A Fund Manager’s View On Market Trends

Meeting with Mr. Jayesh Gandhi, Senior Fund Manager, ABSL.

Recently, I had the opportunity to meet Mr. Jayesh Gandhi and talk about our favourite topic, “THE MARKETS”. Mr. Gandhi manages the Mid & Small-Cap funds of Aditya Birla Sunlife Mutual Fund, schemes of which have been consistent performers in the recent past.

This meeting gave me an opportunity to understand the fund manager’s view of the markets when there is a divergence between mid-cap and large-cap stocks. He follows the growth stock investing approach using a template which finds stocks that are growing in both their sales and profits.

Straight out I asked him about the underperformance of the mid-cap stocks in the recent past against the broad markets. His reasoning was that growth stocks tend to underperform when value picks give larger moves. Growth investing creates higher alpha when the markets get into a broad-based up move. When there is a correction they tend to also correct as much as the indices. The advantage here is that when staying invested in such schemes, over a period, the growth tends to out beat the benchmarks to a larger extent.

Presently the SENSEX and NIFTY have been reaching new highs while the mid and small cap space has lost considerable value. Investors are questioning the underperformance in their portfolios since they see that the Sensex is climbing higher. This divergence is due to a few stocks in the large-cap space garnering higher demand during the recent scheme re-categorization. Fund managers were forced to liquidate quality mid-cap stocks and had to add large-cap stocks to reduce exposure and meet SEBI norms.

In the large-cap space, there are no high-quality stocks which are an equal match to the mid-caps that are fundamentally strong with higher sales and profit growth. Yet, fund managers were forced to add the large-caps, creating demand for a small group of good picks, pushing these stocks further up.  A few mutual fund schemes that already held these large-caps in their portfolio are now outperforming the universe that made big gains in the 2017 rally. But, this divergence is only to stay for a short period.

Mr. Jayesh’s view on profit growth is that in our country the mid and small cap space is likely to be rise by 20 to 30% in the next 3 years. The PE multiples, presently at 25-26 levels,  will reach 14 and below 10 for the small-cap companies, thereby giving very high wealth creation possibility in the coming 3 years.

We had a good rally in the 2014-17 period and are likely to have a similar one for the next 3 years. We are going into an election year. By December we will have more clarity on the outcome of the elections and if it is positive, we should see a 40% growth in 2019-20 alone. And to be a part of this massive wealth creation and reap the benefits in full a person has to be invested now. All portfolio realignment as per SEBI categories is now over, and it will follow now to the next phase of aligning stocks that are the new leaders.

Most of the mutual fund schemes are holding a good amount of cash in their portfolios and these funds will be deployed in the next 2 to 3 months, in preparation for the next rally post elections. Next, we pondered – what if election results are not favourable?

Mr. Gandhi’s thought was that going into the election itself markets will rally about 10-15%. So if there is a correction due to unfavourable results, those already invested will only come back to present levels and not lose much. those who are in now will not lose much if there is an unfavourable condition as the correction if there is one, All the corrections that mid-caps should see is almost over and now the whole market will get aligned. There will be volatility but due to the whole market facing the same condition. Bigger as well as smaller stocks will have the same levels of downside. Whereas on the upside, there is a high potential for the smaller stocks to give higher returns. One is because they are at lows now and the other reason is that they will see higher levels of profit growth.

Oil is expected to touch $85 and probably from there it will see a fall. Exports will increase and with  support from corporate earnings from FY19 everything looks favourable.

For the investors, it is going to be a few more months of ups and downs and then launching off to the next big growth phase. Even our portfolio is doing the same, we have been adding more new stocks, reducing cash exposure and will be ready for the next rally before elections.

Add Insurance To Your SIP For Double Benefit!

Insurance is a high priority investment option in the minds of the Indian investor for decades now. In reality, it is not to be considered as an investment product at all. This option was made to look appealing by insurance companies as they provided a guarantee in repaying the principal along with some appreciation and also an insurance cover. Hence, in the unforeseen eventuality that the insurer is not alive, his dependents get a significant sum of money.

