Investment Philosophy of NJ AMC: Quality-Focused Rule-based Investing

• Date : October 29,2024

NJ AMC's investment philosophy is centered around rule-based investing with a strong focus on quality investing guided by data-driven analysis. With the increased availability of regulated and structured data and a robust technology infrastructure, following a rule-based approach sets NJ AMC apart. This methodology acts as a GPS, guiding us through the complex water of financial markets.

By focusing on a disciplined and scientific approach, NJ AMC aims to eliminate emotional biases from decision-making, ensuring that investment decisions are backed by thorough data analysis and predetermined rules. Whether it's Portfolio Management Services (PMS) or Mutual Funds (MF), our rule-based and quality-focused approach remains consistent, avoiding human biases.

About Rule-Based Investing

Rule-based investing, as the name suggests, refers to the investment practice of following a set of pre-defined rules. These rules are often based on quantitative research and historical data analysis. Unlike traditional discretionary investing, which is subjective and depends on the judgment of fund managers, rule-based investing removes emotions and biases from the decision-making process.

Following a structured approach eliminates emotional biases that may influence investment decisions, offering a more objective investment process. Furthermore, by focusing on data-driven insights, a rule-based quality-focused methodology can help achieve long-term financial goals while minimizing the impact of market volatility.

Key Principles of NJ AMC’s Rule-Based Philosophy

NJ AMC's rule-based investment methodology is guided by the following core values:

• Data-Driven

Data analysis plays a central role in the rule-based investing strategy. At NJ AMC, investment decisions are strongly guided by quantitative research. Leveraging the NJ Smart Beta Research Platform, an in-house research tool, NJ AMC aims to identify patterns, trends, and factors that drive long-term risk-adjusted returns.

• Quality-Focused 

At NJ AMC, our "Quality First" approach ensures that investment decisions are driven by a commitment to focus on companies exhibiting strong quality characteristics. A strong emphasis on quality companies ensures reliability and potential for long-term growth for investors. Our approach is unbiased and benchmark-agnostic, allowing us to construct a unique and differentiated portfolio for investors. 

• Trust 

Trust is a fundamental value of NJ AMC's strategy. By following a rule-based investment strategy, NJ AMC has fostered a long-term relationship with investors. Each step in the journey is “Built on Trust,” ensuring that decisions follow a transparent and consistent set of rules. 

• True-to-Label

At NJ AMC, we believe in delivering what is promised. Our investment decisions are constantly aligned with our rule-based strategy, ensuring that our portfolios consist of high-quality companies.

This commitment to being true-to-label can be testified by comparing our portfolios’ superior quality attributes versus the NIFTY 500 benchmark. The same is evident in the tables below, where a comparison is drawn between the NJ Balanced Advantage Fund, NJ Flexi Cap Fund, NJ ELSS Tax Saver Scheme, and NIfty 500 across various quality parameters.

NOTE: Simple averages of Quality parameters mentioned above for the respective portfolio constituents as on 30th November 2024. Lending companies are excluded from the calculation of Average Portfolio Debt To Equity for all the 3 portfolios. Financial companies are excluded from the calculation of Average Portfolio Current Ratio for all the 3 portfolios. Source: NJ Asset Management Internal Research, CMIE, NSE.

Significance of Quality-Focused Approach 

A quality-focused approach involves selecting companies with robust financial fundamentals. This approach is not just about avoiding high-risk companies; it’s about proactively seeking businesses that have proven their ability to sustain growth over time.

Research suggests that quality factor investing often outperforms traditional benchmarks over time. For example, a study report titled "Quality minus junk"*, highlights the benefits of investing in quality businesses with strong financial fundamentals.

Source: Internal research, CMIE, NSE. Average of daily rolling returns calculated for the different holding periods. The period for calculation is 30th September 2006 to 30th November 2024. Past performance may or may not be sustained in future and is not an indication of future return. NJ Quality+ Model and Low Quality Model are proprietary methodologies developed by NJ Asset Management Private Limited. The methodology will keep evolving with new insight based on the ongoing research and will be updated accordingly from time to time.

The following graph compares the performance of the NJ Quality+ model, the Low Quality model, and the Nifty 500 across various time frames. It suggests that a model with a core focus on quality stocks tends to outperform both a low-quality business model and the Nifty 500 index.

Conclusion

In a market often characterized by unpredictability, NJ AMC’s rule-based investment strategies bring a breath of fresh air. Our unique, sector-agnostic philosophy ensures genuine diversification with low benchmark overlap, providing a distinct edge. Additionally, a robust, data-driven process eliminates human biases, emphasizing the consistency of rule-based investing. With a strong emphasis on quality and a commitment to transparency, NJ AMC delivers a framework that combines the benefits of disciplined, rule-based strategies with smart, data-driven insights.

FAQs

1) What are the benefits of rule-based investing?

A rule-based investing strategy offers several advantages such as consistency, discipline, and transparency across investment decisions.

2) What is factor investing?

Factor investing is an investment methodology that identifies and invests in companies that exhibit certain characteristics (factors), which have historically provided better risk-adjusted returns. 

3) What is the advantage of a quality-focused approach?

A quality-focused investment approach ensures that your portfolio is composed of companies with inherent stability and durability, which means that it is exposed to less risk.

Investors are requested to take advice from their financial/ tax advisor before making an investment decision.

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*Asness, Cliff S. and Frazzini, Andrea and Pedersen, Lasse Heje, Quality Minus Junk (June 5, 2017).