Author: shyam

NPS Tier II: Bogleheads Rejoice!

shyam November 24, 2016

Did T2 kill NIFTY 50 ETFs and Index funds?

Instead of looking at NIFTY 50 ETFs or index funds, why not invest in NPS Tier II Class ‘E’? Unfortunate nomenclature aside, it is hard to beat the 0.01% management fee and the flat Rs. 190/- annual account maintenance fee. Compare that to how much you would pay if you go through:

broker: brokerage + STT + stamp duty + SEBI turnover fee + service tax.
direct through AMC: expense ratios between 0.26% and 1.03% (!)

As of 28th October 2016, 5-year returns across different pension fund managers are between 12.5% and 11.4%. A rough comparison with Birla Sun Life’s Index Direct Fund points to a 10.10% return over the same time-frame. Directly attributable to the lower fee structure of NPS.

The same treatment extends to corporate and government bond funds (Class ‘C’ and Class ‘G’, respectively) as well. Class ‘C’ 5-year returns have been between 11.2% and 12%. Birla Sun Life Corporate Bond Fund (direct) points to a 11% return over the same time-frame. Direct plan expense ratios for corporate bond funds are around 1%. What exactly are you getting for paying 100x more than through NPS?

If you are a Boglehead saving for retirement, you will love the ‘Auto’ feature (Class ‘A’) that automatically shifts the asset allocation from Equity to Debt as you near retirement. All for 0.01%.

If low fees and index investing is all that you care about, then NPS Tier I (tax efficient but with an annuity requirement at the end) and Tier II (just like any other investment ‘folio’) is something you should seriously consider.

Appendix

NPS charges (FAQ)

NPS SCHEME – E (Tier-II) performance (source)

NPS SCHEME – C (Tier-II) performance

Expense ratios of index fund (direct plans)

Expense ratios of corporate bond funds (direct plans)

Categories Investing Insight, Your Money Tags NPS

Monthly Recap: Diwali

shyam October 31, 2016October 31, 2016

Equities

Major
DAX(DEU)	+1.76%
CAC(FRA)	+2.26%
UKX(GBR)	+1.40%
NKY(JPN)	+5.73%
SPX(USA)	-2.09%

MINTs
JCI(IDN)	+1.03%
INMEX(MEX)	+1.03%
NGSEINDX(NGA)	-3.67%
XU030(TUR)	+2.20%

BRICS
IBOV(BRA)	+9.43%
SHCOMP(CHN)	+2.84%
NIFTY(IND)	+0.17%
INDEXCF(RUS)	+0.19%
TOP40(ZAF)	-2.46%

Commodities

Energy
Brent Crude Oil	+0.77%
RBOB Gasoline	-1.77%
Heating Oil	+0.86%
Natural Gas	+7.60%
WTI Crude Oil	+0.50%
Ethanol	+6.33%

Metals
Gold 100oz	-2.92%
Silver 5000oz	-7.29%
Copper	-0.90%
Palladium	-14.45%
Platinum	-5.33%

Currencies

USDEUR:+2.39% USDJPY:+3.35%

MINTs
USDIDR(IDN)	+0.02%
USDMXN(MEX)	-2.12%
USDNGN(NGA)	+0.56%
USDTRY(TUR)	+3.62%

BRICS
USDBRL(BRA)	-1.42%
USDCNY(CHN)	+1.47%
USDINR(IND)	+0.25%
USDRUB(RUS)	+0.40%
USDZAR(ZAF)	+0.30%

Agricultural
Coffee (Robusta)	+9.13%
Orange Juice	+5.51%
Soybean Meal	+6.18%
Sugar #11	-1.77%
White Sugar	-0.91%
Cattle	+5.36%
Cocoa	+2.47%
Coffee (Arabica)	+9.39%
Soybeans	+5.22%
Wheat	+2.18%
Corn	+5.13%
Cotton	+4.12%
Feeder Cattle	-1.18%
Lean Hogs	-5.13%
Lumber	-10.87%

International ETFs (USD)

Nifty Heatmap

Index Returns

More: Sector Dashboard

Market Cap Decile Performance

More: Equal-Weight Deciles, Cap-Weight Deciles

ETF Performance

CPSEETF	+7.79%
JUNIORBEES	+3.40%
INFRABEES	+2.70%
BANKBEES	+0.81%
PSUBNKBEES	+0.72%
NIFTYBEES	+0.37%

Hope springs eternal for CPSEs?

Yield Curve

Bond Indices

Sub Index	Change in YTM	Total Return(%)
0 5	-0.14	+0.91%
5 10	-0.06	+0.79%
10 15	-0.00	+0.57%
15 20	+0.01	+0.46%
20 30	+0.02	+0.38%

The short-end of the curve outperformed the long-end. Did dynamic bond funds catch the drift?

Investment Theme Performance

Enterprise Yield	+14.66%
Quality to Price	+12.73%
Momentum	+11.80%
Velocity	+10.08%
Acceleration	+9.34%
Momo (Velocity) v1.0	+7.17%
Momo (Relative) v1.1	+5.92%
Magic Formula	+4.77%
Financial Strength Value	+4.31%
Balance Sheet Strength	+3.73%
HighIR Momentum	+2.41%
Momo (Acceleration) v1.0	+2.39%

Midcaps FTW!!!

Equity Mutual Funds

Best
HSBC Brazil Fund-Growth	+11.57%
Sahara Infrastructure Fund —VARIABLE PRICING OPTION-Growth Option	+8.59%
Sahara Infrastructure Fund —FIXED PRICING OPTION-Growth Option	+8.42%
Reliance Small Cap Fund – Growth Plan – Growth Option	+7.99%
Sahara Midcap Fund-Growth Plan	+7.72%
Edelweiss Emerging Leaders Fund – Growth	+7.21%
DSP BlackRock Natural Resources And New Energy Fund – Regular – Growth	+6.97%

Worst
ICICI Prudential US Bluechip Equity Fund – Growth	-2.38%
JPMorgan Greater China Equity Off-shore Fund – Regular Plan – Growth Option	-2.52%
ICICI Prudential Global Stable Equity Fund – Growth	-2.53%
HSBC Global Consumer Opportunities Fund – Growth	-2.76%
Kotak Global Emerging Market Fund – Growth	-2.95%
Franklin India Feeder – Franklin European Growth Fund – Growth	-2.97%
DSP BlackRock World Gold Fund – Regular Plan – Growth	-9.59%

Bond Mutual Funds

Best
IDFC Dynamic Bond Fund -Regular Plan-GROWTH	+0.92%
IDFC – SSIF – Investment Plan -Regular Plan- Growth Option	+0.90%
IDFC Dynamic Bond Fund – Growth	+0.90%
DHFL Pramerica Gilt Fund – Growth	+0.89%
HDFC Gilt Fund-Short Term-Growth	+0.86%
DHFL Pramerica Inflation Indexed Bond Fund – Regular Plan – Growth	+0.85%
Franklin India Govt.Sec. Fund-Long Term Plan – Growth	+0.82%

Worst
Invesco India Active Income Fund – Growth	+0.34%
HDFC Income Fund-Growth	+0.34%
IDBI Gilt Fund Growth	+0.32%
Sundaram Bond Saver-Growth	+0.32%
Invesco India GILT Fund – Long Duration Plan – Growth	+0.29%
Birla Sun Life Dynamic Bond Fund-Discipline Advantage Plan-Growth	+0.28%
Birla Sun Life Dynamic Bond Fund – Growth – Regular Plan	+0.28%

Institutional flows

Books I read this month

Cable Cowboy: John Malone and the Rise of the Modern Cable Business (Amazon, Notes)

The book tells the (unfinished) story of John Malone of TCI and Liberty Media fame. How the cable TV business got started in America, how it ended up being one of the largest private sector investments in infrastructure, the regulatory angles, tax dodging, etc. Interesting read.

Business Adventures: Twelve Classic Tales from the World of Wall Street (Amazon, Notes)

This one feels like the author published his diary. It may have felt profound to him, but there is not much to go on. The first and last stories were interesting. However, the book lacked an internal consistency that would have helped the reader make any sense of the rambling.

All the Devils Are Here: The Hidden History of the Financial Crisis (Amazon)

The book paints an accurate picture of the subprime crisis that brought down the world’s financial system. How it began, the main actors… basically the people behind the systemic crisis and its evolution. Interesting read for those who are still wondering about how it all happened.