Pitfalls of Insurance as an Investment

Investors failed to realise that in return for their long-term commitment to pay premiums, what they got back was a pittance. When taking out a policy they only see the high numbers quoted and it looks like a rich reward. At the time of maturity when they receive the maturity amount, only then do they realize that the amount is not a significant growth of their monies. For creating this corpus, they would have shelled out all their lifetime earnings by paying premiums.

The tax saving advantage of the premium paid made insurance look like a much better option compared to other investment avenues available. I even heard the mother of a 2-year-old child asking her husband to take insurance for her child to meet future educational needs. It is not her fault because that is how her parents have saved.

Many are so very sincere and committed to paying the hefty premiums without realizing that, all their commitment is doing is making the insurance company rich and not them.

Increasing Awareness and Options

Off late there is increased awareness about the poor returns that insurance gives. Even with the tax savings that the product delivers, it is not worth an investment and people have been moving to term policies.

People shied away from term policies because they will not get any amount in return if they are alive after the policy term ends. They felt bad that they the premium paid goes waste as most of them are pretty confident that they will live beyond the policy term. Little do they realize that, however healthy you are, there are still some chances that things can go wrong. Life is not fully in our control.

A New Entrant – SIP Insurance

Now, there is a new option available for those who thought that term policy premium payment is going waste. Mutual Funds have begun to give insurance cover for SIP’s. It is called SIP Insurance, where, while you are investing through your SIP’s in mutual funds, you get an insurance cover without any extra cost. Moreover, all the money you pay for the SIP earns the highest returns. Insurance comes free.

Reliance Mutual Fund gives the highest returns in this segment with 120 times the SIP amount as the insurance cover in the 3rd year of the SIP investment. Coverage begins from the second month of the SIP with 20 times the SIP amount for the first year, 50 times for the second year and 120 times for the 3rd year.

The only condition is that the SIP should not be disturbed or redeemed till the age of 55 for the investor. One can start a SIP of 10K, in the 3rd year get 12 lakh insurance cover and then stop the SIP in that scheme and take it in another scheme. At present each fund has a maximum limit of 50 lakhs, so if a person takes a SIP in 3 or more fund houses, over a period, they can have a Rs. 2 crore insurance cover.

Regular term policies have their own challenges as one’s age catches up. Many investors have been denied insurance coverage because they have some existing disease or the premium gets increased because of the pre-existing disease. In SIP Insurance, these conditions don’t exist. Any individual who is investing in a SIP and has opted for insurance gets covered, immaterial of his age or disease status.

A big sigh of relief to those who are in the above condition. This SIP Insure product option takes away the challenges of investing in insurance and getting lower returns. Get in touch to know more about this new avenue for your life savings.

Crude price brings shocks to OMC’s

Government asks OMC’s to take up burden of crude oil price increase by Re. 1/- per litre. This is not a good decision, when crude prices dropped, they brought in duties to take advantage of the gains and filled the government kitty. That was a good decision because small difference in price which the consumers were used to spending will not help them save big & rather make them spend that gain in unwanted luxuries. The same amount if saved by the government will help them get some big projects done, which will benefit the whole population. It actually helped the government to clear off the bonds that it had given OMC’s to make good of the losses when crude was its peak as they were selling at lower prices to ensure that our economy does not suffer.

Now when crude prices moved up, government still wants to have the same revenue and pass the burden to the OMC’s just because they were used to it, is a bad decision. It shows that, Government is not worried about businesses going under loss, while it wants its share to be intact.

OMC stocks which gained strength on their own weight which was not so far since their existence now is again going back in the losing spiral. Stocks have started to bleed heavily post this decision from the government.

