Category: Investing Insight

Investing insight to make you a better investor.

Strategies that rocked in 2014

shyam January 1, 2015

WHAT IS A “THEME”?

A StockViz Investment Theme is a portfolio of stocks that follows a particular strategy. It is a convenient way for you to:

stick to a strategy
follow a preset rebalancing schedule
think in terms of your portfolio strategy rather than individual stocks
avoid common behavioral pitfalls
systematically track your P&L and strategy performance

WHAT IS AN INVESTMENT STRATEGY?

An investment strategy is a specific way of going about the process of investing. It identifies specific variables that define a stock. Variables can be anything: risk, style, sector, balance-sheet items, etc..

By mapping specific Themes to your account, you ensure that you stay pure to your strategy allocation. And that there is no “flying by the seat of your pants” investing.

HOW HAVE YOUR THEMES PERFORMED?

We started 2014 with eight investment strategies. Here is how they performed:

Momentum 200	+90.30%
Balance-sheet Strength	+83.23%
Financial Strength Value	+79.53%
Magic Formula Investing	+75.54%
Quality to Price	+69.65%
Market Elephants	+44.69%
Enterprise Yield	+43.54%
Market Fliers	+32.68%

It was one of those rare years when both momentum and value performed at the same time. The Modi-rally coincided nicely with the bottoming of the cycle.

Passive buy-and-hold

Implementing a strategy involves churn. For die-hard fans of the passive buy-and-hold clan, here’s how 2014 looked like:

PSUBNKBEES	+71.37%
BANKBEES	+64.94%
JUNIORBEES	+43.70%
NIFTYBEES	+31.57%
INFRABEES	+25.83%
GOLDBEES	-9.32%

Gold was a money loser and public-sector banks, in spite of all the bad loans and scams, out-performed the rest of the market by a mile.

WHAT SHOULD I DO NEXT?

You should open a demat account with StockViz and invest through our Themes.

Categories Investing Insight, Your Money Tags theme

Choices: Large-cap Investing

shyam December 30, 2014

While looking at investing in large-cap stocks, investors have quite a few options available to them.

Mutual Funds

Previously, we discussed ‘Top 100’ funds — funds that invest in the largest market-cap stocks. This is one way to go about adding large-cap exposure to your portfolio. However, the expense ratios of more than 2% will eat into your returns. Remember, returns are not predictable, but fees are forever.

Passive ETFs

You can buy an equal proportion of the NIFTYBEES and the JUNIORBEES ETFs. Since these are exchange traded, you don’t have to go through the hassle of “surrendering” your mutual fund “units” and keeping track of exit-loads etc. Besides, NIFTYBEES’ expense ratio is 0.5% and JUNIORBEES’ 1%. Overall, you pay 0.75% to Goldman Sachs to manage the ETFs.

Not a bad deal, considering that you end up tracking the CNX 100 index which represents the top 100 stocks by market cap.

Active ETFs

We have a Theme that takes a tactical route when it comes to tracking the CNX 100 index. Its called the CNX 100 50-Day Tactical Theme. The basic idea is to switch between (NIFTYBEES + JUNIORBEES) and LIQUIDBEES depending on whether the CNX 100 index is trading above or below its 50-day moving average. Details of the strategy can be found here.

The drawback is that in flat markets, you end up getting whipsawed a lot. But if you have the discipline to stick with it for over 5-years, it has the ability to deliver superior risk-adjusted returns.

Conclusion

Each of the approaches described above have their advantages and disadvantages. With mutual funds, you have a brand-name manager who is working for you. With the passive route, you save on fees. The tactical route will probably lessen drawdowns during a market crash and preserve capital.

What you end up investing in finally boils down to whatever sails your boat.

Categories Investing Insight, Your Money Tags mutual funds, theme

Comparison: Top 100 Funds

shyam December 30, 2014December 30, 2014

Large-cap stocks

Large-cap stocks are less volatile, ceterus paribus, compared to mid-cap and small-cap stocks. For most first-time investors, the set of Top 100 Funds offers a straight-forward way of adding equity exposure.

Fund/Scheme	IRR (2014)	Expense
Birla Sun Life Top 100 Fund -Growth Option	48.27%	2.82%
ICICI Prudential Top 100 Fund – Regular Plan – Growth	37.71%	2.77%
IDBI India Top 100 Equity Fund Growth	40.05%	2.87%
UTI – TOP 100 Fund- Growth Option	40.68%	2.43%

Picking the right scheme

As an investor, you should care about two things: risk-adjusted returns and expenses. While the Birla fund gave better returns, it charged a higher fee compared to UTI. But are those higher returns sustainable? Investors should be willing to pay more for more. This is where the FundCompare tool can help.

Birla vs. UTI

Between 2009-07-01 and 2014-12-29, Birla Sun Life Top 100 Fund (Growth Option) has returned a cumulative 155.00% with an IRR of 18.56% vs. UTI TOP 100 Fund (Growth Option)’s cumulative return of 108.35% and an IRR of 14.28%.

On the face of it, Birla’s higher fees seems worth it. But it looks like higher returns came at the expense of higher risk. Birla’s beta (vs. CNX 100) is 0.90761 vs. UTI’s 0.83478 and the latter had deeper drawdowns as well. However, the Sortino Ratio tilts the scale towards Birla’s fund: 0.10762 vs. UTI’s 0.09043.

Conclusion

If you are looking for large-cap exposure then go for Birla Sun Life Top 100 Fund.

Categories Investing Insight, Your Money Tags mutual funds

FundCompare: Pruning your Mutual Fund portfolio

shyam December 21, 2014

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

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: