Happy Earth portfolio (Stock-only Portfolio) methodology

Introduction:

“यत्र पर्यावसायो नस्ति नास्ति तत्र सम्पदाम्।" - Chanakya

(Translation: Where there is no exploitation, there is wealth)

In a world where economic growth often comes at the expense of our planet's well-being, we are inspired by the profound wisdom encapsulated in this Sanskrit quote. The "Happy Earth Portfolio" is a testament to our commitment to align our investments with the principles of sustainability and ethical responsibility. It is a pledge to nurture our planet, empower humanity, and seek prosperity without compromising on environmental and moral values.

The "Happy Earth Portfolio" embodies the principles of sustainability and ethical investing such as Non-Violence (अहिंसा) and environment protection, inspired by the ancient wisdom of India and the global call to protect our planet. In alignment with this vision, we have crafted a methodology that seeks to create a portfolio that not only strives for financial returns but also takes a stand against activities detrimental to our environment and society.

The guiding principles aka “AER” of the Happy Earth Portfolio:

1. Avoidance of Harm (अहिंसा): The portfolio excludes companies involved in activities that cause significant harm to the environment, animals, and human well-being.
2. Environment First (संरक्षण): The portfolio seeks to invest in companies that are actively working towards a sustainable future such that there is no harm to the environment. As they say, the Earth does not belong to us, we belong to the Earth. This portfolio is our quest to leave a better earth for future generations.
3. Responsibility & Alignment with Values (उत्तरदायित्व): Investors in the Happy Earth Portfolio can be confident that their investments reflect their commitment to ethical responsibility. Through this portfolio, we will seek companies with good governance and ethical values.

Investment Criteria:

The Happy Earth Portfolio follows a Flexicap approach and is a pure Stock-only portfolio. The Portfolio’s construction begins with the constituents of the BSE 500 Index. However, companies that are not a part of the BSE 500 may also form part of the universe and the portfolio given that they meet all other criteria. The companies are excluded from the Universe if they derive more than a de minimis proportion (i.e., more than 2%, generally) of their total revenue from products and services directly related to one or more of the following exclusionary criteria:

Exclusionary Criteria

The Happy Earth Portfolio employs a strict set of exclusionary criteria to screen out companies engaged in harmful activities. The companies engaged in the following Prohibited Activities are not considered in the construction of this portfolio:

1. Animal Testing and Animal-Derived Products: Companies involved in animal testing, animal-derived product manufacturing, or animal farming are excluded. This is in line with our commitment to animal welfare. As Mahatma Gandhi once said,
"The greatness of a nation and its moral progress can be judged by the way its animals are treated."

2. Fossil Fuel Extraction and Refining: Companies engaged in the extraction, refining, or services principally related to fossil fuels are excluded. This decision is rooted in the need to reduce carbon emissions and combat climate change.

3. Fossil Fuel Energy Production: Companies that burn fossil fuels for energy production are excluded due to their contribution to air pollution and greenhouse gas emissions.

4. Significant Negative Environmental Impact: Companies with a significant negative environmental impact, such as those involved in deforestation, excessive waste generation, or harmful industrial practices, are excluded.

5. Tobacco Products: Companies involved in the production and sale of tobacco products are excluded to discourage harmful habits and support public health.

6. Alcohol Products: Companies primarily engaged in alcohol production are omitted to promote responsible consumption and well-being.

If a company’s primary business line implicates one or more Prohibited Activities, such company will automatically be excluded from the universe. If a company is engaged in multiple business lines, the identification of Prohibited Activities will be based on the company’s published materials, regulatory filings, websites, and product catalogues.

The allocation of assets is diversified across various sectors and industries to manage risk and enhance long-term returns. We believe that ethical and sustainable investing can also be financially rewarding, and our goal is to generate competitive returns while maintaining our core values.


Stock Selection Approach:

For portfolio construction, this Model Portfolio uses Yadnya’s FIVE-G Framework where we consider many fundamental, industry, and valuation parameters to come up with individual scores of all the companies in the screened universe of stocks. Some of these parameters are mentioned here:


 

Investment Objective:

The aim is to generate long-term returns by investing in a concentrated portfolio of Indian companies following the principles of sustainability and ethical responsibility along with the goal of high growth potential by taking higher risks.

 
Strategy:

Buy and Hold investments with a time horizon of 7 years in stocks that match the guiding principles of AER along with strong fundamental characteristics and sound management.


Methodology:


 

Sector Allocation:


Risk Mitigation Strategy:

We actively consider risk parameters like Beta and Standard Deviation in our analysis. Incorporating lower Beta and low standard deviation stocks helps in constructing portfolios with lower downside risk. Thus, if the benchmark stocks take a steep fall, the constructed model portfolio falls at a lesser pace and quantum. One of the criteria for selecting stocks is that after constructing the portfolio, the Beta and Standard Deviation of the constructed portfolio is less than the Beta and Standard Deviation of the benchmark.

 
Is this model portfolio for you?

