By Trideep Bhattacharya
There are a few fundamental truths about investing, and one of them is that diversification is good for your portfolio. Diversification is simply spreading your portfolio investments across multiple asset classes and strategies such that sharp negative movements in any one investment do not have an inordinately high impact on your portfolio risk and returns. Indeed, diversification helps you mitigate the overall risk in equity investing and ensures that you witness stable returns over the long-term. However, have you ever wondered how the really wealthy get so rich? It is primarily through concentrated exposure.
Promising investment themes
While building concentrated portfolios is a double-edged sword, it is well-known that this approach to investing can be especially beneficial when you are looking to gain exposure to select themes that are likely to play out in the future. Currently, India is at the cusp of transformation and the India growth story is creating robust themes that will act as the wings for this transformation. Judicious exposure to these themes can help investors harness the new opportunities that are likely to eventually become mainstream over a period of time. Some select themes that have a promising future and can potentially become wealth creators include:
Brands: As the contours of business are changing in response to changing consumers’ preferences, it is giving rise to new brands that are catering to the nuanced needs of customers. Further, there are also established brands that are reinventing themselves in order to ensure that they continue to hold sway with their customers and also expand their market share. India is already home to several established companies that have held strong for the better of a century, and continue to attract customers. The appeal in established brands lies in the fact that these brands already hold a dominant position and are thus better equipped to expand further into underpenetrated markets. Further, they already have steady earnings growth, and to that extent, can help in mitigating some portfolio risk. In terms of emerging brands, these are the companies that are gaining prominence and have the potential for earnings growth as well as re-rating.
Market share gainers: One of the biggest factors that drive shareholder value is the increase in market share. Generally, market share gainers are companies that are gaining prominence, are sector leaders, have a strategic moat and strong financial, and consequently deliver better returns compared to peers. Due to their ability to expand market share, they are considered to be long-term compounders. Within this broader theme, there are companies that have shown consistent growth in market share due to unique advantages like having a strong strategic moat or a meaningful position within the sector. Then there are also emerging market share gainers that are identified by ability to gain or recapture market prominence. These can be change agents, i.e., they gain market share through leadership change, product innovation, strategic investment, etc.
Innovators: These are the new wealth creators, companies that are either disrupting the status quo or enhancing value propositions across industries. If you have observed the evolution of businesses and industries over the last 50 years, you will have noticed that the pace of innovation is accelerating. The fact of the matter is that today, no business is immune to the disruption caused by new age companies. In the backdrop of such a landscape innovators, adaptors, and enablers of innovation can become big wealth creators as they disrupt old business models and create new ecosystems. Today, there are a host of factors like enabling regulation, increasing digital adoption, more aware consumers, etc., that are creating a fertile environment for innovative companies to grow. This means that there are several investment opportunities that can now be leveraged by investors. More specifically, sectors that are likely to see innovation and disruption include automobiles, energy, pharmaceuticals, and shared mobility.
By making the right stock selections within these themes and staying invested, investors can potentially generate significant long-term wealth. However, as mentioned before, the risk involved can also be relatively high, and investors must ensure that the overall risk of these investments is well-aligned with their risk profiles.
(Trideep Bhattacharya is the Chief Investment Officer- Equities of Edelweiss Asset Management Limited (EAML) and the views expressed above are his own. Please consult your financial advisor before investing.)