Category: Investing Insight

Investing insight to make you a better investor.

FundCompare: Pruning your Mutual Fund portfolio

shyam December 21, 2014 0

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

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:

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.

Categories Investing Insight, Your Money Tags mutual funds

Re-factored Indices and Momentum

shyam December 6, 2014 0

We have created a whole bunch of Themes based on indices published by the NSE. We call them Re-factored Indices because they use a weighting that is different from NSE’s. We currently have free-float cap weighted and equal weighted themes. Investors can now invest in standard indices directly, without having to go through an index fund.

Recent one-week returns
CNX FMCG Cap-Weighted	+5.95%
CNX MNC Equally Weighted	+5.06%
CNX MEDIA Equally Weighted	+4.86%
CNX MNC Cap-Weighted	+4.38%
CNX PSU BANK Equally Weighted	+3.71%
CNX CONSUMPTION Cap-Weighted	+2.87%
CNX CONSUMPTION Equally Weighted	+2.84%
CNX FMCG Equally Weighted	+2.43%
CNX AUTO Equally Weighted	+2.11%
CNX BANK Equally Weighted	+2.09%
CNX FINANCE Equally Weighted	+2.08%
CNX REALTY Cap-Weighted	+1.79%
CNX MEDIA Cap-Weighted	+1.62%
CNX BANK Cap-Weighted	+1.33%
CPSE INDEX Equally Weighted	+1.07%
CNX REALTY Equally Weighted	+0.99%
CNX PHARMA Equally Weighted	+0.80%
CNX PSU BANK Cap-Weighted	+0.80%
CNX AUTO Cap-Weighted	+0.52%
NI15 Equally Weighted	+0.28%
CNX FINANCE Cap-Weighted	+0.27%
CNX IT Equally Weighted	+0.17%
NI15 Cap-Weighted	+0.05%
LIX 15 Equally Weighted	-0.02%
LIX 15 Cap-Weighted	-0.35%
CNX SERVICE Equally Weighted	-0.36%
CNX METAL Equally Weighted	-0.48%
LIX15 Midcap Equally Weighted	-0.63%
LIX15 Midcap Cap-Weighted	-0.64%
NV20 Equally Weighted	-0.77%
CNX METAL Cap-Weighted	-0.97%
CNX PSE Equally Weighted	-1.10%
CNX COMMODITIES Equally Weighted	-1.13%
CNX SERVICE Cap-Weighted	-1.15%
CNX PHARMA Cap-Weighted	-1.16%
NV20 Cap-Weighted	-1.25%
CNX INFRA Equally Weighted	-1.37%
CNX INFRA Cap-Weighted	-1.84%
CPSE INDEX Cap-Weighted	-1.86%
CNX COMMODITIES Cap-Weighted	-2.03%
CNX PSE Cap-Weighted	-2.52%
CNX IT Cap-Weighted	-3.03%
CNX ENERGY Equally Weighted	-3.33%
CNX ENERGY Cap-Weighted	-3.41%

These Themes are automatically re-balanced once a month. There is no discretion on what goes into them, the portfolio is decided by the NSE/IISL. Investors can use these to “set it and forget it.”

Long-term out performance

Some indices show persistent long-term out-performance. For example, MNCs have beaten PSEs (StockViz) and have shown to have lower draw-downs. Investors can map the MNC Theme and let NSE/IISL figure out what stocks should be part of that index.

Momentum

Short-term investors can use momentum effects to their advantage and implement a switching strategy. For example, CNX BANK shows greater momentum than CNX ENERGY:

And over the last week, momentum in CNX REALTY has improved drastically whereas CNX IT has decreased:

Conclusion

Re-factored Indices can act as ETF-proxies for long-term, passive investors and opens up interesting momentum strategies for short-term investors.

Categories Investing Insight, Your Money Tags theme

India Hedge funds under-perform a simple Momentum strategy

shyam November 22, 2014November 22, 2014 0

Long/short equity funds, which make up a bulk of the India-specific funds, are up 47% year-to-date.

LiveMint recently ran an article, “India hedge funds outperform, but investors remain sceptical.” (link)

I don’t have access to the report quoted in the article and I am not sure if the returns are after fees and profit-sharing. But what is surprising is that these funds under-performed a basic, un-levered, momentum strategy. In the same period, our Momentum 200 Theme is up 61.54% and you can take all of it to the bank.

If you are charging 2 and 20, you should do better. Besides, most of them haven’t been through a down-cycle. And yes, Momentum will totally get crushed in a down-cycle, but at least investors know what they are getting into. For all you know, hedge funds, being the black-boxes that they are, could be just long momentum.

Turns out investor skepticism is warranted after all.

Categories Investing Insight, Your Money Tags theme

The Trouble with Buy-and-Hold Forever…

shyam November 21, 2014 0

Interesting report titled “MYTH: Time reduces risk” by Ineichen Research & Management:

Some academic finance literature suggests that time diversifies risk, meaning that investing for the long term reduces risk. Disciples of buy-and-hold strategies also believe in the idea of time diversification. The logic is that if one has a very long investment horizon, one can recover from large losses. The counter argument is that time actually amplifies risk. The logic here is that over the longer term, more bad things can happen and the probability of failure and destruction is higher.

We think time diversification is a myth. Time amplifies risk. It is true that the annual average rate of return has a smaller standard deviation over a longer time horizon. However, it is also true that the uncertainty compounds over a greater number of years. Unfortunately, the latter effect dominates in the sense that total return becomes more uncertain the longer the investment horizon. Furthermore, betting on the long term might not be applicable for most investors. After all, the long term is nothing else than many short-term periods joined together.

I think there is a fair amount of confusion between what “long-term investing” entails and “buy-and-hold-forever” type of investing and investors get into all sorts of trouble because of that. (here)

Also, the paper talks about diversification being the only free lunch. But the problem is best described by Howard Marks (here):