Categories Your Money Tags monthly

Monthly Recap: September Surgery

shyam October 1, 2016

Equities

Major
DAX(DEU)	-0.77%
CAC(FRA)	+0.23%
UKX(GBR)	+1.74%
NKY(JPN)	-2.59%
SPX(USA)	-0.01%

MINTs
JCI(IDN)	-0.40%
INMEX(MEX)	-1.01%
NGSEINDX(NGA)	+2.67%
XU030(TUR)	+0.51%

BRICS
IBOV(BRA)	+0.78%
SHCOMP(CHN)	-2.62%
NIFTY(IND)	-1.99%
INDEXCF(RUS)	+0.33%
TOP40(ZAF)	-1.81%

Commodities

Energy
Brent Crude Oil	+6.74%
Ethanol	+9.76%
WTI Crude Oil	+7.49%
Heating Oil	+8.72%
Natural Gas	+0.73%
RBOB Gasoline	+5.02%

Metals
Copper	+6.28%
Gold 100oz	+0.48%
Silver 5000oz	+3.23%
Palladium	+7.45%
Platinum	-1.99%

Currencies

USDEUR:-0.71% USDJPY:-2.01%

MINTs
USDIDR(IDN)	-1.72%
USDMXN(MEX)	+2.88%
USDNGN(NGA)	+0.24%
USDTRY(TUR)	+1.43%

BRICS
USDBRL(BRA)	+0.90%
USDCNY(CHN)	-0.11%
USDINR(IND)	-0.53%
USDRUB(RUS)	-3.74%
USDZAR(ZAF)	-6.46%

Agricultural
Cattle	-11.66%
Coffee (Arabica)	+4.31%
Corn	+11.53%
Cotton	+3.42%
Orange Juice	+12.02%
Coffee (Robusta)	+11.36%
Feeder Cattle	-12.32%
Lean Hogs	-21.49%
Lumber	+7.60%
Soybean Meal	-4.46%
Soybeans	-0.52%
Sugar #11	+13.72%
Wheat	+10.82%
Cocoa	-5.72%
White Sugar	+12.46%

International ETFs (USD)

Nifty Heatmap

Index Returns

More: Sector Dashboard

Market Cap Decile Performance

More: Equal-Weight Deciles, Cap-Weight Deciles

ETF Performance

CPSEETF	+1.36%
PSUBNKBEES	+0.79%
GOLDBEES	+0.47%
JUNIORBEES	-0.35%
BANKBEES	-1.96%
NIFTYBEES	-1.96%
INFRABEES	-5.41%

PSU Banks… because all is well!

Yield Curve

Bond Indices

Sub Index	Change in YTM	Total Return(%)
0 5	-0.17	+1.01%
5 10	-0.14	+1.30%
10 15	-0.11	+1.35%
15 20	-0.09	+1.44%
20 30	-0.06	+1.22%

Bonds FTW!!!

Investment Theme Performance

Momo (Relative) v1.1	+6.07%
Financial Strength Value	+5.83%
Momentum	+4.85%
Magic Formula	+3.02%
Balance Sheet Strength	+2.56%
Momo (Velocity) v1.0	+1.66%
Enterprise Yield	+1.18%
Velocity	+0.84%
Acceleration	+0.33%
Quality to Price	-0.17%
HighIR Momentum	-1.13%
Momo (Acceleration) v1.0	-1.45%

Our full automated Momentum strategies (Momos) seem to be out performing their artisanal peers!

Equity Mutual Funds

Best
LIC MF MIDCAP FUND – REGULAR PLAN – GROWTH	+3.72%
L&T Emerging Businesses Fund – Regular Plan – Growth Option	+2.99%
Escorts Infrastructure Fund – Growth Option	+2.88%
DHFL Pramerica Midcap Opportunities Fund – Regular Plan – Growth Option	+2.52%
Indiabulls Value Discovery Fund – Regular Plan – Growth Option	+2.42%
L&T Mid Cap Fund-Regular Plan-Growth	+2.34%
Birla Sun Life Manufacturing Equity Fund – Regular Plan – Growth	+2.27%

Worst
BNP PARIBAS Equity Fund-Growth Option	-2.52%
Invesco India Global Equity Income Fund – Regular Plan – Growth	-2.55%
SBI INFRASTRUCTURE FUND – SERIES I – REGULAR PLAN – GROWTH (6/7/2007)	-2.94%
Invesco India Pan European Equity Fund – Regular Plan – Growth Option	-2.95%
Sahara Infrastructure Fund —VARIABLE PRICING OPTION-Growth Option	-3.39%
Sahara Infrastructure Fund —FIXED PRICING OPTION-Growth Option	-3.56%
Birla Sun Life Commodity Equities Fund – Global Agri Plan – Growth – Regular Plan	-4.17%

