Category: Investing Insight

Investing insight to make you a better investor.

Momentum should be part of every portfolio

shyam June 20, 2015 0

The Two Anomalies in Finance

Momentum and Value remain the two “anomalies” in finance. The Efficient Market Hypothesis cannot explain why value investing, where investors pick up “under-priced” stocks, and momentum investing, where investors bet on stocks that have already run up, give out-sized returns compared to the rest of the market. After all, aren’t markets supposed to discover the “right” price and negate these effects?

Investing in Momentum

Value investors get a lot of face-time in media – people like to hear about stocks that are “hidden gems” that can suddenly come alive and give out-sized returns. However, very little is spoken about momentum investing. This results in investment portfolios that are underweight momentum.

The problem with momentum investing are the large draw-downs. When momentum stocks tank, they do so spectacularly. The draw-down keeps away most mutual funds from seriously pursuing this strategy: a) they can’t get out easily, and b) if they show too much volatility, investors will revolt.

But individual investors don’t have these constraints if they learn to embrace volatility.

Comparing Momentum Returns

Our FundCompare tool allows you to see how momentum investing has fared over different time-frames and compare their returns to whatever mutual fund you own. For example, if you compare Momentum with the ICICI Value Discovery Fund, here’s how the monthly returns compare:

Between 2014-01-01 and 2015-06-18, Momentum has had an IRR of 70.16% vs. ICICI Prudential Value Discovery Fund’s IRR of 50.05%

How much should you invest?

Risk, at the end of the day, is whatever allows you to sleep at night. You could start with a 10% allocation and scale till you reach your limit. Whichever way you choose to go bout it, our Momentum Theme will be ready for you.

Categories Investing Insight, Your Money Tags momentum

Mutual Fund Performance Chasing

shyam June 19, 2015 0

Introduction

Mutual fund sales brochures and distributors often highlight past performance. Why? Because performance sells. The disclaimer that “past performance is not an indicator of future returns” is buried in small-print at the back of the book.

To see how bad a predictor past performance is of future returns, we came up with a novel idea. We used the Relative Strength Spread that we wrote about recently and applied it to mutual fund returns. This gave us three things:

Normalized returns with respect to CNX 500 irrespective of the fund’s benchmark.
A visualization of the performance gap between the best and the worst funds. And,
A parade of top-10 and bottom-10 funds across different periods of time.

Relative Performance

Here’s how the spread between the top and bottom-decile looks like with a 100-day lookback:
CNX 500.mf.relative-spread-index.100

And with a 365-day lookback:
CNX 500.mf.relative-spread-index.365

When the broad markets go up, the performance gap between the best and the worst funds widen. Some managers wring more out the markets than the others. However, during the bear phase, the relative performance between different funds compress. If the market is bad, they all look beige.

Longevity of returns

Is the out-performance sustainable? If you picked the best performing fund this year, will it retain its position the next? Click to embiggen:

None of the top performers in 2010 retained their spot in 2011; same as in 2013 vs. 2014. There were a few cases where funds in the top-decile slipped to the bottom decile the next year. It is a total crap-shoot.

Conclusion

There is absolutely no connection between past performance and future returns. If fund managers require a broad-based rally in the markets to out-perform, then they are in effect, chasing momentum.

Categories Investing Insight, Your Money Tags mutual funds, quant

Investing in Non-Rupee Assets

shyam June 16, 2015 0

Introduction

Indian investors have a significant home bias – we tend to hold a high proportion of our portfolio, sometimes 100%, in Indian assets. However, if you look at how the rupee has behaved vis-a-vis the US Dollar, the advantage of international diversification becomes obvious.

USDINR has been a one-way trade

Historically, the rupee has only depreciated against the dollar. It is the price we pay for being a socialist democracy with poor fiscal responsibility and an unaccountable central bank.

Depreciation quantified

Nifty investors have seen an IRR of 821% since 1991 and today. However, in dollar terms, the IRR is 286%. The difference of 535% is because of rupee depreciation – even if you had held on to a non-productive dollar asset, you would have made that much in rupee terms.

nifty.vs.defty.1991

Diversification benefit

By being long only Indian assets, your fate is tied to the vagaries of the local market participants, regulators and politicians. In a country where most people have dual-SIM phones, it is surprising that most investors are willing to hitch their ride to that pony.

One of the oldest international funds is from Birla Sun Life, let us see how that fared since the financial crisis:

Between 2008-01-01 and 2015-06-15, Birla Sun Life International Equity Fund Plan A- Growth has returned a cumulative 69.99% with an IRR of 7.37% vs. CNX Midcap’s cumulative return of 32.36% and an IRR of 3.83%. It has a beta of only 0.12825 vs. the Midcap index. (MorningStar)

Caveats

The biggest problem with investing in international funds is manager competence. All the reasons we highlighted in our post, Funds that (also) invest in foreign markets, apply. At the end of the day, you are still investing in equities and equity markets are (loosely) correlated. However, investors are better off choosing a pure international equity fund rather than one where the “international” part is a hobby.

