Category: Investing Insight

Investing insight to make you a better investor.

The Problem with Balanced Funds

shyam June 3, 2015 0

Returns vs. Volatility

Balanced funds are those that invest in both stocks and bonds. The exact allocation is up to the fund manager. For example, the Tata Balanced fund is right now 22.85% in bonds and the rest in equities, according to Morningstar.

tata balanced asset allocation

Balanced funds are pitched as having lesser risk than equity-only funds. But what investors gain in lesser volatility, they give up on lower returns and higher fees.

Tata Balanced vs. ICICI Pru. Value Discovery

Between 2007-01-02 and 2015-06-02, Tata Balanced Fund has returned a cumulative 235.97% with an IRR of 15.48% vs. ICICI Prudential Value Discovery Fund’s cumulative return of 316.55% and an IRR of 18.47%

Compare the drawdowns:

drawdowns tatas vs icici

For the moderate-risk taking investor who is typically attracted to balanced funds, a 16% drawdown hurts just as much as a 27% drawdown.

When it comes to fees, Tata’s has an expense ratio of 2.91% vs. ICICI’s 2.34%. Is the extra 50bps worth the safety offered?

HDFC Balanced Fund vs. ICICI Pru. Value Discovery

It is a similar deal with HDFC’s Balanced fund as well: lower returns (IRR: 15.24%) and no escape from double-digit drawdowns

Conclusion

The sales-pitch for balanced funds focus on the investors availability heuristic where people tend to heavily weigh their judgments toward more recent information, making new opinions biased toward that latest news. Ever since the market corrected in March a growing flock of blogs and articles started pitching balanced funds. But before you fall for the marketing pitch, take a step back and ensure that you are not giving too much away for perceived safety.

Categories Investing Insight, Your Money Tags mutual funds

The Walter Mitty Effect

shyam June 1, 2015 0

Walter Mitty is a fictional character in James Thurber’s short story “The Secret Life of Walter Mitty.” Mitty is a meek, mild man totally intimidated by his overbearing wife. He deals with it by daydreaming that he is transformed into a courageous hero.

Investors are a bit like Walter Mitty, says social psychologist Dean G. Pruitt. When the market is doing well, they become brave in their own eyes and eagerly accept more risk. But when the market goes down, they rush for the door. So when you ask an investor directly to explain their risk tolerance, the answer comes from either a fearless bomber pilot (in a bull market) or a henpecked husband (in a bear market).

Source: http://pruitt.socialpsychology.org/

Categories Investing Insight, Your Money Tags behavioral-finance

The Worst Mutual Funds – Quantitative

shyam May 29, 2015 0

Introduction

Our previous post looked at the 10 best mutual funds based on sharpe ratio, bear-beta, information ratio, draw-down depth and draw-down length between Jan-2010 and May-2015. Here are the 10 worst funds based on the same metrics.

As you can imagine, infrastructure funds performed poorly in this time-frame. We ignore them for now.

Sharpe Ratio

Fund	SHARPE	IRR
Mirae Asset Global Commodity Stocks – Growth Option	0.00	-0.16
JM Basic Fund – Growth Option	0.01	0.23
Escorts Tax Plan-Growth	0.01	0.79
HSBC Progressive Themes Fund – Growth	0.02	1.18
Religare Invesco PSU Equity Fund – Growth	0.02	0.87
JM Multi Strategy Fund – Growth option	0.02	1.56
Sundaram Growth Fund-Growth	0.02	1.37
Religare Invesco AGILE Fund – Growth Option	0.02	1.38
Sahara Star Value Fund-Growth Option	0.02	1.69
Bsl Comm Eq Fund – Global Agri Plan – Growth	0.02	1.56

