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  • Writer's pictureFirst Water

Nurturing a concentrated portfolio could be the key to creating alpha

Read extracts from First Water's interview with the Financial Express on the benefits of having a concentrated portfolio.

Concentrated portfolio: A key to creating alpha

Every investor has their own investment strategy. There is no one-size-fits-all approach, but the main thing is to be aware of one’s financial goals and the amount of risk one is willing to take. Investment strategies can range between a diversified portfolio and a concentrated portfolio. While there are some that go by the age-old adage of “do not put all your eggs in one basket”, however, we argue the case that concentration is one of the keys to creating long-term alpha.

Concentrated Portfolio is about knowledge-based investing

In the words of Warren Buffet - “Diversification is a protection against ignorance.” Even today just 5 stocks make up c.75% of his Berkshire Hathaway portfolio. Choosing a concentrated portfolio is the mark of an experienced investor who has the courage of his conviction. This conviction is built up through deep understanding of the selected companies and their underlying intrinsic value especially when the market goes against you.

The case for a concentrated portfolio

For the seasoned and experience investor, a concentrated portfolio can give that extra oomph in their search for alpha. After all, if you have 30-40 stocks in your portfolio, how are you really different than the index?

If a fund has 30 equally positioned investments, each one represents a stake of 3.3%. Even if that investment triples, its impact is muted by its size, adding just 6.67% to the value. Comparing this to an initial position of 15%, a similar increase adds 30%.

Also, having fewer positions, allows the investor the time to study the company as well as react to news. Monitoring too many sectors, companies and news can leave one dizzy.

An example

Since investors who put their funds in concentrated portfolios have studied the company, in the long-term, the profits are manifold. One individual investor who has benefited greatly from this approach is Ricky Kirpalani of First Water Capital, an Indian equity focused fund. Until 2018, he was managing a private pool of capital and while under the radar for many, is considered one of India’s marquee investors for those in the know. A Big 4 auditor has reviewed his performance over a 15-year period and illustrated how he took USD 3.15m to USD 174m. This is a USD CAGR of 30.7% and a multiple of 55x. Part of this performance is contributed to the concentration of his portfolio.

If we look through his portfolio, one example that comes to mind is Polyplex, which at one point represented more than a quarter of the portfolio with a significant contribution to the AUM growth.

Some of you maybe scratching your head and asking who is Polyplex and why would anyone buy such a concentrated position. Polyplex is a flexible packaging company and a proxy play on the highly valued FMCG sector. Flexible packaging is widely used to wrap Lays Chips, lidding for microwave meals as well as many applications beyond food. Essentially this investment is one of the Holy Grails of investing –a long-term serial compounder with several attractive characteristics.

Polyplex at the beginning of 2000’s went from a small Indian player to a top 10 global player. Globally the space is growing at c.4-6% and c.10-12% in India, the company is debt free, is a true case of being Indian multi-national with factories across the world not just export driven, has multiple Blue-Chip clients and on top of that until recently was available at less than book value. – what’s not to love?

It was the ability to identify and understand this theme and the ability to specifically pick this stock with such a concentrated position that has paid off in spades and how.

Polyplex share price as at 25 October 2021

Source: Google


This article expresses the views of the author as of the date indicated and such views are subject to change without notice. The author and First Water Capital has no duty or obligation to update the information contained herein. Further, the author makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.

This article is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory services. Certain information contained herein is based on or derived from information provided by independent third-party sources. The author believes that the sources from which such information has been obtained are reliable; however, he cannot guarantee the accuracy of any of the information provided above and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. Use information provided above at your own risk.

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