DAF's Investment Process Deep Dive

The Dynamic Advantage Fund runs a bottom-up selection approach. The portfolio is fairly concentrated (20-40 companies) so returns are driven by individual picks. DAF focuses on a factor-based strategy that aims to outperform the market over a 3-5 year period, primarily in the Indian equity landscape with some flexibility to take exposure to international equities, gold, and cash/money markets.

Before diving deeper into the investment process, here's a brief synopsis of the investment philosophy:

OVERALL SUMMARY

There are three steps in DAF's investment process - Shortlisting the Opportunity set, positioning based on Zonal classification (more details below) and tracking positions as per the Buy/Sell/Hold triggers in place.

STAGE 1: BUCKETING (ELIMINATE)

Starting with the shortlisting process, the aim is to categorise the companies in the opportunity set into Buckets. These Buckets essentially divide the companies by the quality of business and financials, with Bucket 1 being the best. A major portion of the portfolio is expected to be invested in Bucket 1 and 2 companies. Bucket 3 is used more as tactical bets while Bucket 4 companies are ones where we currently don't have enough coverage or are avoided because of poor business dynamics and financials.

STAGE 2: PORTFOLIO POSITIONING

What makes up the Zonal Score?

Here is the step where all the factors (Business Fundamentals, Valuations, Market Perception and Setup) merge into a single Zonal score for each company.

STAGE 3: TRACKING

A good place to start here is to understand the general zonal traits. The idea, first of all, is not to overpay and catch a stock before it enters into a momentum stage when taking a fresh position. So purchases are usually done when a company falls under Zone 1 and 2. When there is significant momentum, shifting to a more technical setup helps to capture the rally (valuations are no longer a driving force here, it's more market sentiment driven). Zone 4 marks a strong sell indication.

The setup is dynamic when it comes to positioning and tracking. The Buy/Sell triggers and position sizing for the same company are different under different Zones. This is where the dynamism comes into play. The system allows the flexibility to factor in some subjective elements while maintaining its overarching data-driven investment structure.

I hope you found it useful to understand how the DAF investment process is set up. Happy to hear your thoughts/ feedback on the same to continue refining and improving the process over the years.

Thanks.

Shivam