Jinesh Gopani: Analyzing the stock-picking strategy and philosophy of this market expert

The industry veteran believes that quality has been an all-weather wealth creator for long-term investors despite several blips in performance

Jinesh Gopani, the Head of Equity at Axis Mutual Fund has over 16 years of experience in capital markets of which eight years are in equity fund management. He has worked with Birla Sun Life Mutual Fund and Voyager Capital in the past. Given his rich experience in research and a professional mindset, let us understand more about his stock-picking strategy and philosophy.

According to Gopani, equity markets have been great wealth creators over the last 40 years. However, only a handful of investors have benefitted from this wealth creation. On similar lines, there are stock gems of the past that now trade as penny stocks and some have even gone out of business. The wealth destruction that has taken place in some of these stocks is difficult to measure. Therefore, although savings and investing are important, what matters more is the quality of investing.

His approach to understanding the quality of a business connotes a combination of two sets of factors. It is important to evaluate the quantitative aspects like financials, past track records and other key metrics. Secondly, qualitative aspects such as management credentials and business potential are equally crucial. Below listed are some of the factors that Gopani considers while evaluating qualitative and qualitative aspects of the business.

Quantitative factors

• Strong return metrics [example, return on equity (ROE), return on capital employed (ROCE)

• Stable cash flows - a company should be able to fund its organic growth from internal accruals and use long-term capital and working capital efficiently

• High profitability, low debt-to-equity and earnings consistency

Qualitative factors

• A strong management pedigree

• Transparency of operations for investors and key stakeholders

• Credible oversight committees and strong internal controls

• A sustainable long-term business model

This tried and tested approach offers two benefits. Firstly, quality has historically delivered a return premium – being able to outperform the broad benchmark over the long term. Secondly, it offers investors a high margin of safety. Quality typically outperforms other investment styles during periods of turbulence as these stocks are considered less volatile in relative terms by market participants due to their inherent fundamental attributes.

In conclusion, quality has been an all-weather wealth creator for long-term investors despite several blips in performance. The companies labelled as quality are fundamentally driven rather than by sentiment and hence the volatility quotient of these stocks remains relatively lower as compared to momentum and value-driven stocks where asset-pricing is dependent on subjective factors.