Author: shyam

Strategies that rocked in 2014

WHAT IS A “THEME”?

A StockViz Investment Theme is a portfolio of stocks that follows a particular strategy. It is a convenient way for you to:

  1. stick to a strategy
  2. follow a preset rebalancing schedule
  3. think in terms of your portfolio strategy rather than individual stocks
  4. avoid common behavioral pitfalls
  5. systematically track your P&L and strategy performance

WHAT IS AN INVESTMENT STRATEGY?

An investment strategy is a specific way of going about the process of investing. It identifies specific variables that define a stock. Variables can be anything: risk, style, sector, balance-sheet items, etc..

By mapping specific Themes to your account, you ensure that you stay pure to your strategy allocation. And that there is no “flying by the seat of your pants” investing.

HOW HAVE YOUR THEMES PERFORMED?

We started 2014 with eight investment strategies. Here is how they performed:

Momentum 200 +90.30%
Balance-sheet Strength +83.23%
Financial Strength Value +79.53%
Magic Formula Investing +75.54%
Quality to Price +69.65%
Market Elephants +44.69%
Enterprise Yield +43.54%
Market Fliers +32.68%
It was one of those rare years when both momentum and value performed at the same time. The Modi-rally coincided nicely with the bottoming of the cycle.

Passive buy-and-hold

Implementing a strategy involves churn. For die-hard fans of the passive buy-and-hold clan, here’s how 2014 looked like:

PSUBNKBEES +71.37%
BANKBEES +64.94%
JUNIORBEES +43.70%
NIFTYBEES +31.57%
INFRABEES +25.83%
GOLDBEES -9.32%
Gold was a money loser and public-sector banks, in spite of all the bad loans and scams, out-performed the rest of the market by a mile.

WHAT SHOULD I DO NEXT?

You should open a demat account with StockViz and invest through our Themes.

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Choices: Large-cap Investing

While looking at investing in large-cap stocks, investors have quite a few options available to them.

Mutual Funds

Previously, we discussed ‘Top 100’ funds — funds that invest in the largest market-cap stocks. This is one way to go about adding large-cap exposure to your portfolio. However, the expense ratios of more than 2% will eat into your returns. Remember, returns are not predictable, but fees are forever.

Passive ETFs

You can buy an equal proportion of the NIFTYBEES and the JUNIORBEES ETFs. Since these are exchange traded, you don’t have to go through the hassle of “surrendering” your mutual fund “units” and keeping track of exit-loads etc. Besides, NIFTYBEES’ expense ratio is 0.5% and JUNIORBEES’ 1%. Overall, you pay 0.75% to Goldman Sachs to manage the ETFs.

Not a bad deal, considering that you end up tracking the CNX 100 index which represents the top 100 stocks by market cap.

Active ETFs

We have a Theme that takes a tactical route when it comes to tracking the CNX 100 index. Its called the CNX 100 50-Day Tactical Theme. The basic idea is to switch between (NIFTYBEES + JUNIORBEES) and LIQUIDBEES depending on whether the CNX 100 index is trading above or below its 50-day moving average. Details of the strategy can be found here.

The drawback is that in flat markets, you end up getting whipsawed a lot. But if you have the discipline to stick with it for over 5-years, it has the ability to deliver superior risk-adjusted returns.

Conclusion

Each of the approaches described above have their advantages and disadvantages. With mutual funds, you have a brand-name manager who is working for you. With the passive route, you save on fees. The tactical route will probably lessen drawdowns during a market crash and preserve capital.

What you end up investing in finally boils down to whatever sails your boat.

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Comparison: Top 100 Funds

Large-cap stocks

Large-cap stocks are less volatile, ceterus paribus, compared to mid-cap and small-cap stocks. For most first-time investors, the set of Top 100 Funds offers a straight-forward way of adding equity exposure.