Bond Mutual Funds

Best
IDFC GSF-Provident Fund-Regular Plan-Growth	+1.56%
Birla Sun Life Constant Maturity 10 Year Gilt Fund – Growth – Regular Plan	+1.54%
IDFC GSF-Provident Fund-Inst Plan B-Growth	+1.53%
Baroda Pioneer Dynamic Bond Fund – Plan A – Growth Option	+1.53%
ICICI Prudential Long Term Gilt Fund – Growth	+1.53%
BARODA PIONEER INCOME FUND – Plan A – Growth Option	+1.49%
IDFC GSF – Investment Plan -Regular Plan-GROWTH	+1.49%

Worst
IIFL Dynamic Bond Fund – Regular Plan – Growth Option	+0.78%
JM Income Fund – Growth Option	+0.76%
JM Short Term Fund..– Institutional Plan – Growth	+0.75%
Franklin India Banking & PSU Debt Fund – Growth	+0.74%
Invesco India Bank Debt Fund – Growth Option	+0.73%
JM Short Term Fund..-Growth Plan	+0.73%
Taurus Dynamic Income Fund – Growth Option	+0.73%

Institutional fund flows

FII’s continue to binge on Indian equities. When will the tide turn?

Book I read this month

The Most Important Thing – Uncommon Sense for the Thoughtful Investor by Howard Marks (Amazon)

Flamboyant and charismatic investors often get more press than the introverted ones. Howard Marks is one of those under-appreciated value investors who’s work we would do well to assimilate. I have been a fan of his “memos” for the longest time. The book adds historical context to his memos and provides a peek into his thought process. If you see some of Marks’ videos, he comes across as a droning, bitter, professor who keeps telling you that you are not smart enough to make it as a professional investor. If you can get past that vibe, there is a wealth of information you can tap into.

My notes on the book are on OneNote.

Categories Your Money Tags monthly

Total Returns

shyam September 23, 2016

Price vs. Total Return indices

Investors often use the NIFTY 50 index as a benchmark while comparing investments. It is probably fair if you are making price comparisons. However, investment vehicles like mutual funds reinvest the dividends that they get on their holdings. So a more appropriate benchmark there is the NIFTY Total Return (NIFTY 50 TR) index.

The NIFTY 50 TR index is an index with the same constituents as the NIFTY 50 but with dividends reinvested back into the index.

The Dividend Impact on Returns

To give you an idea of how dividends impact long-term returns, here’s a cumulative wealth chart of the NIFTY 50 TR Index vs. the Nifty 50 (Price) Index:

From the beginning of the year 2000 through to the end of August-2016, the Total Return was roughly 6x while the Price return was 4.5x. Here is how dividend reinvestment has boosted returns through the years:

A 1.6% dividend boost sounds trivial until you look at the cumulative effect of it over the years.

Should benchmarks be handicapped?

When you see mutual fund returns compared with “price” indices (all NIFTY indices are price indices unless they are explicitly mentioned to be total return,) you should handicap those returns by ~1.5-2% every year to get an idea of whether the fund actually outperformed the index.

It is tragic that the NSE has maintained a total return index only for the NIFTY 50. With the rising popularity of other asset classes and strategies, it makes sense to provide a Total Return index for every Price index that they publish. We briefly touched upon this while we looked at the MNC asset class. The NIFTY MNC Index, being a price index, missed a lot of performance information. We had to compare an MNC Fund to another Midcap Fund to get a better idea of relative performance. (Read the whole thing here: The MNC Fund Gravy Train, Part II)

Code for the above charts are on Github

Categories Investing Insight, Your Money Tags NIFTY, returns

Intraday Momentum

shyam September 15, 2016

The Research

In their paper, Intraday Momentum: The First Half-Hour Return Predicts the Last Half-Hour Return (pdf,) the authors assert that the first half-hour return on the market predicts the last half-hour return on the market.

Our take

It seems to apply only to the selection of ETFs contained in their research. We ran a sniff-test on our very own NIFTY 50 index. If there was any correlation between the first half-hour and the last half-hour, it should have shown up in the top-right plot:

We admit that our sample size is small. We will continue to accumulate data and run this script a year from now to see if any relationship emerges from the data. Stay tuned!

Categories Investing Insight, Your Money Tags quant