Category: Investing Insight

Investing insight to make you a better investor.

Decisions Under Uncertainty

TCS has been a tremendous wealth creator. Between 2004-8-25 and now, its has turned in a cumulative return of 1164% with an IRR of 28.35% during that period. So you should just “buy right and sit tight”, yeah?

TCS.performance

But before you hang that on your wall, let me take you back to Jan 2007. TCS started sliding on global worries and did stop until losing 65.52% of its value. It took 458 days to make a bottom and another 249 days to climb back up from it. If you think the meltdown in 2007/8 was a once-in-a-lifetime affair, then let me point out that the second worst drawdown for TCS was 27.40% back in 2006. And before that, 24% in 2005.

tcs drawdown

In my experience, 99% of the investors out there would have dumped the stock. That 28.35% IRR is wishful thinking for most investors because not only would they have dumped the stock at maximum pain (peak drawdown) but they would have failed to get back into the stock as well.

But does this mean you should never sell a stock? Have a look at Reliance Infrastructure as a counter example.

RELINFRA.performance

It is yet to recover from the 87% drawdown in 2008! It has been a value destroyer since early 2008.

relinfra drawdown

So does this mean that you should have a “stop loss”? How should you manage whiplash? How do you keep track of all the reasons you bought a stock and if it still fits that criteria? If you sell a stock, what do you replace it with?

The key to making decisions under uncertainty is to have a process. A process that

  1. identifies investment opportunities based on pre-selected parameters (value, momentum, factor, beta, etc…),
  2. has a set holding period, based on the intricacies from (a) and current market conditions, and
  3. forces stocks out of the portfolio based on (a) and (b)

This where StockViz Themes come into the picture. Themes are technology wrappers around different investment strategies that make it convenient for investors to follow a process.

To know what combinations of Themes are right for your risk appetite and investment horizon, get in touch with us now!

Google Asset Management

Facebook, with all the data they are collecting about you, your interests, your social “klout”, etc. could soon make the role of your bank manager redundant. And they have been trying to wedge into the financial services for a while now. Back in April, we surfaced a story about how Facebook is entering the remittances market and is planning to allow its users to store money on Facebook and use it to pay and exchange money with others. “Facebook wants to become a utility in the developing world, and remittances are a gateway drug to financial inclusion.”

Where Facebook goes, can Google be far behind?

Google has commissioned research on how it could enter the asset management industry, adding weight to widespread fears in the fund sector that the world’s biggest internet companies could destroy the livelihoods of established fund houses.

However, Silicon Valley tech firms with their “move fast and break things” motto may be ill suited to meet the fiduciary standards set by regulators to protect investors. Apple sending out a flawed update to new iPhones is a minor irritation, screwing up somebody’s retirement account is a big deal.

It will be interesting to see how this plays out.

Source: Google study heightens fund industry fears

Broken Funds

Cycles usually turn and the most hated sectors end up bouncing back and out-performing the broader markets. Does the same apply to actively managed mutual funds? Should you bet on the asset manager’s luck turning and getting off to the races? Here are some “broken” funds that maybe of interest.

Escorts Infrastructure Fund

Since 2007-09-21, Escorts Infrastructure Fund has returned a cumulative -38.19% vs. CNX 500’s +58.39%. This fund should get a bad-timing award, having launched in 26-Jul-2007, if MorningStar is to be believed (factsheet.) If you are bullish on Indian infrastructure, you may be better off buying the INFRABEES ETF. [stockquote]INFRABEES[/stockquote]

JM Equity Fund

I wonder what the holdings of this fund were in 2008? It lost -71.81% (CNX 500: -64.26%) in value during the crash and is yet to recover. Seeing how well it tracked the broader market, it might make sense to just hold a CNX 500 index fund instead of paying this manager to actively run your investment to the ground.

JM Basic Fund

Since 2006-04-03, JM Basic Fund has returned a cumulative 4.72% vs. CNX 500’s cumulative return of 117.04%.

jm basic fund

Looks like the fund blew up pretty much every year of its existence.

HSBC Progressive Themes Fund

Something happened in Oct-2010 that permanently changed the course of this fund.

Since 2006-04-03, HSBC Progressive Themes Fund has returned a cumulative 36.18% vs. CNX 500’s cumulative return of 117.04%. And since 2013-01-01, the number is 25.73% vs. 31.98%.

Progressively losing client’s money.

Taurus Bonanza Fund

This fund was a bonanza for the asset manager who continues to charge 2.83% on Rs. 250.8M of assets (MorningStar.) Since 2006-04-03, Taurus Bonanza Fund has returned a cumulative 51.66% vs. CNX 500’s cumulative return of 117.04%.

It is yet to recover from the 2008 crash and you are probably better off buying a CNX 100 or CNX 500 index fund instead of chasing this bonanza.

Conclusion

It is said that there is a lot you can learn from studying failure. By looking at the track records of these broken funds, I think the key take-away here is that buy-and-hold only works if you (a) understand what it is that you are holding, and (b) stick to a strict re-balance frequency. Moreover, betting on reversion to mean might only work if you are betting that an out-performing manager will fall back to mediocrity. The other direction is a tough ask.