SENSEX goes Partying, Mid & Small Caps left behind

January 2018 has brought a lot of good news like the IMF reports suggesting good GDP growth numbers, PM giving the keynote at Davos, world looking at India as their investment destination and along with that some very interesting movements in the market. Broad indices like SENSEX & NIFTY going higher and higher while the mid & small caps are going down.

Due to SEBI’s decision to re-organize Mutual Fund portfolios, to have one scheme per category and Large Cap schemes should have a prescribed percentage of large cap stocks in their portfolio. Until now, funds used to have good amount of mid and small cap exposure which helped them achieve better returns against the benchmarks. Now, that has got changed and hence, the shuffle of selling mid and small caps to add large cap stocks to the portfolios.

First instance of the regulator’s over interference on the financial assets has begun to show up. Mutual Funds are now forced to buy more of something that is not good in quality, the reason why they shunned them. Because of buy orders in huge quantities that have created artificial demand, prices are going up and with them the broad indices too are reaching for higher highs. Once the buying is over, markets will begin to react.

The huge flow of retail money, which has come into the markets after seeing big growth and with belief that the economic activity is really strong to continue the growth momentum, is going to get a big surprise. All the belief’s and the environment are perfect without any change. The only concern now is the regulator who in the thought of bringing more transparency is creating more challenges to the market participants.

This over indulgence will create underperformance and deplete the quality as well as the belief of the retail investors, who have put in a lot of investments into the mutual funds expecting returns that were made in the last year. When the retail investors experience poor performance, they will begin to withdraw their investments which will create pressure on the fund managers to liquidate, to meet redemption pressures. Which will again force them to sell mid and small cap stocks which have been the performers and further bring down the overall performance of the schemes.

In India, many a times, it is the regulations that are causing bigger challenges and bring down businesses. Later, the blame goes to the operators.

 

2% Population Takes Care Of Our Whole Nation

A country like India is poised to become the next superpower. We are a rapidly developing nation because of our readiness to adapt and grow under any and all circumstance. While there is a more significant transformation happening to become a developed nation soon, revenues from tax receipts are severely low, almost appalling.

Only 1.97% of our population are taxpayers. Even if we take out children along with retired people as 50% of our population and unemployed people as another 20% of the population, more than 28% of earning community in our country is not paying tax.

However, this does not stop them from enjoying civic amenities like roads, power, buses, railways, parks and all other public services.

When we see a dug up road that takes a long time to patch up, we see the apathy of an irresponsible bunch of citizens who have the time to complain but not so much to bring their earnings into the system. The tax obtained from even just half of these individuals can help shape the nation’s growth, but these people lack the long-term vision required to understand that a better nation cannot be achieved by building walls around ourselves.

In a way, it can be said that the 1.97% of the responsible population is feeding these irresponsible citizens. As the tiny percentage of taxpayers slowly begins to grow, either through their willingness or government force, the balance will tilt the other way; people themselves will self-police and bring the evaders to task. That said, force measures can yield results only for some time, and people always find a way to evade tax no matter what norms are put into place. What is needed is a change in moral conduct, much like the Japanese who value their time immensely. To see this difference, we must educate our children and set the right examples for them to emulate. Remember, evading tax is a lot like living on the alms provided by responsible citizens, and no one wants to be a rich beggar.

1000% Gainers, How Many Do We Have In Our Portfolio?

SENSEX hit 30000 on 5th April 2017 and reached 35000 on 17th Jan 2018. It took 198 trading sessions to gain 5000 points, a 17% gain. In this period there were a couple of companies whose stocks have managed to grow between 100 to 1000%. The following is a list of those stocks.

If someone had invested in all of these stocks, the kind of money they could have made would be hard to imagine! While all these numbers are relevant in hindsight and no single account could have captured all of them at the prices stated here, there are possibilities that some portfolios could have some of these stocks or even a majority of them.

