Tag: returns

ETFs vs. Indices

shyam May 29, 2014September 9, 2014 0

ETFs (Exchange Traded Funds) offer investors a convenient way to gain exposure to a particular index. Since these funds are not actively managed, they are measured by their how cheap they are (in terms of asset management fees) and their tracking error. Before we begin, some key terms:

Kurtosis

Kurtosis is a measure of “peakedness” of a distribution. For a normal distribution, Kurtosis is 3. Positive excess Kurtosis indicates fat tails while negative indicates peakedness.

Skew

Skewness is a measure of asymmetry of a distribution. Positive skew indicates a long right tail while a negative skew indicates a long left tail.

How effective have Indian ETFs been? Lets pull up some histograms and see for ourselves.

NIFTYBEES vs. CNX Nifty

The Nifty ETF actually shows a -ve skew and a lower kurtosis compared to the index. This is how tracking error and fees manifests itself in daily returns. However, their impact on cumulative returns is minimal. The story for less liquid and higher-fee ETFs are different.

PSUBNKBEES vs. CNX PSU BANK

Notice the big difference in kurtosis and skewness? This is tracking error personified. The story for the Juniors’ are not that different.

JUNIORBEES vs. CNX NIFTY JUNIOR

Given that there really isn’t much of a push either from investors or from asset management firms on ETFs, the dynamics are unlikely to change in the short term.

Categories Investing Insight, Your Money Tags ETF, returns

Smart Beta Strategy Return Analysis

shyam May 23, 2014September 9, 2014 0

The best part about StockViz Investment Themes is that you can setup 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

In StockViz, there are two smart-beta themes: Market Fliers tracks a high-volatility and high-beta portfolio while Market Elephants tracks a low-beta portfolio. Between the two strategies and the Nifty, what should an investor prefer?

Daily Returns

In a bull-market, such as the one we are in, it makes sense to be in a high-beta portfolio. Notice how narrow the low-beta histogram is compared to high-beta, indicating little variation in day-to-day returns. However, you cannot escape the gigantic 10%+ outlier in the Market Fliers.

Nifty

High Beta (Market Fliers)

Low Beta (Market Elephants)

Drawdowns

Any investment will have drawdowns: it is the peak-to-trough decline during a specific period. Market fliers had a horrible couple of months in December-Jan where it saw a jaw-dropping 20% draw-down that took 29 days to recover from.

Nifty

From	Trough	To	Depth	Length	To Trough	Recovery
2013-Dec-10	2014-Feb-04	2014-Mar-06	-0.057	61	40	21
2013-Nov-05	2013-Nov-13	2013-Dec-09	-0.0519	24	7	17
2014-Apr-25	2014-May-07	2014-May-09	-0.0275	10	8	2
2014-Apr-11	2014-Apr-16	2014-Apr-21	-0.0178	5	3	2
2014-Apr-03	2014-Apr-04	2014-Apr-09	-0.0086	4	2	2

High Beta (Market Fliers)

From	Trough	To	Depth	Length	To Trough	Recovery
2013-Dec-09	2014-Feb-12	2014-Mar-27	-0.1955	75	46	29
2013-Nov-05	2013-Nov-12	2013-Dec-08	-0.1083	22	5	17
2014-Apr-10	2014-Apr-15	2014-May-11	-0.0751	18	3	15
2014-Apr-02	2014-Apr-02	2014-Apr-08	-0.0215	4	1	3
2014-Mar-31	2014-Mar-31	2014-Apr-01	-0.0092	2	1	1

Low Beta (Market Elephants)

From	Trough	To	Depth	Length	To Trough	Recovery
2014-Jan-15	2014-Feb-12	2014-Feb-27	-0.0427	31	21	10
2013-Nov-04	2013-Nov-25	2013-Dec-02	-0.0338	19	14	5
2014-Apr-24	2014-May-06	2014-May-21	-0.0309	19	8	11
2013-Dec-03	2013-Dec-12	2013-Dec-15	-0.024	8	7	1
2013-Dec-29	2014-Jan-06	2014-Jan-13	-0.0219	12	7	5

Performance

The wealth chart for market filers is basically a parabola at this point. During the period, the Nifty clocked in +19.26%, Market Fliers +72.42% and Market Elephants +21.16%

Nifty

High Beta (Market Fliers)

Low Beta (Market Elephants)

Performance vs. Drawdown

How do you tell if these Themes are better than the Nifty? One way to measure relative performance is through the Calmar ratio and the Sterling ratio.

The Calmar ratio is a comparison of the average annual compounded rate of return and the maximum drawdown risk. The lower the Calmar Ratio, the worse the investment performed on a risk-adjusted basis over the specified time period; the higher the Calmar Ratio, the better it performed.

The Sterling ratio = Compounded Annual Return ÷ (Avg. Max Drawdown – 10%)

Just like the Calmar ratio, a higher Sterling ratio is generally better because it means that the investment is receiving a higher return relative to risk.

