Portfolio Yoga - Part 32

Of Labels and Stereotypes

Like it or not, we are all labelled one way or the other – from the Religion we profess to the Country in which we happen to be born among many others. For South Indians, anyone born in the North is a Bihari regardless of whether he is from Bihar or from Rajasthan. In the inverse, anyone south of the Vindyas is regarded as a Madarassi once again overlooking the vastness of the land that is there.

In Investments, we are believers in labels. We can either be Value Investors / Momentum Traders depending on which way the wind is blowing though there are guys (including me) who are die-hard fans of one style versus the other and would rather defend to death our ideology than just be open to whatever works.

Whatever Works. Isn’t that the key?

Chris Gayle you may claim has no style when you compare him to say Rahul Dravid. But in the format of 20-20, the key wasn’t whether he had style or not. It was whether he delivered. Its as simple as that.

In the Universe of Mutual Funds, funds are labelled according to their Portfolio into either Large Cap / Multi-Cap / Mid Cap and the Small Cap Universe. But these labels aren’t permanent for as the portfolio changes shape, so do the labels.

Quantum Long Term fund for example was long labelled as a Multi Cap fund but now is seen and categorized as a Large Cap fund. The fund is currently the best performing fund among Large Caps with a 10 year return of 14.63%. But what if the fund was not labelled and was compared with every other fund with a 10 year track record. Would it still be the leader?

14.63% Compounded Growth over 10 years is no small return and yet it would be placed in the 18th position among all funds (Excluding Sector Funds). Wait a minute you would say, aren’t we ignoring the Risk of these funds verus the lower risk of Quantum?

Thankfully we don’t need to speculate for we have data. For this exercise, I select 2 other funds. The first is IDFC Premier Equity Fund which is the best fund among all Equity Funds over the last 10 years. The second fund is ICICI Prudential Value Discovery Fund, the best fund among “MultiCap” funds of the last 10 years.

Since a picture says a thousand words, here is a chart showcasing the draw-downs suffered by these funds against one another.

Absent labels, could you really identify which fund is a Large Cap Fund, which one is a Mid Cap fund and which one is a Multi Cap one?

When shit hits the fan so as to speak, there isn’t much difference between a good mid cap stock and a great large cap one. Every starts to behave like a small cap and the above chart is just showcasing how close they are when it comes to risks taken.

Now, lets look at the cumulative returns (2006 to date) generated by these funds,

At no point of time has IDFC been even challenged in terms of leadership in returns. Quantum and ICICI were competing with each other before ICICI took off in the “Modi Magic” bull market with Quantum constrained to play catch up.

If I were to have not given you knowledge of the fund names or the labels they carry, which one would you go out and invest today?

Parag Parikh Mutual Fund was launched as a kind of Value Fund. But since fund research houses don’t have a label for Value, its closeted with other Multi Cap fund. The fund is really unique in many ways. For instance its well known exposure to stocks listed in US to the extent that its biggest holding is Alphabet Inc (Google).

Recent portfolio also shows its into Arbitrage (Futures versus Cash) with nearly 8% of the portfolio being totally hedged. It also has around 16% of its AUM in cash.

Since the fund has been launched only in 2013, we really don’t have a track record long enough to compare with other funds. But fact of the matter is that while the span maybe short, its performance hasn’t been great even in that short spell.

With a 3 year CAGR return of 15.66%, its return is half the Category Leader, Motilal Oswal MOSt Focused Multicap 35 Fund. But when it comes to draw-downs, the difference is not too big to suggest that the Multicap 35 fund is taking way higher risk than this fund which could account for the difference in returns.

2 Funds. Which one would you Buy? pic.twitter.com/qwRxYT8xft

— Prashanth (@Prashanth_Krish) May 21, 2017

Without the label of being a “Value Fund” , would you be a investor in the fund? To help you make a better call, here is what Warren Buffett said recently about this funds largest holding

Buffett said he had failed to see Alphabet’s growth potential, despite being a user of the online search giant.

