USDINR
Lets start with one-the-run USDINR futures (news):
US Treasuries vs. Indian Govies
Spread between 10-year US Treasury bonds and Indian gilts:
FII/DII investment flows
(previous)
Category: Investing Insight
Investing insight to make you a better investor.
Predicting is a losers game
We have always maintained that financial prognosticating is harmful to your wealth (see: Prepare – Don’t Predict!) But the lure of prediction is too strong for most investors to ignore.
One recent example is the RBI’s “surprise” rate cut. The media went gaga over it, some pundits did a “I told you so” dance and you probably went and subscribed to a newsletter hoping that you too will be clued in when it happens next. The question is: did you make money?
Positioning your portfolio
Back in September last year, we had pointed out that with the consensus behind RBI rate cuts happening in early 2015, its time to look at long duration bond funds. We had picked the UTI Gilt Advantage fund as our favorite. Between 2014-10-01 and 2015-01-15, UTI – GILT ADVANTAGE has returned a cumulative 11.08% with an IRR of 43.61% vs. CNX NIFTY’s cumulative return of 6.90% and an IRR of 25.85%.
Heck, with the RBI getting serious about trampling down inflation, bonds have been rallying for almost the whole of 2014. Between 2014-01-01 and 2015-01-15, UTI – GILT ADVANTAGE has returned a cumulative 21.90% with an IRR of 21.01% vs. CNX NIFTY’s cumulative return of 34.79% and an IRR of 33.31%.
Good investing is boring
From the Wolf of Wall Street:
Mark Hanna: Nobody knows if a stock is going to go up, down, sideways or in circles. You know what a Fugazi is?
Jordan Belfort: Fugazi, it’s a fake.
Mark Hanna: Fugazi, Fugazi. It’s a wazy. It’s a woozie. It’s fairy dust.
Jordan Belfort: Fugazi, it’s a fake.
Mark Hanna: Fugazi, Fugazi. It’s a wazy. It’s a woozie. It’s fairy dust.
The difference between trying to predict market events and positioning your portfolio is in the level of excitement you feel. If you feel very smart while putting your money to work, then you are doing something wrong. If you feel that your investments are a “sure thing”, then you are doing something wrong. Good investing will feel like a boring routine that you keep doing – like flossing your teeth – because it is good for you.
Process vs. Outcome
The end result of process oriented investing is a well positioned portfolio. Investors should give up on trying to figure out what the outcome is going to be. Who knows what the NIFTY IRR is going to be this year? Who knew that plain old bonds will give 20% returns in 2014? What is the one-day price target for anything?
Positioning your portfolio would have allowed you to actually realize the returns that the market gave. The alternative is all Fugazi.
Fair value
Equity futures have a ‘fair-value’:
Futures Price = Cash Price [1+r (x/360)] – Dividends;
where x = days to expiration of the futures contract
Fair value is the theoretical assumption of where a futures contract should be priced given such things as the current index level, index dividends, days to expiration and interest rates. The actual futures price will not necessarily trade at the theoretical price, as short-term supply and demand will cause price to fluctuate around fair value. Price discrepancies above or below fair value should cause arbitrageurs to return the market closer to its fair value. – CME
Cash-futures Basis
You can see this in action when you plot the NIFTY index value with its futures:
Initially, x/360 is large, so futures’ trade rich to cash. As expiry approaches, futures and cash prices converge. This is the natural order of things.
Interest Rate
You can go one step further and back out the interest rate baked into these prices:
r is usually within a tight band; roughly around where short-term rates are.
So if you ever wondered why futures are trading higher than cash, now you know!
One of Thomas Friedman‘s theses states that individual countries must sacrifice some degree of economic sovereignty to global institutions, a situation he has termed the “golden straitjacket.”
From his book, The Lexus and the Olive Tree:
To fit into the Golden Straitjacket a country must either adopt, or be seen as moving toward, the following golden rules:
- making the private sector the primary engine of its economic growth,
- maintaining a low rate of inflation and price stability,
- shrinking the size of its state bureaucracy,
- maintaining as close to a balanced budget as possible, if not a surplus,
- eliminating and lowering tariffs on imported goods,
- removing restrictions on foreign investment,
- getting rid of quotas and domestic monopolies,
- increasing exports,
- privatizing state-owned industries and utilities,
- deregulating capital markets,
- making its currency convertible,
- opening its industries, stock and bond markets to direct foreign ownership and investment,
- deregulating its economy to promote as much domestic competition as possible,
- eliminating government corruption, subsidies and kickbacks as much as possible,
- opening its banking and telecommunications systems to private ownership and competition, and
- allowing its citizens to choose from an array of competing pension options and foreign-run pension and mutual funds.
When you stitch all of these pieces together you have the Golden Straitjacket.
As your country puts on the Golden Straitjacket, two things tend to happen: your economy grows and your politics shrinks. That is, on the economic front the Golden Straitjacket usually fosters more growth and higher average incomes — through more trade, foreign investment, privatization and more efficient use of resources under the pressure of global competition. But on the political front, the Golden Straitjacket narrows the political and economic policy choices of those in power to relatively tight parameters. Governments — be they led by Democrats or Republicans, Conservatives or Labourites, Gaullists or Socialists, Christian Democrats or Social Democrats — that deviate too far from the core rules will see their investors stampede away, interest rates rise and stock market valuations fall.
Will the Modi-Jaitley duo make this budget the budget of the Golden Straitjacket? Or are they going to stick to the UPA/Congress playbook of rent extraction? Fingers crossed…
Sometimes, when you are comparing funds from different AMCs, you stumble across a pair of them that are so similar that it becomes a tough call choosing between them. For example, Religare Invesco MID N SMALL CAP Fund and ICICI Prudential Value Discovery Fund are right on top of each other. Try to spot the difference here (Jan-2012 through Jan-2015):
Between 2012-01-02 and 2015-01-07, Religare Invesco MID N SMALL CAP Fund has returned a cumulative 172.88% with an IRR of 39.49% vs. ICICI Prudential Value Discovery Fund’s cumulative return of 170.32% and an IRR of 39.05%.
Their drawdowns are similar as well. And since the NAV is quoted after all expenses, Religare’s expense ratio of 2.97% vs. ICICI’s 2.34% is factored into the returns.
In terms of metrics, Religare is marginally better than ICICI. However, there is nothing there to swing the decision one way or the other.
Run the FundCompare tool and have a look for yourself.