You can run the comparison tool here: FundCompare
 
 
 

Please get in touch with Shyam for advice on investing in mutual funds.
You can either WhatsApp him or call him at 080-2665-0232.
He is an AMFI registered IFA who can advice you on Mirae, HDFC, ICICI Pru, UTI and Birla Sun Life funds.

Risk, Volatility and Returns

Many investors believe that more risk implies more returns. However, that is an over-simplification: more risk implies a higher probability of more returns (and a higher probability of loss, as well.) Higher risk also implies higher volatility. This graphic is probably the best illustration of the relationship between risk, volatility and returns.

risk-return

As mutual fund investors, you may have come across the ICICI Prudential “Very Aggressive” and the “Very Cautious” funds. Lets compare their relative performance across different time horizons to further understand the relationship between risk, volatility and returns.

Since March 2008

Since 2008-03-03, ICICI Prudential Very Aggressive fund has returned a cumulative 56.24% vs. ICICI Prudential Very Cautious fund’s cumulative return of 53.30%. The 3% out-performance came with significant stomach-ulcer causing volatility.

icici 2008

It would require someone to have some serious testicular fortitude to hang-on to their investments after a 45% drawdown. It took the “Very Aggressive” fund more than a year to claw itself out of the hole. And many investors would have abandoned the fund during that period.

Here’s wealth chart:

Since March 2009

Boom!

Since 2009-03-02, “Very Aggressive” returned a cumulative 169.40% vs. the “Very Cautious” cumulative return of 41.37%. Max Drawdown: -13.81% vs. -4.70%.

Peace of mind came with a very high performance penalty.

Since March 2010

Since 2010-03-02, “Very Aggressive”: 50.02%, “Very Cautious”: 35.48%.

And This Year

Since 2010-03-02, “Very Aggressive”: 17.58%, “Very Cautious”: 7.54%.

Conclusion

The real risk, if you are investing for retirement, is the inability to maintain a certain lifestyle post-retirement due to inadequate savings. Ideally, your investments should be risk-seeking when you are young and risk-avoiding as you near retirement. You can use a set of funds to reflect this attitude towards risk. And there is almost never a “one-size-fits-all-5-star-gold-plated” fund that you can remain invested forever.

You can run our very own comparison tool: FundCompare to see how different funds performed over different time frames, indices and other funds.
 
 
 
 

Please get in touch with Shyam for advice on investing in mutual funds.
You can either WhatsApp him or call him at 080-2665-0232.
He is an AMFI registered IFA who can advice you on Mirae, HDFC, ICICI Pru, UTI and Birla Sun Life funds.

Long-term Gilt Funds

With the consensus on RBI rate cuts beginning next year, investors have been lapping up long-term government bonds (gsecs or gilts, if you wish.) The long-end has been bid so hard that the yield curve is flat as a pancake.

zero.curve.2012-01-05.2014-09-25

GSec Total Return Indices have tracked this, except for the hiccup back in May last year.

Short-term:

GSEC_SUB_1-3.2012-01-05.performance

Medium-term:

GSEC_SUB_3-8.2012-01-05.performance

Long-term:

GSEC_SUB_8.2012-01-05.performance

Drawdowns

May’13 was a rude reminder to investors who thought that you cannot lose money investing in government bonds. You can. Investors in the long-end of the curve are yet to recover from the drawdown last year.

gsec draws

Should you expect actively managed gilt funds to do better?

UTI – GILT ADVANTAGE vs. ICICI Prudential Long Term Gilt

UTI’s fund has a much shorter duration compared to ICICI’s (4.1 vs. 7.35 years.) And the returns that the funds have posted exemplify the importance of incorporating the fund portfolio’s duration into your decision making.

Since 2012-01-05, UTI – GILT ADVANTAGE-LONG TERM has returned a cumulative 24.59% vs. ICICI Prudential Long Term Gilt Fund’s cumulative return of 20.16%.

UTI – GILT ADVANTAGE vs. Birla Sun Life Gilt Plus

Since 2012-01-05, UTI – GILT ADVANTAGE has returned a cumulative 24.59% vs. Birla Sun Life Gilt Plus’s cumulative return of 14.79%. And BSL’s fund is yet to recover from the May’13 drawdown.

birla gilt drawdown

UTI – GILT ADVANTAGE vs. HDFC Gilt Fund-Long Term

Since 2012-01-05, UTI – GILT ADVANTAGE has returned a cumulative 24.59% vs. HDFC Gilt Fund-Long Term’s cumulative return of 22.01%. Of the three funds we compared, this is the closest any gilt fund has come to matching UTI’s returns.

UTI – GILT ADVANTAGE vs. GSEC SUB 3-8 TRI

Since 2012-01-05, UTI – GILT ADVANTAGE-LONG TERM has returned a cumulative 24.59% vs. GSEC SUB 3-8’s cumulative return of 18.55%. The fund beat the sub-index hands-down.

Conclusion

It looks like the UTI Gilt Advantage fund is a well managed fund that has beat its peers and benchmarks. But as the standard disclaimer reads, “past performance does not necessarily predict future results.”

You can run the comparison tool here: FundCompare
 
 
 

Please don’t treat the information here as investment advice.
If you want advice on investing in mutual funds, please get in touch with Shyam.
You can either WhatsApp him or call him at 080-2665-0232.
He is an AMFI registered IFA who can advice you on HDFC, ICICI Pru, UTI and Birla Sun Life funds.