In our portfolio, we had invested into 11 of the 20 stocks which have helped us achieve 44.34% gains at the same time when the SENSEX made 17%. Most of the stocks named in the list are from the specialty chemicals, electrodes, carbon black, housing, automobile ancillaries & jewellery sectors. Majority of them have gained because of the pollution ban in China which was never anticipated at the beginning of 2017. Only a process driven approach could identify these stocks and make profits out of them.

Movers and Shakers for 19th August 2017

Movers and Shakers of the week: $400 bn Forex Reserves JAM- Jan Dhan, Aadhaar & Mobile advantage Barcelona Terror Attacks Vishal Sikka resignation from Infosys

Strongest stocks turn the weakest…..

Our portfolio had higher exposure in the financial sector followed by Sugar, Paper and Cements. All these businesses were doing very good growth on their sales and profits and that showed in their stock prices. Having these high growth stocks helped us achieve 8.50% gains in the month of October.

Following the demonetisation and Trump win in the US elections, the very same high growth sectors went into the receiving end. Pressure on liquidity brought various kinds of pain to the businesses in these Industries.

A couple of articles published in ET after the event showing the impact of currency on the sectors.

 

Nov 17 2016 : The Economic Times (Bangalore)

NBFCs Recover Some Ground, but Gains may be Short-Lived

Anandi C Mumbai

VALUATIONS HIGH Non-banking financial cos’ loan against portfolio book expected to be squeezed due to demonetisation; valuations still rich given prospects hazy

Non-banking finance companies on Wednesday got a break from the sell-off on the bourses post the government’s demonetisation move that has dragged their shares down by 13-20% in a week. Shares of the financiers such as Bajaj Finance, Cholamandalam Investment and Finance and LIC Housing Finance, among others rallied 3-10% on Wednesday but the gains could be short-lived amid worries about rising bad assets and rich stock valuations.

Non-banking finance companies (NBFCs) have been among the best performers on Dalal Street in 2016 as rising consumption and increased demand for housing led to voracious appetite for loans especially in Tier 2 and 3 towns. Since March 01, when the market rebound began after falling in January and February, Bajaj Finserv soared 81%, Bajaj Finance jumped 51%, Dewan Housing Finance rose 50% and Can Fin Homes gained 46%.

Now, with demonetisation expected to result in a decline in property prices, the loan against portfolio (LAP) book of NBFCs will be squeezed, resulting in higher bad loans.

“Finance companies which have bet big on LAP and mortgage loans in last couple of years and expanded their balance sheet rapidly will be among the most impacted because many of them will start seeing pressure on asset quality,“ said Ritesh Jain, chief investment officer, Tata Mutual Fund.

Dewan Housing, Repco Home Finance, Shriram City Union, CanFin Homes and Capital First have fallen 17% in a week. Companies lending to commercial vehicles could be among the biggest hit by the demonetisation move.

“commercial vehicles would be affected as they heavily rely on cash.This short-term cash mismatch could impact their business in the coming two quarters,“ said Siddharth Purohit, senior equity research analyst, Angel Broking.

Valuations of many of these companies have moderated after the recent sell-off but they are still rich given their hazy prospects, said fund managers.

“The valuations of many of them are quite steep at current levels and any bounce back would be temporary ,“ said Jain of Tata Mutual Fund.

Analysts said that it would take more time to determine the right valuations which had inflated over the past one year.

“Only if the prices correct quite significantly compared to the past five years’ rise can we say that meaningful corrections have come in,“ said Paras Bothra, president equities, Ashika Stock Broking.

 

Nov 17 2016 : The Economic Times (Bangalore)

A Real Estate in Pain is Bad News for Cement Cos

Rajesh N Naidu & Ashutosh R Shyam
ET Intelligence Group

CREDIT SUISSE has cut EPS projections for UltraTech, Ambuja & ACC by 16-27% for FY18 after govt’s demonetisation move

The government’s demonetisation drive has affected cement companies badly as they rely a lot on the real estate sector, which is bearing the brunt of this initiative. Analysts have cut the earnings per share (EPS) estimates of cement companies for the next two fiscals between 10 and 20%.

