Prashanth Krish | Portfolio Yoga

Quantum Dynamic Bond Fund – NFO Review

Quantum Mutual Fund which is known for being the one and only fund house which started off and still continues to remain Direct Only has now come up with a new fund – Quantum Dynamic Bond Fund.

While most investors prefer the safety and comfort of Fixed Deposits, for investors who are in the highest tax bracket, Debt funds make more sense due to the way its taxed (Long Term, Indexed).

Debt mutual funds come in various categories – Arbitrage / Floating Rate Funds / Fixed Maturity Funds / Gilt Funds / Income Funds / Monthly Income Plans / Short Term Plans / Ultra Short Term Liquidity Plans among others. Now that’s quite a handful for any investor who wants to venture into debt funds.

Before we dive into the debt funds, specifically QDBF, lets see what a fixed deposit provides. A fixed deposit in a bank provides for a guaranteed interest of X% for the amount that is invested. Now, if you invest into a FD today at say 8.5% and a year down the lane, interest rate moves up or down by say 2%, the rate you get does not change one bit. While you shall be happy to have locked in at 8.5% if interest rate falls, if they rise, you may cringe about being locked in at a lower rate. Either way, you have a clear idea about what your end result will be.

Most Debt funds on the other hand are not instruments where they guarantee to provide you with X% returns or even Y% appreciation of capital over Z years.

The biggest risk of any mutual fund is the fact that the view of the fund manager can go horribly wrong. If he expects interest rates to go up, he may like to be invested in bonds with average maturity being as close as possible. On the other hand, if the fund manager believes that the interest rates will soften as we go by, he will try to lock in into bonds that offer him a high rate of interest for the longest possible time.

But like the stock markets, things can go wrong pretty easily. The best example of this was provided by Bond King, Bill Gross when he misjudged the timing and impact of the Federal Reserve’s plan to scale back its asset purchases in 2013, spurring the Pimco Total Return Fund’s biggest decline in almost two decades (Bloomberg)

Hence when one invests into a bond fund, one is betting on the prowess of the fund manager to get his view right and hence be able to provide returns better than what one can do on our own.

Dynamic Bond funds in India has been there for quite some time though most of the funds are pretty new. Only SBI Dynamic Bond Fund has a 5 year track record and hence if you were to try and compare the long term performance of other funds, you may not have much of a history to look into.

At the current juncture, the stock markets having rallied quite strongly is at a stage where it does not make sense to invest more than 50% of one’s funds as our Asset Allocator for May detailed. While this allocation shall change as markets move either higher or lower, unless we see a total crash in equities or companies showcase spectacular growth, its unlikely to cross 75% allocation to equities in the next 1 – 2 years.

Quantum Long Term Equity fund which is their biggest Equity fund has not been among the best funds due to the fact that unlike other funds, this fund did not dive into the Mid Caps and large caps haven’t quite generated the returns that Mid and Small cap stocks generated. To compound the mistake if one were to say, they also went into Cash (30% of portfolio) way too soon.

But now with the markets down 10% from the peaks, the fund has been one of the better performing funds compared to many other funds which have lost substantially. The only fund to better this fund has been the PPFAS fund which also had been a under-performer when the markets were rallying. In fact, my own Top 10 funds to invest does not feature both of them (List)

I believe Quantum Dynamic Bond fund too will be run pretty conservatively and hence while it may not be the top performing fund by returns, if you were to measure them in terms of being safer and less volatile, I believe that they may suit a investor who is prepared for the long haul and is not chasing short term performances.

Our Recommendation is a Buy with capital allocation of 10% of Portfolio if you are prepared to stay put with it for at the very least 5 years (as usual, more the better 🙂 ).

Rel-Rand Portfolio Update, May 2015

Last month, we introduced a set of portfolio’s (Rel-Rand) which is based on Relative performance and is shuffled on a monthly scale.

April 2015 turned out be a pretty volatile month and while our portfolio’s did better than the benchmark, the fact that all portfolio’s turned out negative suggests that strong stocks were as badly beaten as weak stocks. The performance of the portfolio’s is as here-under

The changes in the Individual portfolio’s were as under

Under performing Mutual Funds

Various studies in the US have shown that very few mutual funds out there have been able to beat the benchmarks and its no wonder that there has bee a steady and strong rise in the participation by investors into simple ETF’s that track the market.

