Quest Smart Alpha Sector Rotation

Investment Philosophy

Quest Smart Alpha Sector Rotation is a concentrated multi-cap strategy that actively rotates across sectors by identifying a limited number of high-conviction themes at any point in time. The strategy is built on the belief that sector leadership changes across market cycles and that timely sector and stock rotation is a key driver of alpha.

Rationale for Sector Rotation

• Sector leaders change with economic and earnings cycles, creating repeated re-rating opportunities
• Correct sector identification helps capture both earnings upcycles and valuation expansion
• Typical holding period for a sector or theme ranges between 6–18 months

Sector & Company Selection

• Sector Calls: Driven by a combination of macro trends, industry dynamics, management commentary, financial performance, and valuations; sector selection contributes ~10–20% of alpha
• Company Selection: Primary source of value-add, as stock performance within a sector varies meaningfully based on fundamentals and positioning
• Rotation Discipline: Continuous evaluation of both sectors and individual stocks as cycles evolve

Exit Philosophy

• Exit decisions are as critical as entry points
• Sectors are exited when valuations become stretched or the earnings cycle peaks

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Portfolio Construction

Structure

• Themes: Limited to 4 themes at any point in time (each theme may span multiple sub-sectors)
• Holdings: 3–5 stocks per theme, resulting in a 15–20 stock portfolio
• Cash Calls: Tactical cash allocation permitted, up to 50%

Portfolio Character: The strategy follows an aggressive portfolio construction approach, with high conviction theme concentration and flexibility to hold meaningful cash. Performance outcomes are therefore closely linked to the team’s consistency in identifying and rotating themes correctly.

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Investment Strategy

Current Themes

• Agri Economy Recovery: Rising farmer disposable income driven by food inflation and fertiliser subsidies
  Sub-sectors: Agri-chemicals, farm equipment (tractors), FMCG
• India Manufacturing: Beneficiaries of PLI-led domestic manufacturing push
  Sub-sectors: Defence, white goods, auto ancillaries
• Energy Security: Electrification and industrialisation-led demand growth
  Sub-sectors: Power generation, solar, hydrogen, power equipment suppliers
• Fourth Theme: Currently under evaluation

AMC Background

Quest was set up in the 1980s by Ajay Sheth as an institutional equity research firm with a strong focus on small and mid-cap stocks. Building on its deep research heritage, the firm launched its PMS business in 2007 and has since scaled into one of the larger PMS houses in India, typically ranking in the top 10–20 by scale.

Quest brings over three decades of experience in listed Indian equities, with a long-standing focus on small and mid-caps. The investment team is anchored by co-founder and CIO Bharat Sheth, who brings over 25 years of hands-on investment management experience. The presence of a founder-CIO provides stability and continuity to the firm’s investment philosophy and processes.

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Investment Philosophy

Quest follows a principle-driven investment philosophy focused on owning high-quality businesses with strong management, scalable growth opportunities, sound financials, and reasonable valuations, with an explicit emphasis on downside protection.

Core Investment Principles

• Management: Unquestionable integrity, governance, and execution capability
• Business Quality: Leadership position, pricing power, and non–“me too” models
• Profitability: Strong and improving ROE with stable or expanding margins
• Scalability: Exponential growth potential driven by large addressable markets
• Financial Strength: Strong cash flows, resilient balance sheets, and below-industry leverage
• Valuation: Adequate margin of safety embedded in entry price

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Portfolio Construction

Portfolio construction is market-cap and sector agnostic, combining top-down sectoral insights with bottom-up stock selection. The team remains agile across cycles, actively rotating across sectors and managing cash levels to take advantage of market volatility, with the objective of delivering superior risk-adjusted returns.

Barbell Portfolio Structure

• Growth Stocks (35–45%): Cycle-resistant businesses (e.g. financials, NBFCs, consumer discretionary) with high EPS growth and high ROCE
• Re-rating Stocks (35–45%): Companies in expansion or disruption phases (technology, chemicals, pharma, select consumer discretionary) with improving ROEs and mid-teen EPS growth
• Value Stocks (15–25%): Downcycle sectors (capital goods, autos, cement, telecom) available at deep value with low-teen ROE/ROCE and earnings recovery potential

Portfolio Philosophy: The barbell approach allows Quess to participate in long-term value creation through growth companies while simultaneously capturing value discovery opportunities during cyclical downturns.

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Suitable For

Investors seeking an established, research-driven investment manager with the flexibility to navigate multiple market cycles through a balanced growth-and-value portfolio construction approach.