The second problem is that there are some funds that invest in emerging Asia or frontier markets. These funds are not really long the dollar. Investors should pay attention to this detail.

Conclusion

Investing in international funds makes sense from a depreciation and diversification point of view. In our Aggressive Fund portfolio, we assign 30% of investor allocation to international funds.

Categories Investing Insight, Your Money Tags mutual funds

Mutual Fund Performance in Bear Markets

shyam June 10, 2015 0

Introduction

During our discussion on Relative Strength Spread, we saw how the relative performance between winners and losers were compressed in the bear markets of 2011, 2012 and 2013. During these doldrums, most active investment strategies fail to outperform their benchmarks. Since most mutual fund investments span multiple bull and bear markets, it makes sense to have a look at how funds performed in the most recent bear market.

For our analysis, we took funds that had more than 90% allocated in equities and ignored sector and international funds. We then applied the same benchmark, the CNX Midcap Index, to make sure that we had an apples-to-apples comparison. A total of 200 funds were analyzed.

The 10 worst funds

Information Ratio

Fund	IR	IRR
HSBC Progressive Themes Fund – Growth	-0.99	-0.29
JM Basic Fund – Growth Option	-0.48	-0.21
HSBC Midcap Equity Fund – Growth	-0.44	-0.21
DSP BlackRock India T.I.G.E.R. Fund – Regular Plan – Growth	-0.43	-0.17
JM Multi Strategy Fund – Growth option	-0.28	-0.16
HDFC Core and Satellite Fund – GROWTH	-0.11	-0.12
JM Equity Fund-Growth	-0.00	-0.10
BARODA PIONEER GROWTH FUND – Plan A – Growth Option	0.01	-0.09
Sundaram S.M.I.L.E.Fund-Growth	0.02	-0.09
HDFC Premier Multi-Cap Fund-Growth	0.07	-0.08

Sharpe Ratio

Fund	SHARPE	IRR
HSBC Progressive Themes Fund – Growth	-0.02	-0.29
HSBC Midcap Equity Fund – Growth	-0.01	-0.21
JM Basic Fund – Growth Option	-0.01	-0.21
DSP BlackRock India T.I.G.E.R. Fund – Regular Plan – Growth	-0.01	-0.17
JM Multi Strategy Fund – Growth option	-0.01	-0.16
HDFC Core and Satellite Fund – GROWTH	-0.01	-0.12
BARODA PIONEER GROWTH FUND – Plan A – Growth Option	-0.00	-0.09
HDFC Premier Multi-Cap Fund-Growth	-0.00	-0.08
Sundaram S.M.I.L.E.Fund-Growth	-0.00	-0.09
JM Equity Fund-Growth	-0.00	-0.10

Beta

Fund	BETA	IRR
HSBC Progressive Themes Fund – Growth	1.19	-0.29
JM Basic Fund – Growth Option	1.15	-0.21
HSBC Midcap Equity Fund – Growth	1.07	-0.21
DSP BlackRock India T.I.G.E.R. Fund – Regular Plan – Growth	0.98	-0.17
JM Multi Strategy Fund – Growth option	1.02	-0.16
HDFC Core and Satellite Fund – GROWTH	0.84	-0.12
JM Equity Fund-Growth	0.92	-0.10
BARODA PIONEER GROWTH FUND – Plan A – Growth Option	0.91	-0.09
Sundaram S.M.I.L.E.Fund-Growth	0.92	-0.09
Reliance Vision Fund-GROWTH PLAN-Growth Option	0.90	-0.08

Bear Beta

Fund	BETA BEAR	IRR
HSBC Progressive Themes Fund – Growth	1.18	-0.29
HSBC Midcap Equity Fund – Growth	1.13	-0.21
JM Basic Fund – Growth Option	1.09	-0.21
JM Multi Strategy Fund – Growth option	0.98	-0.16
DSP BlackRock India T.I.G.E.R. Fund – Regular Plan – Growth	0.95	-0.17
Sundaram S.M.I.L.E.Fund-Growth	0.95	-0.09
Reliance Focused Large Cap Fund-Growth Plan-Growth Option	0.93	0.07
Principal Growth Fund-Growth Option	0.91	0.09
HDFC Top 200 Fund – Growth Option	0.91	0.04
Taurus Discovery Fund – Growth Option	0.91	0.04