One’s man’s trash is another man’s treasure goes a saying. But if all you have is data from the past, shouldn’t that be the only criteria to judge a fund / investment.

Adios!

IPO’s,do they really add value to your Portfolio?

Twitter is a great way to share view points but given that one has limited number of characters within which to express one’s opinion, the opinion can be misconstructed to mean something other than what it was supposed to mean in the first place.

I made a comment on how major brokerages were recommending the DMart issue not because it was supposedly a great business to own but because it’s cheaper than other listed peers which is really a pathetic argument IMO.

Walmart sells at a PE of 14.61, Costco Wholesale Corp @ 31, Home Depot Inc @ 25.3, Target Corp @ 9.21 times.

— Prashanth (@Prashanth_Krish) March 8, 2017

Here is a comparative valuation chart of all listed companies in the Retail space (Data Courtesy: http://www.moneyworks4me.com/)

But even leaving aside the Valuation concern, the question here is does it make sense to apply for IPO’s in general.

I am not a fan of IPO’s in general and the worst IPO’s are those that come at the peak of a market rally. With markets already hot, even normal companies get extra ordinary valuations, great companies get whatever they ask for.

The objective of every merchant banker / investment manager is to try and maximise returns for the selling shareholder while also ensuing something is left on the table for the allotee as well.

In recent times, most IPO’s have opened higher than the price at which they were sold which seems like a great opportunity for a investor. But it’s not as if every investor gets allotted the number of shares he applies for.

In case of DMart, investors will be lucky if they can get a single lot (50 shares). This means that unless you are a very small investor, even a 50% pop will barely register on your total portfolio (If your Equity Portfolio is worth 25lakhs, a 50% pop will mean a profit of 7,500 Rupees {that is assuming you are lucky enough to get a allocation} which is 0.3% of your portfolio).

One historical example that has been used suggest that even paying a high price to earnings is worthwhile is by using the example of Walmart. Like Sam Watson used a different strategy that set aside Walmart from rest of the competition, so has DMart. But will it be able to replicate its own success of its Initial years is something only time will tell.

The Key difference is that unlike the time when Walmart started up, the playbook to success in retail is way different. As a investor, it definitely makes sense to apply to the IPO. If you are a small investor, opening pop can provide for juicy returns where as if you are a large investor, at worst this could be a tracking position.

Ultimately though, your returns are less driven by IPO’s such as these and more by how much of your net worth you allocate to a particular asset class, the kind of returns you are able to generate in that asset class and the asset allocation model you follow.

The Asset Allocator has changed

Equity Markets move in cycles is we all know. But if only we knew when the markets will top and when they shall bottom, life would be so much simpler.

Since we don’t have that information, all we can do is use a bit of mathematics to try and figure out how and where to add exposure to markets and vice versa.

Who doesn’t love to buy when markets crash or sell when it tops at multiple year high valuations. Then again, much of this is not only hindsight in nature but the bigger issue is the amount of time available to take that decision. Market stays at Market Tops or Market Bottoms for very short period of time.

Based on earlier tops, one of the easiest prediction people made was about market topping in 2016 (1992 Top + 8 years = 2000 Top, 2000 Top + 8 years = 2008 top. Hence, 2008 Top + 8 = Market Tops in 2016).

Rather than hoping to Buy everything at the bottoms and Sell everything at the Peaks, we need to granulate to ensure that we don’t end up with too low a exposure when time is ripe for buying or have too much invested when markets are near the peak.

Portfolio Yoga Asset Allocator has been up there since the start of the site. Its time for a revamp and this is what we have done today.

While the basic philosophy stays the same, we have tried to granulate the entries and exists to ensure that we don’t stay too long in the party. On the other hand, when market falls big time, this allocator is more nimble to be able to capture at least a part of it.

