Tag: mutual funds

Churn and Burn

When retail investors trade stocks, the market impact of trading decisions are de minimis. However, when a fund trades its portfolio, it has a noticeable market impact. According to a study quoted here in the Economist article, when academics compared the returns of the funds with their estimated trading costs, the funds with the highest costs had the lowest returns.

For contrast, lets compare the DWS Tax Saving Fund with Templeton India Growth Fund.

DWS Tax Saving Fund

First, investors would have been better off buying a CNX Midcap index fund. Between 2006-06-01 and 2015-02-19, DWS TAX SAVING FUND has returned a cumulative 143.52% with an IRR of 10.74% vs. CNX Midcap’s cumulative return of 209.71% and an IRR of 13.83%. (http://svz.bz/1EHGTxu)

Second, the fund looks like a fun trading vehicle for the manager rather than something that is meant to build wealth over the long term. Here’s how the manager has churned his portfolio:

Not only should you stay away from this fund, but you should use it in informational videos on how not to churn your portfolio.

Templeton India Growth Fund

First, even though returns are not the absolute best that it could have been, between 2006-06-01 and 2015-02-19, Templeton India Growth Fund has returned a cumulative 267.72% with an IRR of 16.09%.(http://svz.bz/1EHIljm)

Second, the portfolio doesn’t look like a mad scramble like the one above. Markedly fewer holdings for longer:

When you compare the two funds with each other, you can see who is doing a better job (http://svz.bz/1EHJCa2):

Conclusion

Beware of funds that churn their portfolios frequently. It might be a reflection of shoddy research, poor conviction or immaturity that you end up paying for.

Tracking the big guys

Small investors can stay nimble and can buy stocks in companies that big investors or funds cannot. If you are a small and smart investor, you should be able to generate market beating returns over the long-run. But what about funds that generate superior returns in spite of their large size? Given that portfolio disclosures have to be made every month and the manager cannot really predict the cashflows in and out of his fund, if he is consistently beating the market, it points to some real skill (or a really long streak of good luck, we’ll let you be the judge.)

Irrespective of whether it was skill or luck that produced the alpha, it makes sense for individual investors to track what different fund managers are doing. Besides, if you are thinking for buying or selling a fund, you should get comfortable with the manager. But how do you go about visualizing a fund?

NAV based metrics

Our FundCompare tool provides a convenient way to chart fund performance vs. different benchmarks, observe historical drawdowns, etc. For example, if you wanted to compare IDBI Equity Advantage Fund to the MNC index, you can do that with the tool. (http://svz.bz/1CQUAI0)

But what if you wanted to drill into the actual portfolio? Most websites give you a static snapshot of the portfolio on the latest disclosure date. But anybody who has managed money will know that portfolios are path-dependent.

Portfolio Videos

Given the sheer size of the data, it makes sense to try and visualize portfolios through videos. Here’s how the IDBI Equity Advantage Fund portfolio “looks” like:

It is almost as if the manager did his portfolio selection back in Jan 2014 and let his winners ride. An almost static portfolio, much like our Themes.

Contrast that to ICICI Prudential Value Discovery Fund:

This manager is way more active than his IDBI counterpart, going in and out of stocks at a rapid clip. A lot of small positions, except for ICICI bank which is almost 8% of the fund. Given the size of the fund (more than 8,500 crores), the market impact on these trades are likely to be significant.

The UTI MNC Fund takes a different track: a smaller portfolio with concentrated positions and very few high in-and-outs.

There you have it: three different funds and three different approaches to portfolio construction and management, easily told apart through 45-second video clips.

Coming up next

We plan to roll out portfolio videos for the funds that we have recommended our clients and in which we have ourselves invested. If you have any specific funds in mind that you want us to create videos for or looking to invest, give us a call or send us a WhatsApp!

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:

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.

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.