Bear-Beta

Fund	BETA BEAR	IRR
HSBC Progressive Themes Fund – Growth	1.19	1.18
HSBC Midcap Equity Fund – Growth	1.12	3.11
Sundaram S.M.I.L.E.Fund-Growth	1.05	5.74
JM Basic Fund – Growth Option	1.03	0.23
Sahara Star Value Fund-Growth Option	1.01	1.69
Sahara Midcap Fund-Growth Plan	1.00	4.32
Escorts Leading Sectors Fund – Growth Option	0.97	5.79
DSP BlackRock India T.I.G.E.R. Fund – Regular Plan – Growth	0.96	2.02
JM Multi Strategy Fund – Growth option	0.95	1.56
DSP BlackRock Small and Mid Cap Fund – Regular Plan – Growth	0.93	7.76

Information Ratio

Fund	IR	IRR
JM Basic Fund – Growth Option	-1.14	0.23
Escorts Tax Plan-Growth	-0.81	0.79
Religare Invesco PSU Equity Fund – Growth	-0.75	0.87
Mirae Asset Global Commodity Stocks – Growth Option	-0.75	-0.16
HSBC Progressive Themes Fund – Growth	-0.67	1.18
Sundaram Growth Fund-Growth	-0.62	1.37
Sahara Super 20 Fund – Growth Option	-0.51	1.49
Sahara Growth Fund-Growth	-0.49	1.71
JM Multi Strategy Fund – Growth option	-0.49	1.56
Sundaram Select Focus-Growth	-0.48	1.57

Draw-down Depth

Fund	DRAW DEPTH	IRR
HSBC Progressive Themes Fund – Growth	-54.39	1.18
HSBC Midcap Equity Fund – Growth	-52.28	3.11
JM Basic Fund – Growth Option	-51.83	0.23
Escorts Tax Plan-Growth	-46.87	0.79
Escorts Leading Sectors Fund – Growth Option	-44.69	5.79
JM Multi Strategy Fund – Growth option	-42.41	1.56
Sahara Star Value Fund-Growth Option	-42.38	1.69
Religare Invesco PSU Equity Fund – Growth	-41.63	0.87
Principal Emerging Bluechip Fund – Growth Option	-40.74	8.64
Sundaram S.M.I.L.E.Fund-Growth	-40.61	5.74

Draw-down Length

Fund	DRAW LENGTH	IRR
JM Basic Fund – Growth Option	1092.00	0.23
Escorts Tax Plan-Growth	932.00	0.79
Escorts Leading Sectors Fund – Growth Option	842.00	5.79
JM Multi Strategy Fund – Growth option	840.00	1.56
HSBC Progressive Themes Fund – Growth	838.00	1.18
Religare Invesco PSU Equity Fund – Growth	824.00	0.87
JM Tax Gain Fund – Growth option	822.00	2.42
HSBC Midcap Equity Fund – Growth	820.00	3.11
DSP BlackRock India T.I.G.E.R. Fund – Regular Plan – Growth	808.00	2.02
SBI CONTRA – REGULAR PLAN -GROWTH	807.00	2.06

Past Performance

Fund	BETA	IRR
Mirae Asset Global Commodity Stocks – Growth Option	0.52	-0.16
JM Basic Fund – Growth Option	1.09	0.23
Escorts Tax Plan-Growth	0.82	0.79
Religare Invesco PSU Equity Fund – Growth	0.84	0.87
Taurus Infrastructure Fund -Growth Option	1.01	1.12
HSBC Progressive Themes Fund – Growth	1.18	1.18
Sundaram Growth Fund-Growth	0.85	1.37
Religare Invesco AGILE Fund – Growth Option	0.73	1.38
Sundaram Global Advantage Fund Growth	0.26	1.44
Sahara Super 20 Fund – Growth Option	0.75	1.49

Conclusion

Mutual funds are marketed as wealth builders. However, the truth is that most of them struggle. As you can see from the analysis here, there are quite a few of them with low-single-digit returns over 5-year time-frames. 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, quant

The Best Mutual Funds – Quantitative

shyam May 28, 2015 0

Introduction

Mutual fund investors are faced with a zillion choices in the marketplace. At last count, there were more than 5300 different schemes that an investor could choose from. When confronted with such a large number of choices, investors either spiral into an “analysis paralysis” mode and end up doing nothing or blindly invest in whatever their broker recommends – both these paths lead to situations that are injurious to the investor’s long-term financial health.