Mutual Funds or ETF

The topic is something I have written about earlier but given the nature of the market, it keeps propping up as one or the other side unearths what seems to be new evidence which show why one is better than the other. In the United States, its more or less settled that Active funds cannot beat simple ETF’s and this is not just limited to Mutual funds as the bet by Warren Buffett is showcasing.

Ravi Dasika, Co-Founder, Tavaga.com wrote a post on Medium trying to show why the viewpoint of Sharad Singh, Founder and CEO of Invezta.com wherein it was claimed that 95% of all funds beat ETF’s was simply and absolutely wrong. Before we go any further, a word on these two sites. Tavaga.com is a site founded to provide investors a way to build portfolio’s using simple ETF’s while Invezta.com is a site that provides investors with the ability to invest in Mutual Funds Direct (other sites such as FundsIndia for example are sites that provide avenue to invest via Regular schemes which are more expensive ,0.5% to 1.25% approx depending on fund.)

In other words, they offer their customers a choice that is pretty much opposite (Passive vs Active) and even while the total pie of investments that is coming into the equity markets is pretty high, like in the United States, at some point we shall see some sort of cannibalization.

Given the background, lets explore what Sharad Singh wrote at Business Today in his post More than 90% active mutual funds beat the indices. There is still time for ETFs. I would suggest you read the article though the conclusion (as would be evident from the headline itself) was that ETF’s were inferior to active Mutual Funds.

To make a case for Active, Sharad combined ETF’s and Index funds on one side and all Mutual funds on the other. While Index funds are supposedly passive and theoretically should move like the Index, it rarely does so thanks to Tracking Errors that dominate. Either way, Sharad takes a total of 17 ETF’s. I on the other hand could find a total of 24 funds (18 Index, 6 ETF’s) with a minimum track record of 5 years.

Here is the list with returns

As the data evidently shows, ETF’s handsomely beat Index Funds some of which can be attributed to fees (IDBI Nifty Index fund for example charges 1.74% as its Expense) while others maybe due to the churn needed to continually adjust for the inflows / outflows. While even ETF’s face that issue, due to the size of the Creation Unit being large, I believe that impact is much lower in their case.

Now, lets look at Mutual Funds (and since Direct funds are still a very small portion of Retail Investors, I shall use Regular)

On an average, Mutual funds have indeed outperformed both Index Funds and ETF’s by a margin. But what data misses is the fact that this data is skewed in two ways.

One, the starting point of the 5 year analysis starts right after the bear market of 2011. A fund which had a higher beta than the Index would surely outperform given the overall bullishness in the period.

Second, the 10 year returns are of funds that continue to exist. Any fund that was closed / merged would be missed propping up the returns higher (since its generally weak under-performing funds that find themselves under the axe).

Even more important point to note is that if you had invested in any of the funds on the left hand side, you would have either kept in line with the ETF or under performed. On the other hand, investing in funds on the right hand side should have given you a return much higher than what you could have got through ETF’s / Index funds. But either way, its not a 95:5 split but more of a 50:50 (Coin Toss). (Errata: Only 22% of funds have under-performed not 50%. Apologies).

Do note that while we compare all the funds against Nifty 50, its actually a wrong way to compare since many of the above funds have pretty large investments in stocks outside the Nifty 50. On the other hand, if you were to invest equally into both Nifty 50 and Nifty Next 50, you would more or less get the entire population. But since we have just 2 ETF’s with minuscule AUM’s, it would not be a fair comparison.

Over the last 5 years, Nifty Next 50 has given a return of 20.24% showcasing where and how the extra returns by the funds above maybe been garnered. One can only hope that we see more launches to track indexes such as these making it easy for potential investors to invest in a ratio that has a very high probability of beating the best of the funds (which are recognized only in hindsight).

If you were looking at investing for the long term, a good mix of Nifty 50 and Nifty Next 50 on the equity side should beat the shit out the majority of funds 10 / 20 years from now, that is unless you know which fund to buy and forget for the next decade.

Finally, the goal of investing is to ensure that our Goals are met. The road you prefer is left to you and while most of us will still arrive at our destinations, the time taken maybe different due to the different roads we took to reach.

Dogs of Nifty 50

Dogs of the Dow is a very old strategy strategy popularized by Michael B. O’Higgins in 1991 (Wiki Link). The concept if you aren’t too interested in checking out the link is to buy the top dividend yielding firms and holds for a period of 1 year before a new set is selected and invested therein.

On the US markets, this strategy has shown promise as per stats (Link). I haven’t back-tested the same on Nifty 50 though I would assume that the risk of such a portfolio would not be too different from holding a portfolio of all Nifty 50 stocks.

So, here are the Dogs of Nifty 50. Will check back on this in Jan 2018 to see both the performance and the changes required for the forthcoming year.

Retirement Woes

One of the key reasons for savings is to ensure that once one retires from their job, they have enough resources to help them lead a comfortable life for the next XX years they may survive. The last thing most people want is to become destitute’s in their old age and dependent on either their children or worse relations.

If you were to read the key problems facing Americans, most of them aren’t ready financially for retirement and even those who thought they were were rudely awakened when the global financial crisis hit the town in 2008. In India, savings for Retirement is generally made via Provident Fund if you are employed. State / Central government employees contribute part of their income to ensure that after they retire, they can get a pension (which is adjusted for inflation) till the end of their lives.

While under savings is a horror story many hear and for sure don’t want to be on the same boat, over savings (which like anything else in life comes at a cost) is meaningless especially if comes at the cost of sacrificing things you may have loved to do during your younger years but got too daunted since that would have eroded a substantial part of the savings.

In last few years, I have lost two family members and the story of their lives is so much similar and yet so different. While both faced hurdles at a younger age, one was able to enjoy life much better than the other. I was reminded of them when I was having a conversation with a good friend of mine who wanted to do certain things given that as one ages he knows that he will not be able to do the same as he gets older, yet the lack of understanding of what he really requires to lead a comfortable life post his working career means that he would rather save as much as he can (and given what I know, he already has exceeded what would be required at the current stage of his career).

Financial Planning these days is all about Excel and Calculators to show that if you spend X now, 10, 15 years later you will need (m * n), but does one really have a clue as to how the world will shape out 10 / 20 / 30 years into the future?

10 years ago, I did not dream of spending as much as I do on Telecommunication as I do now while on the other hand, what I thought would be really expensive hasn’t really lived up to the fear. 10 years from now, do we really know what our major spends will be given the pace at which technology is changing our lives?

Former prime minister Indira Gandhi coined the term “roti, kapda aur makaan” as an election slogan and truth be told that its the basic requirements I think most of the readers here would already possess. Census 2011 said that 86.6% of the population owned their houses and yet the Real Estate boom has meant that rather than enjoying what we possess, we try to gather more in the hope of even more gains.

Food Inflation has been pretty high in recent times but given that is a commodity at best, the same cannot go on forever since consolidation of land, better quality seeds, use of technology will make food cheaper at best or roundabouts here.

While Textiles has turned out cheap, the one factor most didn’t account for and is a major dent for families is Education which has become way expensive over time. Then again, not sure if anyone thought people would ponk up the kind of money they do now.

But with Massive open online course (MOOC) catching up, do you really think that 20 years from now, Children will have to spend a Crore or more to get into a college in America?

Savings is important but so is leading a life as carefree as possible. Right now I am in the middle of reading Shoe Dog by Phil Knight and while its a case of Survivor / Selection bias (he wrote the book because he survived the adventure and we read because Nike is after all one of the biggest brands out there), I still wonder how many families allow their wards to take risks he took early in his career.

Not all risks pay off, but the experience stays and helps one feel of a life led according to ones wishes and dreams. So, how many dreams are you killing for a goal about which you don’t have a clue let alone know the path? Food for Thought?

Here is what happened in 2016

Year end posts are obligatory in nature. So, this is a list of stocks that went up, this is another list that went down and hey, this what I think will happen in the coming year.