In India, the scene has been a bit different though with quite a few funds being able to generate returns well beyond what the benchmarks have provided. Out-performance in our case has more to do with picking stocks outside of the Universe of the benchmark and hence strictly speaking may not be comparable, but still the fact that they have out-performed what a investment in Nifty Bees (the largest ETF in India) has meant that ETF investing in India has not caught on as much as in US.

But is this out-performance fading away. A study by S&P Dow Jones Indices seems to suggest that over the last 5 years, more funds under-performed the large cap indices (BSE-100 in this case). Of course, 5 years is too short a time to really understand whether our fund managers too are no better than those in US. A better study would be over a period of say 10 or 15 years when we have seen both a strong bull and bear markets.

A critique of the study seems to be that it has not accounted for size, but for the investor, does the size of the fund really matter or does it matter as to whether he gets better returns for his investment.

Source Article : Study finds mutual funds are not for long-haul (LT @invest_mutual)

SEBI Riskometer

Mint today reported that SEBI has ordered Mutual Funds to classify their schemes in five categories in terms of their risk levels – the risk being of Principal loss. (Link). Currently Mutual Funds follow a Color coding model based on 3 parameters – nature of scheme, investment objective and level of risk, denoted by 3 different colours.

The new scheme while on the face of it seems to have evoked humor among twitter friends, I believe that while the intention of SEBI is good, like in many cases, this is only the first step with a lot more ground to cover if it really wants to see higher participation in mutual funds by the investing public.

While Mutual funds do not carry as much of a risk as direct investment in equities, there is still a risk of capital loss on the short to medium term and that risk has meant that investors prefer to invest their savings in other asset classes like Gold and Land other than the good old fixed deposit.

Also, when we look at returns from Mutual funds, we tend to ignore the fact that the funds we are seeing are the survivors (Survivor Bias). For some one who invested in say CRB Mutual Funds, the investment was as good as lost and it was only after 20 years they saw closure and the return of a part of their capital that was invested.

Its interesting that just yesterday we launched our own Risk-o-meter by way of analysing how much of one’s savings should be devoted to Equity and how much to debt. (Link). Risk of capital loss exists all the time though it differs from time to time.

A fund that is low risk is very much likely to have a very small allocation to equities while one with exposure to markets will need to be categorised as high risk. All the in-between in a way have no meaning since even balanced funds can take quite a hit when markets tumble as they did in 2008.

Our Asset Allocation model on the other hand is dynamic with monthly resets which ensure that when the markets are at what we consider as the peak, the exposure to markets is lowest and vice-versa. A static model on the other hand and is bound to fail since it looks at risk as one-dimensional (Equities = Risk, Bonds = Safe).

Having said that, if we are unable to educate the investors about the basic concepts of markets and money, no amount of color coding or charts will make him change his mind as to what asset class he prefers investing into.

Introducing Portfolio Yoga – Asset Allocator

Re-balancing is a term that is rarely used in the investment advisory industry, let alone practiced with some amount of rigor. Re-balancing done rightly ensures that one is able to ride out the larger market cycles without just being a bystander to both the bull runs and the bear.

While it makes sense for a investor to have as much investment as his risk tolerance provides when the markets are moving higher, when the markets start to trend lower (and they do), it makes no sense to continue with the same allocation which can prove very detrimental to the health of the portfolio as the markets move lower and lower.

In one of my previous blog posts, I showcased how very good funds suffered draw-downs in excess of 50% when the markets collapsed in 2008. While the funds have recovered and posted new highs, at the lows when the logic at those times was to increase their exposure, data shows that investors actually exited, unable to bear the pain of such strong losses and fearing more loss if the markets continued to trend lower.

But what if a investor had exposed just 20% of his funds to the market compared to say 80%, would he be so concerned when the markets finally cracked?

A lot of sites provide a split on how much to invest into equity and how much into debt based on one’s risk tolerance. But that is a single dimensional approach since it does not look at the state of the market and whether even for the conservative investor, does it make sense to expose 40% of his funds to the market when its at its most expensive level.

At Portfolio Yoga, we are happy to introduce a simple way to calculate your asset allocation based both on your risk tolerance as well as the state of the market.

The PY-Asset Allocator will provide on a monthly basis, the split between debt and equity that is appropriate for the investor .Since the percentages can change on a monthly scale, the best way to implement would be via Nifty Bees since most mutual funds levy a high exit fee is the investment is unwound before a minimum amount of time (generally a year or more).

In the days and months that follow, we will also be implementing a simple questionnaire based process which shall enable you to assess the kind of investor / risk tolerance you have.