In this post, we try to simplify the choices in front of the investor by ranking the top 10 funds based these risk metrics: sharpe ratio, bear-beta, information ratio, draw-down depth and draw-down length between Jan-2010 and May-2015.

Sharpe Ratio

Fund	SHARPE	IRR
ICICI Prudential Blended Plan A – Regular Plan – Growth	0.35	2.12
Birla Sun Life MNC Fund-Plan B (Growth)	0.10	24.25
UTI – MNC Fund (UGS 10000)-Growth Option	0.09	17.14
Edelweiss Absolute Return Fund – Growth Option	0.08	3.87
Birla Sun Life Asset Allocation Fund-Conservative Plan-Growth Plan	0.08	2.14
Franklin India Pension Plan-Growth	0.08	3.67
Escorts Leading Sectors Fund – Growth Option	0.07	5.79
Axis Long Term Equity Fund – Growth	0.07	17.29
ICICI Prudential Balanced Advantage Fund – Regular Plan – Growth	0.07	5.57
HDFC Balanced Fund – Growth Option	0.07	8.11

The Sharpe ratio is a measure of risk-adjusted performance of a fund.

Glad to see the two MNC funds that we have been recommending our clients make the top end of this list.

But also note the single digit IRR funds.

Bear-Beta

Fund	BETA BEAR	IRR
ICICI Prudential Blended Plan A – Regular Plan – Growth	-0.03	2.12
Birla Sun Life International Equity Fund Plan A- Growth	0.05	4.81
Bsl Comm Eq Fund – Global Agri Plan – Growth	0.08	1.56
Birla Sun Life Asset Allocation Fund-Conservative Plan-Growth Plan	0.20	2.14
Edelweiss Absolute Return Fund – Growth Option	0.25	3.87
Franklin Asian Equity Fund – Growth Plan	0.27	2.71
Franklin India Pension Plan-Growth	0.30	3.67
ICICI Prudential Moderate – Regular Plan – Growth	0.33	2.81
Franklin India Dynamic PE Ratio Fund of Funds-Growth	0.37	2.86
ICICI Prudential Very Aggressive – Regular Plan – Growth	0.41	2.37

Bear Beta is a measure of the sensitivity of a fund’s return to negative changes in its benchmark’s return.

Given the single digit IRRs that test will for this metric, investors can ignore the bear-beta.

Information Ratio

Fund	IR	IRR
HDFC MID-CAP OPPORTUNITIES FUND – Growth Option	2.05	15.96
JPMorgan India Mid and Small Cap Fund – Regular Plan – Growth Option	1.95	13.96
Religare Invesco MID N SMALL CAP Fund – Growth Option	1.84	16.84
Canara Robeco Emerging Equities – Regular Plan – GROWTH	1.83	17.31
ICICI Prudential Value Discovery Fund – Regular Plan – Growth	1.73	13.27
Franklin India Smaller Companies Fund-Growth	1.71	15.23
UTI Mid Cap Fund-Growth Option	1.69	12.55
Birla Sun Life MNC Fund-Plan B (Growth)	1.57	24.25
Religare Invesco Mid Cap Fund – Growth Option	1.55	13.35
Axis Long Term Equity Fund – Growth	1.53	17.29

The information ratio is a ratio of the portfolio’s returns above the returns of a benchmark (CNX MIDCAP, in this case) to the volatility of those returns.

This is probably a better metric than the Sharpe ratio to rank funds.

Nice to see that both the Value Discovery fund and an MNC fund make this list.

