Ambit Good And Clean

Fund Snapshot

Investment Philosophy

It ranks companies as clean companies with no political connectivity but has high corporate governance, clean accounting, high promoters’ integrity, who don’t compromise on ethics, have no political party-related transactions, and don’t favour linkages to bureaucrats.

In comparison, Ambit Good & Clean ranks companies as Good Companies based on focused capital allocation, high return on equity, high return on capital employed, oligopolistic nature of the business, high earnings and high cash flows.

Its proprietary forensic accounting framework identifies good accounts.

In contrast, its proprietary greatness framework identifies companies with consistent growth potential resulting in a concentrated portfolio of 15-16 stocks. And who have a low churn of less than 15-20% in any year amounting to 2-3 assets being replaced.

Case Study

Due to flaws in the accounting and auditing procedures, a reputable Big 4 auditing firm that has been working with the company since 2008 failed to report Wirecard’s “unorthodox financial arrangements.” Another Big 4 auditing company was later retained to conduct a special audit, which indicated that it could not confirm the validity of the agreements that accounted for the majority of the Wirecard earnings recorded from 2016 to 2018. The focus of the debate is the missing Euro 1.9 billion from Wirecard, which was supposed to be deposited in banks worldwide but was never found. The sum was about a fourth of the company’s sales from 2016 to 2019.

Investment Process

Invest in companies that are (a) Good – Based on the history of capital allocation and the degree to which financial indicators have improved over the previous six years, and (b) Clean – Based on the accuracy of their financial statements and corporate governance.

Focusing on “good” encourages growth while maintaining “clean” standards prevents danger on the downside. While generating returns is the main goal, improving drawdown management is even more important because executing the latter is crucial for accomplishing the former.

Our patented “greatness” methodology at Ambit helps identify effective capital allocators with a comprehensive strategy to steady growth. In contrast, our proprietary “forensic accounting” structure helps screen out companies with low-quality accounts.

The result is a portfolio of 15-20 stocks with minimal turnover (not more than 15-20% of the portfolio each year translating to 2-3 holdings being replaced), which pulls down less than the market during declines.

Unique Feature

Their recent study demonstrates that, in addition to firm-specific competitive advantages, the following three elements are crucial for a company to outperform continually:

• Clean Accounting.
• Conservative Capital Allocation.
• Good governance and lack of political connectivity.

Clean Accounting

Since November 2010, the top 60% of the BSE500 equities have outperformed the bottom 40% by a staggering 12% annually.

CONSERVATIVE CAPITAL ALLOCATION

The aggressive capital allocation practices of Indian businesses are among the most costly to their owners.

Good governance and lack of political connectivity. 

Political connectedness is seldom a key competitive advantage for businesses in India.

How did we deliver this?

A result of good processes is good risk-adjusted returns, which are characterized by:

• Stringent quantitative filters

Each product is built on a framework that has undergone extensive study and backtesting to create the investing universe. The high bar for performance over extended periods significantly reduces the likelihood of underperforming or low-quality firms entering the investing universe. Corporate governance and the high caliber of accounting are not compromised.

• Experienced team & deep-dive research

Devoted and knowledgeable research team All investment decisions must be approved by the Investment Committee, inspired by IE Research. Benefits of being a member of the broader Ambit group Concentrate on what is vital and what can be known.

• Focus on earnings growth and earnings quality

Reduce the concern with timing when investing in firms of a higher caliber. We seek businesses with a good record of consistency and strong leadership. Current management capabilities plus past performance and future sector potential equals comfort in producing superior earnings.

• Risk Management

Concentrated portfolios produce the best returns since the returns do not average out. Long-term-oriented organizations with low churn realize lower drawdowns since secular sectors have consistently performed well, Compounding’s strength.