	Calmar Ratio	Sterling Ratio
Nifty	6.487609	2.35644
Market Fliers	8.720311	5.768798
Market Elephants	9.828884	2.942523

As you can see, smart beta strategies beat the Nifty both in absolute returns and in risk.

Note: The analysis starts from 2013-Oct-28.

Categories Investing Insight, Your Money Tags returns, theme

Pick your risk factor: value or momentum?

shyam March 11, 2014 0

The Capital Spectator has a gem of a piece out:

The term “investing” is a misnomer when it comes to managing money. It’s really a job of choosing a set of risk factors that will produce an expected result. The real challenge is deciding which risk exposures are appropriate and how to manage those risks. But you can’t engineer risk away to nothing in a portfolio, at least not without incurring unbearable expenses. In the end, you can only earn a risk premium as the result of bearing risk and managing it in a way that suits your specific risk tolerance and return requirements.

We had written about this almost a year ago, saying that there is no such thing as “risk free.” Capital and risk are joined at the hip:

The conversations I have been having recently typically ends with “I don’t want to take any risk right now, let me wait and watch.” And therein lies the rub – there is no such thing as “risk-free.” Not in life, not in investing. The total risk in this world is a constant – we only transform it by our action or in-action.

This is where our investment themes come into the picture. By investing across different strategies, you get the benefit of balancing out strategy-specific risks. Worried about choosing between momentum and value? Why not choose both? Keep reinvesting your returns and the winning strategy will automatically become a larger part of your portfolio by the magic of compounding. You can begin by checking out how different strategies have performed here.

Source: The Illusion Of “Investing”

Categories Your Money Tags behavioral-finance, returns

Returns on Recurring Deposits

shyam February 6, 2014February 7, 2014 0

Earlier, we discussed returns on a systematic investment plan (SIP) on an index ETF (To SIP an ETF or Not?) The analysis was incomplete because it did not discuss returns on a similar investment made on a risk-free asset. How would a recurring deposit over the same period of time perform?

To simplify, lets have a look at the overnight rates on our zero-coupon yield curve:

We can use these rates as a rough approximation for 1 month risk-free returns. What would returns be if an investor put in a fixed amount every month and re-invested it based on the risk-free yield above?

Since 2011: 9.66%
Since 2012: 10.25%
Since 2013: 11.98%

Compare this to SIP on ETF returns:

Since 2011: 7.40%
Since 2012: 8.58%
Since 2013: 5.33%

Three years worth of data points are too short to draw any conclusions. And unfortunately we don’t have yield curves before 2011, so we’ll take the 1-Month Mumbai Interbank rates as a proxy.

Recurring Deposit

Start Year (Jan)	IRR
2004	7.87%
2005	8.03%
2006	8.18%
2007	8.33%
2008	8.54%
2009	8.90%
2010	9.49%
2011	9.86%
2012	10.13%
2013	11.19%

SIP on the JUNIORBEES ETF

Start Year (Jan)	IRR
2004	10.77%
2005	9.48%
2006	8.66%
2007	8.47%
2008	9.81%
2009	8.70%
2010	4.91%
2011	7.40%
2012	8.58%
2013	5.33%

It looks like right up till 2009, the market outperformed the risk-free rate. And then took a turn for the worse and is yet to recover. Better days ahead, hopefully.

Update from Prakash Lekkala:

we will be taxed 30% on fixed deposit returns… so considering that, dollar cost averaging did better than FD, except in 2010 and 2013.

Bond MF’s would have done better since 2010, as you wouldn’t have paid tax after indentation

Categories Your Money Tags returns

To SIP an ETF or Not?

shyam February 2, 2014 0

The two holy grails of investing: dollar cost averaging and low-cost investing come together if you systematically invest in an index ETF. We took a look at returns on doing an SIP on JUNIORBEES, an ETF that tracks the Junior Nifty index, that was introduced in 2003.

Summary of Returns

Start Year (Jan)	IRR
2004	10.77%
2005	9.48%
2006	8.66%
2007	8.47%
2008	9.81%
2009	8.70%
2010	4.91%
2011	7.40%
2012	8.58%
2013	5.33%

The experiment

The question we set out to answer was: What would typical returns be if you systematically invested in a low-cost index ETF over different periods of time?

So we assume that the investor buys Rs. 5,000 worth of JUNIORBEES at the closing price on the last day of each month. We accumulate the units, the cost basis and the P&L over different periods of time, starting at 2004 and moving forward in one-year increments.

The dollar cost averaging ensures that you buy more ETF units when the index goes down and less of it when it trades higher. And by tracking the IRR we ensure that we normalize returns for the investment period.

Conclusion

We expected nominal returns to be higher than what we observed. Between 2004 and 2014, inflation was often running in double digits. So even a 10% IRR would actually be negative real returns. Investors probably would have made better returns if they had kept the money in a bank fixed deposit instead. So from a purely returns perspective, an SIP on an index ETF doesn’t make sense.

Caveat: Just because the real returns were negative with this approach in the past, doesn’t mean that it will be so in the future.

Categories Your Money Tags ETF, returns