The Happy Earth Portfolio is designed for individuals and organizations in India who are passionate about aligning their investments with their ethical values such as अहिंसा (non-violence) and environmental consciousness. If you seek to invest with a purpose along with financial returns and wish to contribute to a better world, this portfolio is a compelling choice. It's ideal for investors who want to actively avoid companies engaged in activities like animal testing, animal-derived products, fossil fuel extraction, and other practices that harm the environment or exploit animals. Additionally, if you are committed to supporting businesses that prioritize sustainability, innovation, and social responsibility, the Happy Earth Portfolio offers an opportunity to make a positive impact while pursuing your financial goals. Ideally, this portfolio will work like a typical Flexicap approach-based Stock-only portfolio of InvestYadnya and overall, it will be for aggressive risk investors with a minimum investment horizon of 7 years. An aggressive portfolio might average a 12-15% average rate of return over time. In its best year, it might gain 25-30%. In its worst year, it could decline by 20-30%. 

Here are typical profiles who can refer to this portfolio –

1.    A moderate to high-risk taker 20–30 year old investor with low liabilities and a high savings rate.

2.    A high-risk taker 35–50 year old investor with dependents, above average savings rate and stable and a well growing job.

3.    A very high-risk taker above 50 year old investor who has no liabilities and all financial goals are taken care of.

 

Frequently Asked Questions:

1.    Is this an ESG Portfolio?

The Happy Earth Portfolio is not just an ESG (Environmental, Social, and Governance) portfolio; it is an ESG-Plus Portfolio. While ESG portfolios often rely on standardized ESG scores to make investment decisions, our approach is distinct. We do not use any ESG scores from third-party sources. Instead, we carry out our own dedicated and meticulous research to assess the companies in our portfolio against our stringent ethical and environmental criteria. This hands-on approach ensures that we have a comprehensive understanding of each company's practices and values, allowing us to make informed investment choices that align more closely with our mission and your values. Our commitment to ethical investing is stricter and goes beyond standard ESG considerations, to provide you with a truly responsible and sustainable investment experience.

2.    Is the Happy Earth Portfolio suitable for all investors?

The Happy Earth Portfolio is suitable for investors who prioritize ethical and sustainable investing and have an aggressive risk profile with a minimum 7-year investment horizon. However, it's essential to consider your financial goals, risk tolerance, and investment horizon before making any investment decisions. Always consult your investment advisor before making any decision.

3.    What are the risks involved in investing in this portfolio?

Investing in the Happy Earth Portfolio offers a unique opportunity to align your investments with ethical and environmental values. However, it's essential to be aware of the potential risks associated with this distinctive investment approach:

• Concentration Risk: As the Happy Earth Portfolio excludes certain industries and companies based on ethical and environmental criteria, it may be less diversified than a traditional portfolio. This concentration in specific sectors or industries can lead to higher volatility in the portfolio's performance.
• Removal of Stock Due to Prohibited Activities: To maintain the ethical and environmental integrity of the portfolio, we actively monitor and remove stocks of companies that engage in prohibited activities. While this action aligns with our values, it can impact the portfolio's performance if a removed stock has been a significant contributor to returns.
• Equity Risk: All investments in stocks carry inherent equity risk. The value of individual stocks can fluctuate due to market conditions, economic factors, and company-specific developments. While we prioritize ethical and sustainable investments, stock prices can still be subject to market volatility.
• Sectoral Risk: By excluding certain sectors or industries from the portfolio, we may miss out on potential opportunities in those sectors that could perform well in specific market conditions. This sectoral risk means that the portfolio's returns may not align with broader market trends.
• Market Risk: All investments are exposed to market risk, which includes factors like interest rate changes, inflation, and economic cycles. The Happy Earth Portfolio is not immune to these broader market forces.

It's important to note that while these risks exist, the Happy Earth Portfolio is designed to help investors make a positive impact on the environment and society while pursuing financial goals. Diversification, regular monitoring, and a long-term investment horizon can help mitigate some of these risks. Additionally, we encourage investors to consult with a financial advisor to ensure that their investment choices align with their financial objectives and risk tolerance.

4.   Does this portfolio guarantee that the companies are not involved in the prohibited activities?

Investors should be aware that ethical investing involves a degree of trust in the information available and our team's ongoing vigilance. While we diligently research and select companies based on our strict ethical and environmental criteria, it's essential to understand that our information is based on publicly available data and disclosures.

Companies' practices can change over time due to various factors and unforeseen events can occur. Hence, we cannot offer absolute assurance that a company will never engage in prohibited activities in the future.

However, our commitment to ongoing monitoring and our dedication to ethical and environmental principles mean that we will take action to remove any company from the portfolio if it becomes involved in prohibited activities after our initial selection.

Accordingly, the Happy Earth Portfolio does not provide a guarantee that the companies included in the portfolio are not involved in prohibited activities.

5.    What kind of returns can I expect from the Happy Earth Portfolio?

While the primary focus of the portfolio is ethical and environmental responsibility, it also aims to generate competitive returns. Investment returns can vary depending on market conditions and the performance of the selected companies. Past performance is not indicative of future results.

 
Time Horizon:

Min. 7+ years

Rebalancing Frequency:

Rebalancing of the portfolio will be done on a quarterly basis.

Benchmark:

BSE 500 Index

Important Dates:

Inception Date – September 20th, 2023

Launch Date – September 20th, 2023

Market Cap Category – Flexi Cap

First Quarterly Rebalancing – August 24th, 2024

Next Quarterly Rebalancing - November 30th, 2024

Portfolio Performance as of 01st November 2024:

Disclaimer: The information on this site is provided for reference purposes only and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell stocks or MF. All these portfolios are created based on our expert’s experience in the market. These Model Portfolios are prepared by SEBI Registered RIA.