Fund/Scheme IRR (2014) Expense
Birla Sun Life Top 100 Fund -Growth Option 48.27% 2.82%
ICICI Prudential Top 100 Fund – Regular Plan – Growth 37.71% 2.77%
IDBI India Top 100 Equity Fund Growth 40.05% 2.87%
UTI – TOP 100 Fund- Growth Option 40.68% 2.43%

Picking the right scheme

Birla Sun Life Top 100 Fund -Growth Option.performance

As an investor, you should care about two things: risk-adjusted returns and expenses. While the Birla fund gave better returns, it charged a higher fee compared to UTI. But are those higher returns sustainable? Investors should be willing to pay more for more. This is where the FundCompare tool can help.

Birla vs. UTI

Birla vs. UTI Top 100

Between 2009-07-01 and 2014-12-29, Birla Sun Life Top 100 Fund (Growth Option) has returned a cumulative 155.00% with an IRR of 18.56% vs. UTI TOP 100 Fund (Growth Option)’s cumulative return of 108.35% and an IRR of 14.28%.

On the face of it, Birla’s higher fees seems worth it. But it looks like higher returns came at the expense of higher risk. Birla’s beta (vs. CNX 100) is 0.90761 vs. UTI’s 0.83478 and the latter had deeper drawdowns as well. However, the Sortino Ratio tilts the scale towards Birla’s fund: 0.10762 vs. UTI’s 0.09043.

Conclusion

If you are looking for large-cap exposure then go for Birla Sun Life Top 100 Fund.

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Weekly Recap: Inevitablilty

world.2014-12-19.2014-12-26

Equities

Major
DAX(DEU) +1.38%
CAC(FRA) +1.28%
UKX(GBR) +0.99%
NKY(JPN) +1.12%
SPX(USA) +1.24%
MINTs
JCI(IDN) +0.43%
INMEX(MEX) +0.69%
NGSEINDX(NGA) +13.60%
XU030(TUR) +1.50%
BRICS
IBOV(BRA) +2.47%
SHCOMP(CHN) +1.58%
NIFTY(IND) -0.30%
INDEXCF(RUS) -2.16%
TOP40(ZAF) +0.21%

Commodities

Energy
Brent Crude Oil -1.56%
Heating Oil -2.21%
RBOB Gasoline -2.52%
Ethanol +0.80%
Natural Gas -13.76%
WTI Crude Oil -1.88%
Metals
Copper -2.06%
Palladium +1.23%
Gold 100oz -0.23%
Platinum +1.37%
Silver 5000oz +1.26%

Currencies

USDEUR:+0.44% USDJPY:+0.74%

MINTs
USDIDR(IDN) -0.70%
USDMXN(MEX) +0.35%
USDNGN(NGA) +1.11%
USDTRY(TUR) +0.27%
BRICS
USDBRL(BRA) +0.75%
USDCNY(CHN) -0.13%
USDINR(IND) +0.42%
USDRUB(RUS) -9.38%
USDZAR(ZAF) +0.03%
Agricultural
Cattle +1.66%
Cotton +1.63%
Feeder Cattle -3.89%
Lumber -0.24%
Orange Juice -0.87%
White Sugar +0.23%
Coffee (Robusta) -1.84%
Corn +1.35%
Wheat -2.81%
Cocoa +0.00%
Lean Hogs -1.17%
Soybean Meal +3.90%
Sugar #11 -1.41%
Coffee (Arabica) -4.22%
Soybeans +2.05%

Credit Indices

Index Change
Markit CDX EM +1.37%
Markit CDX NA HY +0.34%
Markit CDX NA IG -0.81%
Markit iTraxx Asia ex-Japan IG -4.39%
Markit iTraxx Australia -4.03%
Markit iTraxx Europe -4.00%
Markit iTraxx Europe Crossover -20.00%
Markit iTraxx Japan -1.28%
Markit iTraxx SovX Western Europe -2.25%
Markit LCDX (Loan CDS) +0.00%
Markit MCDX (Municipal CDS) +1.08%
It was one heckuva week with the upside surprise in US GDP, thin holiday trading and a volatile expiry.

