Portfolio | 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

Cloning Rakesh Jhunjhunwala

Copying from the Rank student is as old as the system of education. Students who are lazy enough not to put in their own efforts would love if they can get their hands on the answer sheet of the Rank Student and enable them to pass the exam without having to deal with the nitty gritties of studying for the same.

While copying in exams is illegal, copying the strategy or even better off, the portfolio of acclaimed investors is a process that has been well documented by Mohnish Pabrai who even wrote a book which deals with some aspects of the same – “The Dhandho Investor: The Low – Risk Value Method to High Returns” and “Mosaic: Perspectives on Investing”.

At Portfolio Yoga, one of our aims is to simplify the complexities of investing in the stock markets and what better than to create portfolio’s which mimic the great investing legends of India. By buying the top picks / holdings of these people, we believe can provide for excellent returns though even the best of guys can make bad picks and hence one needs to do a bit of studying rather than blindly copy.

“Be a cloner… but clone the best” says Mohnish Pabrai and who better to start of this series than India’s best known Investor – Rakesh Radheshyam Jhunjhunwala. I do not think that I can say anything about the guy which is not known by the reader.

So, how does one clone any others portfolio?

Rakesh Radheshyam Jhunjhunwala may invest into hundreds of companies, but we as cloners are concerned only about his holdings where he holds more than 1% of the company’s total stock. This is because by having a investment > 1%, he not only shows his confidence in the said company but also enables us to track his holding via the updaets company makes to the stock exchanges.

The secondary aspect of investing would be to determine how much of money one devotes to each company of the investor we intend to clone. A simple formula would be to make equal investments into each such ideas. But if a investor has huge holding (in value terms) in one company and a mearage holding in other, why should we give equal weight to both of them.

The better way would be to invest in the same proportion as he has. Maximum investment in his biggest shareholding and smallest in one where he has the least amount invested. When I say “invested”, I mean the current value since we are not privy to the prices at which he purchased and even if we knew, it makes not much of a sense at the current juncture owing to the appreciation or the depreciation seen by the said stock.

So, if you were investing say a sum of 1 Million based on the picks by Rakesh, what should your investment be in each of his holding stocks?

The answer is provided in the pic below. Do note that the value has been taken as on date while the holding is as on 31-12-2014 for which data has been last updated.

Remember that while cloning is no guarantee for success, it at the very least provides us with a list of stocks one can look deeper.

Introducing Rel-Rand

The objective of this site is to provide proprietary and non-proprietary models portfolios that suit one’s purpose.

To begin with, introducing the Rel-Rand portfolio family. The objective of the portfolio is to beat the returns of its benchmark index by buying stocks that are showing strength and selling those that are showcasing weakness. In other words, this portfolio shall aim to hold stocks that are winning while cutting back on stocks that are losing.

The portfolio consists of 25 stocks with it being long all the time (No Shorts). Each month, on the last trading day, the system is run and stocks that have weakened over the look back period are removed and fresh ones added.

General Info

Inception Date	31-12-2010
Last Rebalance Date	31-03-2015
Rebalance Frequency	Monthly
Rebalance Method	Semi-Automatic
Benchmark	CNX 500

Link to the PDF file containing its historical performance.

While the 5 portfolio’s each showcase different returns, since the only difference between them is the order of ranks, we believe that over time, all of them will showcase similar returns.

The file will be next updated on 30th April 2015.

Portfolio Construction – An Introduction

The long term goal of building wealth in markets starts from being able to get right a portfolio of stocks that suit ones risk tolerance. Take too much of risk and you may jump ship well before the goal is reached, take too little and your goals may remain unfulfilled.

So, what is risk?

While risk is often defined as the volatility of the investment, Warren Buffett sees Risk as Permanent loss of Capital which seems to make much more sense when taken in the context that no investment (other than Fixed Deposits) will yield a return without some amount of volatility.

Hence when a portfolio is being build, one has to ensure that the risk of permanent loss of capital is kept low. But then we come to the axiom which seems to say that Risk and Reward go hand in hand. Higher the risk, Higher the return, or so goes the saying.

But as Howard Marks says, while its true that market appears to provide higher rewards for assets that seemingly have higher risks, its worth noting the word “appear.” We’re talking about investors’ opinions regarding future return, not facts. Risky investments are – by definition – far from certain to deliver on their promise of high returns.”

By creating a portfolio of stocks, the idea is to minimize those risks by spreading them across. But the question that comes up next is that while its true that its better to have a basket of securities, how many should one have. Should one have a few stocks which one beliefs will deliver strong returns or spread it thin across many stocks to ensure that one or two bad apples do not negatively impact the net portfolio.

Below here, I have reproduced in graphical form the damage a portfolio can see from a stock that has fallen 25% from the entry price (Equal investment is assumed in all the stocks)

The chart above shows the damage to a portfolio in case a single stock among the portfolio constituents goes down by 25%. The impact is highest if the number of stocks in a portfolio is just 5 and the lowest in case the portfolio consists of 50 stocks.

On the other hand, we get a similar number if a stock moves up by 25%. For a portfolio with 5 stocks, the net value of the entire portfolio moves up by 5%. On the other hand, in the portfolio of 50 stocks, this barely makes a dent as the portfolio climbs a partly 0.50%.

We believe that a good portfolio can be of 20 – 25 stocks which in essence will mean that the investment in each stock is limited to 4 – 5 percent. But the choice comes down to both the risk taking capacity as well as the goals one defines.

There is a large amount of reading material that is available on the internet that goes into every little facet concerning portfolio management and construction and it can help one a lot.

In our future posts, we shall attempt to build portfolios using various proven methodologies. But for now, lets wrap it up with a nice little presentation from Vanguard (Link)

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