Category: Investing Insight

Investing insight to make you a better investor.

Two Relative Strength Index (RSI) Strategies that Do Not Work

Definition from StockCharts:

RSI oscillates between zero and 100. Traditionally, and according to Wilder, RSI is considered overbought when above 70 and oversold when below 30.

A naive implementation of it would be exit when RSI > 70. Lets see how it worked out vs. a simple buy-and-hold.

CNX 100-RSI-returns-2010

A simple B&H strategy was miles ahead of one that exited the market whenever RSI indicated “overbought.”

How about being long only when the index is an uptrend (> 200-day SMA) and RSI is not ‘overbought’ (< 70)?

CNX 100-RSIxSMA-returns-2010

Using RSI was a net negative – it under-performed both a buy-and-hold and a SMA-200 strategy.

Would it work on other indices?

NIFTY: NO

CNX NIFTY-RSI-returns-2010

CNX NIFTY-RSIxSMA-returns-2010

CNX BANK: NO

CNX BANK-RSI-returns-2010

CNX BANK-RSIxSMA-returns-2010

Conclusion

The naive RSI strategies described above are money losers. The gains are nowhere near enough to compensate for the losses. A simple buy-and-hold strategy ends up outperforming the RSI.

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FII Investments

Yesterday, we saw how FIIs have pumped in closed to $12 billion this year alone. Lets see what stocks they have been buying up.

Since September 2013

Increases
SRTRANSFIN
40.34
JSWSTEEL
22.23
HINDPETRO
12.5
POWERGRID
10.27
YESBANK
9.95
UPL
8.45
TECHM
6.47
ZEEL
6.01
PETRONET
5.7
AXISBANK
4.9
Decreases
DABUR
-1.02
BAJAJFINSV
-1.06
ACC
-1.17
CONCOR
-2.22
EXIDEIND
-2.55
BANKINDIA
-3.38
FEDERALBNK
-6.86
HINDALCO
-11.09
GLAXO
-21.24
MCDOWELL-N
-31.47
FIIs have been active across the board. With no single sector being overly favored…

Since March 2014

Increases
ZEEL
48.68
YESBANK
7.06
KOTAKBANK
3.41
TATASTEEL
2.96
CANBK
2.53
TATAGLOBAL
2.42
PETRONET
2.23
UNIONBANK
2.2
IDEA
2.12
HINDPETRO
1.85
Decreases
WIPRO
-0.73
CAIRN
-0.75
IDFC
-0.80
BAJAJFINSV
-0.99
CONCOR
-2.27
BHARATFORG
-2.29
EXIDEIND
-2.32
FEDERALBNK
-3.77
HINDALCO
-11.55
MCDOWELL-N
-29.26
… However, they seem to have made up their minds on getting out of CONCOR and FEDERALBNK. And do we see a concentration among banking stocks?

Investment Strategy Implications

The data is delayed due to quarterly reporting and we get to hear about activity in bits and pieces, days after they occur. No sure if playing a guessing game as to what FIIs will buy or sell next will add any alpha to your portfolio. Its just nice to know what they have been up to…

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Mutual Funds: A Tricky Business

There have been a couple of high profile exits from the asset management business recently. First, it was Fidelity that threw in the towel. And then it was Morgan Stanely’s turn. From where I stand, this is how I see it:

  1. The Mutual Fund business is all about accumulating Assets Under Management (AUM.)
  2. The breakeven is around Rs. 10,000 crore in AUM.
  3. Most investors focus on absolute returns so “beating a benchmark” is not rewarded with more flows.
  4. It is a distribution game. The fund house with the widest distribution network wins.
  5. The product is sold, not bought. Given the plethora of choices in the market, the average investor usually has no clue as to what is best for him. Schemes are sold on the basis of trust between the agent and the investor.
  6. The SEBI killed the distribution network by abolishing the entry load.
  7. The winners were the fund houses who had paid employees who could convert footfalls into sales.

LiveMint’s analysis back in Feb 2012:

Sources:

  • A cautionary tale of Morgan Stanley’s mutual funds in India (ET)
  • Morgan Stanley: Quit India (MoneyLife)
  • Fidelity’s exit, a slap on SEBI’s face (MoneyLife)
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FII (FPI) and Mutual Fund Investment Charts

Foreign investors love the India Story

Just look at the amount of money pumped into India: $25,347.95 million so far this year alone.

fii-investments.2012-01-01.2014-08-31

And just into Equities: $11,960.36 million this year.

fii-investments-equities.2008-1-1.2014-08-31

Domestic Institutionals have a debt fixation

DIIs have bought up Rs. 3,99,840.60 crores into debt this year alone.

dii-investments.2012-01-01.2014-08-31

And have been net sellers of equities. Taking out a total of Rs. 452.30 crores this year and Rs. 22,507.20 crores since 2013.

dii-investments-equity.2008-1-1.2014-08-31

There are signs that domestic investors are finally joining the party. Here’s to hoping that a majority of those funds will come from fresh investments rather than from rotating out of debt into equity.

Also, these trends beg a question: Have our regulatory and tax system skewed incentives toward debt at the cost of equities?

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REIT All the Way

We had discussed REITs (Real Estate Investment Trusts) before. The SEBI board has approved the final set of regulations.

Key take away

  1. Tax pass-through: return from investments through these instruments will be taxed only in the hands of investors and the trusts will not have to pay tax on income.
  2. REITs and Invits should have a starting asset value of at least Rs 500 crore and the initial offer has to be Rs 250 crore or more.
  3. REITs will be allowed to invest only in commercial property. They should be completed and should be generating revenue.
  4. REITs will have to be listed. But if the experience of listing NCDs is any indication, expect little no secondary market liquidity.
  5. REITs will not be allowed to invest in other REITs.
  6. Minimum investment: Rs. 2 lakhs

Impact

This will be a good way to build a diversified portfolio. Right now, investing in any form of real estate is a nightmare. Ticket sizes tend to be more than Rs. 50 lakhs for decent properties, there’s a huge legal tail-risk associated with land, the total cost of ownership cannot be fully calculated beforehand, so ROI is a matter of gut-instinct. REITs will be a net positive for investors with white money.

Right now, small ticket purchases (less than Rs. 50 lakhs) has been focused on buying up land in the outskirt of cities or Tier-2/Tier-3 cities. If REITs end up being popular, then it may negatively impact appreciation rates in these areas.

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