Yet, if you really dig the data you can find some interesting facets that may have been easy to miss otherwise. 2016 was literally another dud year, the 2nd in the row. Yes, we did have some great moves and huge volatility, but we are still where we were at the beginning of September 2014 and surprisingly despite the passage of time, we aren’t any cheaper than we were at that point of time. Says something, ain’t it?

Lets start of with the percentage move plotted in a distribution style chart.

While the year may have been flat, we have had a lot of stocks that doubled or more. If you were invested in such stocks, 2016 would have been a awesome year for sure. For others (and that would include me), better luck next time, eh 🙂

The biggest gainers, gains > 100% were mostly mid and small caps with very few of them starting out at 100 Rupee or more. Sugar sector had a awesome year with the equal weighted index rising as much as 74% and hence its no surprise to see many a stock related to Sugar at the top of that list.

On the negative side, ignoring the random names of small cap stocks that are on the route to oblivion, the biggest disappointments would Tree House, RCom and Just Dial. And then there are stocks whose charts suggest a clear cut pattern of pump and dump, Global Offshore for instance

But overall, with 48% of stocks ending in positive territory, it isn’t so bad either. And before we move on, here is the list of the Best and Worst 25 stocks

Stock picking is tough in the best of times and even though the current year hasn’t been bad, anyone (and there are literally thousands of investors) who are holding stocks that literally bled to death this year are unlikely to believe that Equities are the best way to invest for a secure future.

Yes, the hope is to catch as many of the Green ones as possible, but how many do you really have the expertise to catch and a bigger question, will you know how long you need to hold it?

Global Offshore for example went up from 50’s to 800’s and yet some one who bought with intention of sitting tight would have seen all his gains withered off.

On the other stocks like Mandhana after having literally no returns over the last few years finally gave way as it fell 80% from its peak.

ETF’s are still a nascent product in India though with the arrival of Robo Advisory and investment by EPFO into ETF’s, hopefully going forward we should see more momentum .

Almost all ETF’s ended in the Green with the only exception being the Infra ETF.

While not all sector index are available, with new launches we are seeing quite a few options other than Gold and Nifty which still constitute the maximum number.

With mainline indices being flat for the year, the Top winners and losers among Mutual funds were dominated by Sector funds.

DSP had a good year with 3 of its funds being among the top winners though it also holds the ignomity of having a IT fund that lost a great deal more than both the Nifty IT Index (its benchmark) as we as its peers.

For the Second year running, FII’s continued to be Net Sellers and like last year, the only solace and what maybe saved the markets from having a much rough year was the steady stream of investments coming in from local funds (read Mutual Funds) which thanks to the weakness in Real Estate, Falling Interest rates and good advertising has been able to rake in much higher amounts than it used to.

But with there being a very high correlation between Nifty and FII investments, its essential that they start trusting the markets with their money if we were to have a bullish year like the ones we saw in 2012 or 2014.

Internationally, were were more or less on in the middle with neither we being great performers nor being the dogs of the year.

Since the table uses local currency to measure the gains, any gains accruing due to depreciation alone gets counted when its essentially just adjustment (Example: FTSE 100)

And finally, Nifty Sector / Thematic Index returns over the years. I have broken it into 2 pictures. One with at least 10 years of data and in the other you shall find all Indices with their returns over the last 5 years.

And finally, the best and the worst performing Indices over the years. Here is the interesting thing in this data set. In the winners, you can find Nifty Metals represented three times and yet if you were to measure the returns over the last 10 years, its a pittance to say the least. Once again, blind buy and hold doesn’t work other than in hind sight and with money you really have no requirement for

Nifty Pharma had one of its worst years since 2008 and while its still not yet very cheap, I see it getting (stockwise) to that zone from where you could see it bounce back providing decent returns at the very least.

So, here is me hoping that 2017 bring out the best of opportunities for us.

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