Nifty Heatmap

CNX NIFTY.2014-12-19.2014-12-26

Index Returns

index performance.2014-12-19.2014-12-26

Sector Performance

sector performance.2014-12-19.2014-12-26

Advance Decline

advance.decline.line2.2014-12-19.2014-12-26

Market Cap Decile Performance

Decile Mkt. Cap. Adv/Decl
1 (micro) -3.05% 66/70
2 -0.47% 63/72
3 -0.82% 64/72
4 -0.50% 65/69
5 -1.73% 64/72
6 -0.27% 67/68
7 +1.35% 75/61
8 +0.02% 69/66
9 +1.19% 62/74
10 (mega) -0.43% 72/64
One big nothingburger.

Top Winners and Losers

BANKINDIA +5.00%
JINDALSTEL +8.98%
UNIONBANK +9.00%
HINDPETRO -5.26%
INFRATEL -4.89%
HINDALCO -3.68%
No bombs feel, computers did not take control…

ETF Performance

PSUBNKBEES +2.35%
BANKBEES +0.85%
INFRABEES +0.80%
JUNIORBEES +0.53%
GOLDBEES -0.01%
CPSEETF -0.36%
NIFTYBEES -0.71%
… and PSU banks outperformed.

Yield Curve

yield Curve.2014-12-19.2014-12-26

Bond Indices

Sub Index Change in YTM Total Return(%)
GSEC TB -0.42 +0.27%
GSEC SUB 1-3 -0.15 +0.60%
GSEC SUB 3-8 +0.02 +0.22%
GSEC SUB 8 +0.07 -0.40%
The long bond gave up some ground (FIIs selling?)

Investment Theme Performance

Market Fliers +2.46%
Growth with Moat +2.31%
Magic Formula Investing +1.95%
Refract: PPFAS Long Term Value Fund +1.63%
Efficient Growth +1.19%
The Other Value +0.99%
Piotroski ROC Small Caps +0.91%
Old Economy Value +0.75%
Balance-sheet Strength +0.31%
Enterprise Yield +0.30%
ADAG Mania +0.03%
Industrial Value +0.01%
Momentum Long-Short +0.00%
CNX 100 50-Day Tactical -0.09%
Financial Strength Value -0.38%
Market Elephants -0.41%
Quality to Price -0.58%
Momentum 200 -0.61%
IT 3rd Benchers -0.67%
Auto -1.46%
A mixed week for investment strategies…

Thought for the weekend

The most important thing to understand is that both bear markets and volatility are inevitable. In fact, they are the true source of the equity risk premium, and why it has historically been so large.

Stocks are riskier than bonds. Thus, investors demand a premium, in the form of a higher expected return, as compensation for taking the greater risk stocks entail. The key word is “expected.” If stocks always outperformed, there would be no risk in purchasing them. It’s the risk of the unexpected happening that leads to the equity risk premium.

Source: How To Think About Bear Markets

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FundCompare: Pruning your Mutual Fund portfolio

The dilemma

Ownership of a diversified, un-correlated set of assets remains the touchstone of a well crafted portfolio. We had discussed how adding bonds to your equity portfolio reduces volatility before. However, comparing correlations between funds within the same asset class is a challenge.

For example, say you already have the Reliance Equity Opportunities Fund in your portfolio and your agent is pitching the Sundaram Select Midcap fund, how do you figure out whether to add to your existing holding of the Reliance fund, add an extra line item or switch to Sundaram?

Comparative returns

reliance_sund_returns

Between 2006-04-03 and 2014-12-19, Reliance’s Fund returned a cumulative 280.08% with an IRR of 16.55% vs. Sundaram’s cumulative return of 290.44% and an IRR of 16.91%.

As you can see, the wealth charts are almost on top of each other. The correlation chart confirms it:

reliance sund cor

Except for a few outliers, they are almost the same fund packaged differently.

Histogram of returns

The FundCompare tool also gives you the histogram of fund returns and the associated skewness. In this case, the Reliance Fund has a skew of -0.15 vs. Sundaram’s +0.22. Given that the average returns are more-or-less the same, this means that Sundaram’s Fund is better. Besides, it also appears that Sundaram’s Fund has a better Sharpe ratio.

Given that Reliance’s Fund has an expense ratio of 2.29% vs. Sundaram’s 2.26%, I would say “switch.”

Compare Your Funds

Before pulling the trigger based on what your fund broker/adviser tells you, get a free quantitative analysis of your options on our FundCompare tool.

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