Draw down depth

Fund	DRAW DEPTH	IRR
HSBC Progressive Themes Fund – Growth	-48.31	-0.29
HSBC Midcap Equity Fund – Growth	-45.71	-0.21
JM Basic Fund – Growth Option	-41.83	-0.21
JM Multi Strategy Fund – Growth option	-37.54	-0.16
Principal Emerging Bluechip Fund – Growth Option	-36.49	0.06
DSP BlackRock India T.I.G.E.R. Fund – Regular Plan – Growth	-35.52	-0.17
Sundaram S.M.I.L.E.Fund-Growth	-34.50	-0.09
ICICI Prudential MidCap Fund – Regular Plan – Growth	-33.43	0.01
JM Tax Gain Fund – Growth option	-33.33	-0.05
HDFC Core and Satellite Fund – GROWTH	-32.50	-0.12

Draw down length

Fund	DRAW LENGTH	IRR
BARODA PIONEER GROWTH FUND – Plan A – Growth Option	715.00	-0.09
Birla Sun Life Advantage Fund – Regular Growth	715.00	-0.00
Birla Sun Life Special Situations Fund – Growth	715.00	-0.06
DSP BlackRock India T.I.G.E.R. Fund – Regular Plan – Growth	715.00	-0.17
DWS Investment Opportunity Fund – Growth Option	715.00	-0.04
DWS TAX SAVING FUND-GROWTH	715.00	-0.03
DWS Alpha Equity Fund – Growth	715.00	-0.02
Edelweiss Value Opportunities Fund – Growth Option	715.00	-0.02
HDFC Core and Satellite Fund – GROWTH	715.00	-0.12
HDFC Premier Multi-Cap Fund-Growth	715.00	-0.08

The 10 best funds

Information Ratio

Fund	IR	IRR
Mirae Asset Emerging Bluechip Fund – Regular Plan – Growth Option	2.23	0.33
HDFC MID-CAP OPPORTUNITIES FUND – Growth Option	1.69	0.25
Birla Sun Life India Gennext Fund-Growth Option	1.66	0.30
BNP Paribas Mid Cap Fund-Growth Option	1.65	0.31
Religare Invesco MID N SMALL CAP Fund – Growth Option	1.64	0.29
Axis Long Term Equity Fund – Growth	1.61	0.32
ICICI Prudential Value Discovery Fund – Regular Plan – Growth	1.44	0.20
Reliance Equity Opportunities Fund-Growth Plan-Growth Option	1.43	0.20
Religare Invesco Mid Cap Fund – Growth Option	1.41	0.24
IDFC Tax Advantage (ELSS) Fund-Regular Plan-Growth	1.35	0.19

Sharpe Ratio

Fund	SHARPE	IRR
Birla Sun Life MNC Fund-Plan B (Growth)	0.04	0.36
Mirae Asset Emerging Bluechip Fund – Regular Plan – Growth Option	0.03	0.33
Axis Long Term Equity Fund – Growth	0.03	0.32
BNP Paribas Mid Cap Fund-Growth Option	0.03	0.31
Religare Invesco MID N SMALL CAP Fund – Growth Option	0.03	0.29
SBI MSFU EMERGING BUSINESSES FUND – REGULAR PLAN -GROWTH	0.03	0.30
Birla Sun Life India Gennext Fund-Growth Option	0.03	0.30
Franklin Asian Equity Fund – Growth Plan	0.03	0.30
Sundaram Global Advantage Fund Growth	0.03	0.27
Franklin India Dynamic PE Ratio Fund of Funds-Growth	0.03	0.18

Beta

Fund	BETA	IRR
Birla Sun Life MNC Fund-Plan B (Growth)	0.50	0.36
Mirae Asset Emerging Bluechip Fund – Regular Plan – Growth Option	0.76	0.33
Axis Long Term Equity Fund – Growth	0.73	0.32
BNP Paribas Mid Cap Fund-Growth Option	0.69	0.31
Birla Sun Life India Gennext Fund-Growth Option	0.76	0.30
Religare Invesco MID N SMALL CAP Fund – Growth Option	0.70	0.29
HDFC MID-CAP OPPORTUNITIES FUND – Growth Option	0.73	0.25
SBI Magnum MIDCAP FUND – REGULAR PLAN – GROWTH	0.71	0.24
Religare Invesco Mid Cap Fund – Growth Option	0.69	0.24
BNP Paribas Long Term Equity Fund – Growth Option	0.68	0.22

