
Devendra Phadke, the Portfolio Manager at Purnartha shares the history of his firm, their investment philosophy and details about their portfolio management services in this interview. He speaks about the five foundational points of their investment philosophy. On filtering the 6000 stocks in the Indian listed space, Phadke shares that after applying their 5 filters, their universe reduces to about 42 companies for further research. He explains Purnartha’s choice in creating a portfolio concentrated in just 6-8 stocks which pass all of the firm’s criteria across changing economic and political regimes. On valuation, he emphasizes their incorporation of growth expectations to stock value and their reliance on the EV/ Operating Cash flow. Phadke highlights the firm’s approach to diversification at the point of portfolio construction by not including more than one stock from each sector. He explains his firm’s classification of companies into manufacturing, financial services and non-financial services.
Purnartha Investment Advisers: Offering Focussed Investment Advisory Solutions for Wealth Generation in the Long Term. SiliconIndia, March 2020
Hemant Vispute, Managing Director of Purnartha Investment Advisers shares details about his firm’s investment philosophy. He mentions that they advise their clients to invest in only equities that they themselves invest in, in line with their “ Vasudhaiva Kutumbakam” mantra. Vispute indicates that Purnartha invests only in non-cyclical companies with a proven track record and robust business model to ensure low drawdowns and faster recovery. The anticipated PMS offering of the firm scheduled later in the year is introduced. It is described as a firm adaptation to changing regulations in India.
PMS AIF World Engages with Mr. Rahul Rathi from Purnartha Research & Advisory. PMS AIF World, 28th May 2019
Rahul Rathi shares the development of Purnartha’s investment philosophy and principles of identifying securities. He acknowledges that security prices are an outcome of the logic of fundamentals and human emotions. Rathi mentions that his realization that market participants have limited control over human emotions led him to look into using fundamentals and logic to make investment decisions. He elaborates on the five foundational points of Purnartha’s investment philosophy including volume growth, pricing, operating cash flow, company debt and owners’/ promoters’ skin in the game.
How investment advisory pros at Purnartha pick companies worth investing in. Economic Times, 6th March 2019
In their brand story, Purnartha shares their belief in the importance of harnessing long-term investment opportunities with factual analysis avoiding speculation common with media outlets. The firm indicates that their analysts pay special attention to company history, business model, volume growth and channel checks to value investment opportunities. They specify their preference for companies without debt and their use of analytics in projecting future volume growth for target companies.
Analyst assessment & questions
- Purnartha has articulated 5 foundational principles for stock screening including years of operational history, volume and price growth measures, operating cash flow realised, leverage etc. Why do you think these attributes are not already priced in? Or do you expect price convergence to enable you realize a return within a specific time horizon?
- Why do you choose the Enterprise Value/ Operating Cash flow metric for valuation?
- Purnartha chooses a market capitalization and market sector agnostic approach to selecting stocks. At the portfolio construction stage how do you approach diversification and risk? Do you tilt towards certain macro-factor exposures?
- Given that you have 6-8 stocks in each portfolio, we assume that you have a high target for alpha. What is your alpha target for each of your portfolios?
- Following your high conviction portfolio approach, how confident is Purnartha in realising returns? Is this a function of your management fees or manager incentive structure?
- How do you choose a representative benchmark for each of your portfolios following your strict filtering process?
- Do you structure your team meetings to be periodic? What is your strategy to ensure everyone, from founders to fund managers contribute to your portfolio management operations?
Prepared by – Adza Stella Vajime
Date – 6th April 2021
Peer review and additional questions –
As you mentioned in wealth approach model the amount or percentage of AUM as assessed based on “Proprietary model of Emotional Capital at risk”, Can you elaborate Emotional Capital at risk?
Why do you invest Emotional Capital at risk amount in the units of schemes of Mutual funds?
What is your exit strategy, if there is a material change in investment philosophy of the company you have invested?
What is your alpha target?
Peer reviewed by – kavin sadvilkar
Date – May 2021