Draw-down Depth

Fund	DRAW DEPTH	IRR
ICICI Prudential Blended Plan A – Regular Plan – Growth	-0.35	2.12
Edelweiss Absolute Return Fund – Growth Option	-7.46	3.87
Birla Sun Life Asset Allocation Fund-Conservative Plan-Growth Plan	-9.69	2.14
Franklin India Pension Plan-Growth	-10.87	3.67
ICICI Prudential Moderate – Regular Plan – Growth	-11.57	2.81
Birla Sun Life Asset Allocation Fund-Moderate Plan-Growth Plan	-12.05	2.71
Franklin India Dynamic PE Ratio Fund of Funds-Growth	-12.06	2.86
ICICI Prudential Balanced Advantage Fund – Regular Plan – Growth	-13.00	5.57
ICICI Prudential Balanced Fund – Regular Plan – Growth	-13.26	7.30
ICICI Prudential Very Aggressive – Regular Plan – Growth	-13.81	2.37

Draw-down depth measures the max-loss from peak valuation.

For example, the Blended Plan at the top of the list only lost 0.35% from its peak valuation between 2010 and 2015.

Portfolios with a lot of short-term bonds test well for this metric. But note the pathetic IRRs – no pain = no gain!

Draw-down Length

Fund	DRAW LENGTH	IRR
Franklin India Dynamic PE Ratio Fund of Funds-Growth	110.00	2.86
HDFC Balanced Fund – Growth Option	126.00	8.11
ICICI Prudential Balanced Fund – Regular Plan – Growth	126.00	7.30
ICICI Prudential Balanced Advantage Fund – Regular Plan – Growth	128.00	5.57
UTI – MNC Fund (UGS 10000)-Growth Option	140.00	17.14
Birla Sun Life MNC Fund-Plan B (Growth)	141.00	24.25
Franklin India Pension Plan-Growth	158.00	3.67
Birla Sun Life International Equity Fund Plan A- Growth	190.00	4.81
Principal Global Opportunities Fund-Growth Option	194.00	1.71
Sundaram Global Advantage Fund Growth	207.00	1.44

The draw-down length is a measure of how many days it took the fund to get back the previous peak valuation after a draw-down.

Shorter bounce-backs typically indicate high-quality portfolios.

Nice to see both the MNC funds make this list.

Past Performance

Fund	BETA	IRR
Birla Sun Life MNC Fund-Plan B (Growth)	0.55	24.25
Canara Robeco Emerging Equities – Regular Plan – GROWTH	0.78	17.31
Axis Long Term Equity Fund – Growth	0.69	17.29
UTI – MNC Fund (UGS 10000)-Growth Option	0.54	17.14
Religare Invesco MID N SMALL CAP Fund – Growth Option	0.73	16.84
HDFC MID-CAP OPPORTUNITIES FUND – Growth Option	0.76	15.96
Franklin India Smaller Companies Fund-Growth	0.76	15.23
JPMorgan India Mid and Small Cap Fund – Regular Plan – Growth Option	0.80	13.96
Religare Invesco Mid Cap Fund – Growth Option	0.74	13.35
ICICI Prudential Value Discovery Fund – Regular Plan – Growth	0.78	13.27

We wanted to check if higher returns were achieved by taking higher risk. Given the low betas (against CNX MIDCAP), it looks like these funds have taken the “right” risk.

Conclusion

We looked at broad spectrum of funds – including those with bond allocations – to ferret out a good set of funds that investors can consider. Depending on what is more important to the investor, the appropriate set of metrics can be weighted to fit individual risk appetites.

Mutual fund investors whom we advise will immediately recognize some of these funds as they are already part of their portfolios. 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, quant

Practical Momentum – Conclusion

shyam May 21, 2015May 21, 2015 0

Recap

We began the exploration of a practical way to execute momentum using derivatives. We found that:

A lookback period of one year works best (Part I)
Because of survivorship bias, long-short underperforms long-only (Part II)
Hedging with single-name put options doesn’t work(Part III)
Larger long-only portfolios have smaller drawdowns and better performance than smaller long-only portfolios (Part III)

Conclusion

The way things stand, Momentum is best executed using a broad basket of stocks. There is no mechanical way to maintain a momentum driven derivative portfolio. You can explore long-only equity momentum here.

Categories Investing Insight, Your Money Tags momentum, quant