Here is the link for the page which shall be updated on a monthly basis. You can find the link on our home page http://www.portfolioyoga.com/ as well.

200 Bar Average

For a very long time, the 200 day average is seen as a barrier between bull and bear markets. While many a analyst questions the reasoning behind using the 200 and not 199 or 201 (which anyway will make for not much of a difference), the key reason 200 came to be seen as a major average was that in an earlier era, markets were open more or less 200 days in a year.

The key question though is should one use a simple moving average (DMA) or a exponential moving average for calculation. The key difference here being that while a simple moving average provides equal weight to all the bars, a exponential moving average provides more weight for recent data and less for the older data.

Exponential is what I personally prefer because I believe that if market data has predictive information, one should have much more weight for yesterday’s data bar than the data bar that is 10 months old. Of course, other than DMA and EMA, we have many a way to slice and dice the data when in comes to moving averages. For the sake of brevity, let me list out a few of them.

DEMA -> Double Exponential Moving Average

TEMA -> Triple Exponential Moving Average

WMA -> Weighted Moving Average

While much of the Industry usage is limited to DMA or EMA, lets test out the viability of all the above variations of the Moving Average to see if thinking differently leads to a better output.

The test is as usual conducted on Nifty Futures (Rolling – No Adjustments) with no compounding of position sizes. All trades are taken at the closing price. A commission / slippage factor of 0.05% per trade is applied. While 0.05% may appear excessive in these days of discount brokerage, traders paid a brokerage which was much higher than even that just a few years back.

Nifty was tested from 12-06-2000 till 24-04-2015. We took only long trades (no Shorts). The key numbers to look out for in my opinion are

1. Profit generated (measured in Points)

2. Maximum Draw-down (measured in % from the highest peak to the lowest trough)

3. Number of Trades

So, here are the results

While no average is able to beat the Buy & Hold in terms of point returns, DEMA comes way close and as a added benefit is also one which has the lowest draw-down.

While the DMA was broken just today, the DEMA was broken way back on 9th March. But on the negative side, this average was broken multiple times over the last few months.

All in all, if you want to use a moving average that is not too short and not too long, 200 is worth a look.

Cost of laziness

We all know that laziness can be expensive in any area of life, be it health or finance or family but that never seems to deter us from committing one sin after the other.

The other day, I was surprised to learn that a online firm that enables investment into mutual funds had crossed a major landmark in terms of investment routed through them.

Now, the money they gain comes at the cost of the investors who have invested through that person and the total amount which is a few crores of rupees is no small sum either, especially since as long as the investors have their investment in those funds, the trailing commission will keep accruing to the agent concerned.

But since the money is not taken out directly – in terms of asking you pay separately, this is generally missed out as non consequential though if you are a real long term investor, the difference at the end of the period can be a very substantial number.

Just like most stock brokers have no clue as to what is the best stock to buy, so is the arena of fund advisory. But since when faced with the deluge of options, our mind wants the security that is generated by having some one advise us, we fall prey to advisory agents who at the end of the day may be no better than what we are.

A financial planner is supposed to work for you for a fee but since we Indians want everything free, he makes it seem as if the whole service is free while actually taking more money than what you would actually be charged if done as a service the way a stock broker charges you a commission while enabling you to buy / sell your shares.

In the years gone by, Stock Brokers used to charge an arm and a leg to let you enter the arena but with development of technology, it now costs less to make a trade worth a few crores than a Coffee at a nearby cafe.

The same technology can be used by Individuals sitting at home to invest directly into mutual funds and hence saving the money that would go to the distributor. Remember the adage, “a rupee saved is a rupee earned”. Hence our belief – Go DIRECT

We, at Portfolio Yoga are hoping to shake up things a bit by enabling you to make the right choice without having to spend a Rupee.

“Good things come to those who wait” and we hope to provide in the coming days and months, tools and information that can that make you a better investor – both in the arena of Mutual Funds as well in selecting the right portfolio if you are a believer in Direct Investments.

A couple of links on what you are losing out by not choosing the Direct way of Investment

Invest Mutual

CapitalMind

Following is a chart I had tweeted on the difference in percentage terms between the HDFC Top 200 Direct Scheme and the Regular.

As you can see, the longer you continue in a regular scheme, the larger is the loss that you accrue. So, why wait?

“A life spent making mistakes is not only more honorable but more useful than a life spent doing nothing.” – George Bernard Shaw

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