Category: Investing Insight

Investing insight to make you a better investor.

Equity Returns at the Turn of the Month

The Turn of the Month Effect

A recent paper in the Financial Analysts Journal looks at the Turn of the Month effect on equities. Equity Returns at the Turn of the Month, John J. McConnell and Wei Xu:

The turn-of-the-month effect in U.S. equities is found to be so powerful in the 1926–2005 period that, on average, investors received no reward for bearing market risk except at turns of the month. The effect is not confined to small-capitalization or low-price stocks, to calendar year-ends or quarter ends, or to the United States: This study finds that it occurs in 31 of the 35 countries examined. Furthermore, it is not caused by month-end buying pressure as measured by trading volume or net flows to equity funds. This persistent peculiarity in returns remains a puzzle in search of an answer.

Does it apply to Indian markets?

The study skips over the Indian markets. So we did a quick test on the CNX 100 index to check if the effect holds. Here’s the cumulative return chart between a Buy-and-Hold CNX 100 strategy (B&H, black) and a Turn-of-the-Month CNX 100 strategy (TOM, red):

CNX100.TOM

Although the TOM strategy has lower-drawdowns, the B&H wins – both in terms of tax advantage and trading costs. The Turn-of-the-Month effect doesn’t seem to apply to Indian equities.

Categories , Tags

Diwali Stock Picks: Doodh ya Paani?

Mostly Paani.

Back in October last year, we created two Themes to track the Diwali stock picks collated by ET and Kotak. ET had written that the 10 stocks that they assembled from the recommendations of four brokers could double by next Diwali.

However, between 2014-10-21 and 2015-11-02, ET Diwali Picks 2014 returned a cumulative 2.50% (IRR of 2.41%) vs. CNX Midcap’s cumulative return of 17.60% (16.10%.) While Kotak Diwali Picks 2014 has returned a cumulative 14.60% (14.11%.) (ET Picks, Kotak Picks)

ET has once again put out stock picks for this Diwali. You can track the portfolio here: Diwali Picks ET 2015

Better luck this year!

Categories , Tags

Should You Buy What Mutual Funds Buy?

No.

Mutual fund conviction buys

Every month, mutual funds disclose their portfolios and investors go to work on them to find investment ideas. But should they? Tracking their conviction buys – stocks that are new additions to their portfolios – tell a different story.

mf.new.additions

Median T+5, T+10 and T+20 returns were -0.13%, -0.93% and -1.3%

You were actually worse off following them if you were looking for a quick trade.

Does this mean fund managers miss the mark?

No. Their reason for buying a stock makes sense for the strategy and portfolio that they are running. Their time horizon extends beyond 20-days. Using their actions to guide your trading decisions is what misses the mark.

How is this data useful?

This is basically a negative result. The next time some fund manager is asked what he is buying on TV or you come across a media item that lists the most bought stocks, curb your instinct to go out and buy them.

If you really like what a fund manager is doing with his portfolio, it is cheaper to buy his fund rather than trying to do it yourself.

Related:
Mutual Fund Exposure of Stocks
Mutual Fund Portfolio Disclosures

Categories , Tags

Mutual Fund Exposure of Stocks

Know thy enemy

Mutual fund asset managers face a lot of ‘career risk’ if they make an unpopular bet and are proven wrong. They end up following the herd in selling on the face of bad news so it pays to keep an eye on the how much exposure funds have to a specific stock. If no mutual fund owns it then you could make a “deep value” case for an undiscovered gem. If a lot of funds own it, then it is probably a momentum play.

However, be vary of outsourcing your investment decisions. For instance, Canara Robeco Emerging Equities’ exposure to DCB Bank stood at 1.86% as per September’s portfolio disclosure – it was a new addition. The stock is down ~40% since it announced an ambitious expansion plan in October.

Fund Exposure on StockViz

The ‘Analysis’ section on the equity page gives a 6-month ownership history of a specific stock. For example, this is how it looks for DCB Bank:

dcb bank

Play around and let us know if you have any suggestions!

Categories , Tags

Mutual Fund Portfolio Disclosures

More is less

According to SEBI regulations, mutual funds should disclose their portfolios at the end of every month. Typically, by the 10th of every month, the previous month’s portfolio is made publicly available. Investors and analysts use these disclosures to guide their allocation strategies. But should they?

First, these disclosures are mere snapshots of an actively managed portfolio. A fund’s performance could have nothing to do with the portfolio disclosed at the end of the month. The portfolio hides trading gains (or losses) and this skews the correlation between NAV returns and portfolio returns.

Second, since the fund manager knows that investors will be scrutinizing the disclosures, he may engage in window-dressing. He might temporarily swap out securities that are perceived as “risky” by investors with “good-looking” alternatives.

Third, the source of returns may not be the visible portfolio. For example, if the fund holds hedges or has holdings in foreign stocks, then NAV returns could be driven by deltas or currency depreciation rather than the visible part of the portfolio.

Portfolio Trajectory

With the above caveats in mind, we present the ability to browse through historical portfolios through our FundCompare tool. We have uploaded portfolios of over 200 equity funds for the last two years and given you easy access to all of them.

Collecting this information was a painstaking process. Every fund has its own format of disclosing this information – some in excel sheets, some in pdfs, etc. And none of them give you the ticker, we had to use Natural Language Processing (NLP) techniques to map the names of every line-item to an NSE/BSE ticker. If you find any bugs or you want us to add a fund to our coverage, please mention them in the comments section of the FundCompare tool.

Categories , Tags