Bear Beta

Fund	BETA BEAR	IRR
Franklin India Dynamic PE Ratio Fund of Funds-Growth	0.43	0.18
Tata Ethical Fund Plan A – Growth	0.55	0.21
Templeton India Equity Income Fund-Growth Plan	0.55	0.07
Birla Sun Life MNC Fund-Plan B (Growth)	0.56	0.36
Birla Sun Life India Opportunities Fund-Plan B (Growth)	0.64	0.12
Canara Robeco Large Cap+ Fund – Regular Plan – Growth	0.65	0.17
Franklin India Taxshield-Growth	0.66	0.16
Religare Invesco AGILE Fund – Growth Option	0.67	0.09
Canara Robeco Emerging Equities – Regular Plan – GROWTH	0.68	0.19
Canara Robeco Equity Taxsaver – Regular Plan – Growth	0.68	0.14

Draw down depth

Fund	DRAW DEPTH	IRR
Franklin India Dynamic PE Ratio Fund of Funds-Growth	-12.06	0.18
Canara Robeco Large Cap+ Fund – Regular Plan – Growth	-14.30	0.17
UTI Opportunities Fund-Growth Option	-14.33	0.18
Axis Long Term Equity Fund – Growth	-16.95	0.32
BNP Paribas Long Term Equity Fund – Growth Option	-17.01	0.22
UTI India Lifestyle Fund – Growth Option	-17.30	0.20
Canara Robeco Equity Diversified – Regular Plan – Growth	-17.44	0.15
Franklin India Taxshield-Growth	-17.45	0.16
ICICI Prudential Focused Bluechip Equity Fund – Regular Plan – Growth	-17.66	0.17
Canara Robeco Equity Taxsaver – Regular Plan – Growth	-17.96	0.14

Draw down length

Fund	DRAW LENGTH	IRR
Franklin India Dynamic PE Ratio Fund of Funds-Growth	113.00	0.18
Canara Robeco Large Cap+ Fund – Regular Plan – Growth	145.00	0.17
Birla Sun Life MNC Fund-Plan B (Growth)	147.00	0.36
Mirae Asset Emerging Bluechip Fund – Regular Plan – Growth Option	172.00	0.33
HDFC Growth Fund – Growth Option	229.00	-0.01
Religare Invesco Mid Cap Fund – Growth Option	232.00	0.24
Axis Long Term Equity Fund – Growth	235.00	0.32
Kotak Emerging Equity Scheme – Growth	238.00	0.03
Birla Sun Life India Gennext Fund-Growth Option	258.00	0.30
UTI India Lifestyle Fund – Growth Option	266.00	0.20

Conclusion

The Birla MNC fund stands out as one having the most points in its favour: low and shallow drawdown, better sharpe and higher returns. The next stand outs were the Axis Long-term equity fund and the Mirae Asset Emerging Bluechip Fund.

In terms of the worst funds, HSBC Progressive Themes was definitely regressive to your wealth. JM Basic and Sundram SMILE funds also laid a deuce.

Mutual funds are marketed as wealth builders. However, the truth is that most of them struggle. At last count, there were more than 5300 different schemes that you could choose from.

Are you getting the right advise? Get in touch with us if you are looking to invest! Call us or Whatsapp us at +918026650232

Categories Investing Insight, Your Money Tags mutual funds

Relative Strength Spread

shyam June 7, 2015 0

Introduction

The Relative Strength Spread takes all the stocks in the CNX 500 index, sorts them by their relative performance vs. the index and takes the ratio between the median relative performance of the top decile and the bottom decile. When you plot the spread, a rising chart indicates that relative strength leaders are performing better than relative strength laggards.

Relative Strength Spread Charts

CNX 500.relative-spread-index.50

CNX 500.relative-spread-index.100

CNX 500.relative-spread-index.365

High Relative Strength Spread environments provide the largest momentum profits – winning trades easily eclipse losing trades.

The 365-day RS-Spread chart clearly demarcates the “Modi-Mania.” The Modi-Mania was manna from heaven for trend-following strategies. However, the post-Modi-Mania phase has seem most momentum algorithms struggle.

A silver-lining is that the 50-day chart shows that we are probably due for a momentum comeback. But it is not uncommon to have prolonged periods of the “doldrums” where momentum is just “average.” It maybe tempting to give up on trend-following strategies during these periods. But just like how we cannot predict momentum crashes, we cannot predict momentum comebacks. So it is important to maintain allocation to momentum strategies.

Conclusion

The Relative Strength Spread index can be useful in explaining momentum profits. However, it is not much of a predictor of future momentum returns. It could also be used to explain the “skill vs. luck” question of returns – just like how a rising tide lifts all boats, a high RS-Spread environment will lift all portfolio returns.

Going forward, we will update the 50-day Relative Strength Spread chart on our weekly Index Update posts.

Categories Investing Insight, Your Money Tags momentum, quant