The annual volumes growth of the cement industry is pared to 5-6% in the next three years, compared with 8-9% earlier -in FY16, the total cement consumption was close to 278 MT. Given these factors, cement stocks are likely to fall further and more downgrades are expected.

In the past few years though, cement companies had caught the fancy of investors as it was believed that utilisation levels would go up to 90% by 2020 from 69% at present. It was estimated that cement companies would record superior operating margins as seen in the last upcycle during 2004-2009.

Besides, increase in infrastructure spending, no significant capacity expansion and the ability of these companies to maintain and increase prices in most regions, except east India, helped improve their valuations. Before the recent correction, cement firms were trading at a 15year high EVEBITDA.

But now with the government’s decision to do away with high-denominated currency notes, the demand for housing is likely to take a hit as builders stare at a cash crunch. And the government’s infrastructure projects aren’t enough to negate the possible slowdown in the sector.

This is because the governmentsupported projects -roads, irrigation and railways -consume only 6% of the total cement produced.What’s worse, this comes at a time when input costs are rising as pet coke and coal prices are rising.

Foreign brokerage Credit Suisse has cut its EPS projections for UltraTech, Ambuja and ACC by 1627% for FY18, which has led to a lowering of their target price in the range of 7-20% for these firms.

 

 

 

Jhunjunwals’s portfolio drops 15%. So was ours, many of the stocks in his portfolio also adorned ours and we are holding on for our tables to confirm their exits.

 

Nov 17 2016 : The Economic Times (Bangalore)

Jhunjhunwala Loses Rs 1,480 cr in Just 16 Days

Jwalit Vyas Mumbai:

MAXIMUM VALUE erosion of Rs 397 cr in Titan, where share price fell 15% in Nov

Rakesh Jhunjhunwala, the big bull of Dalal Street, has seen value erosion of over $200 million or `1,478 crore since November 1, 2016 on his portfolio.This does not include the value erosion on the investments in his recent top pick DLF, which is down over 30% in the last 15 days, as his exact holding in the company is not public.

Maximum wealth erosion in terms of value for Jhunjhunwala has been in Tata group owned jewellery company Titan, which saw share price fall 15% since the beginning of the month, leading to a total value erosion of `397 crore.From the peak in August this year, Jhunjhunwala’s holding value in the company is down by `840 crore.Holding value in the other Tata Group stocks such as Tata Motors and Rallis have also come down significantly.

In terms of percentage, the big gest loser in the big bull’s portfolio is the casino company Delta Corp, whose shares plummeted over 40% in the last 15 days.

Jhunjhunwala was bullish on the Indian real estate sector.Other than DLF, he holds 3.2% in Dewan Housing Finance, which lends money to the real estate de velopers and home buyers. The stock tanked 28% in the last 15 days, wiping out al most `100 crore for the big bull.

Other real estate stocks in his port folio include Delhi-based Mumbai-based D B Anant Raj and Mumbai-based D B Realty and Man Infraconstructions, stocks down 15% to 33% in the last 15 days. The only exceptions in his portfolio are MCX and CRISIL, which have remained flattish in a falling market. He owns 3.94% and 1.7% in the two companies, respectively .

 

 

 

We don’t own CAPF, while the stock is in our buy list and the entry price has been consistently moving down following the drop in the stock’s price.

 

Nov 17 2016 : The Economic Times (Bangalore)

ET NOW Q&A – Only 1.5% of LAPs Paid Back in Cash: Capital First

 

In an interview to ET NOW, Capital First chairman V Vaidyanathan, said that in the loan against property book, only 1.5% is collected in the form of cash and that the issue about loan against property (LAP) is overdone.Edited excerpts:

What’s the first hand experience of demonetisation at Capital First?

We should distinguish between a liquidity issue and a solvency issue.Right now, it is only liquidity issue.Basically, traders which are a substantial part of the people to whom we lend, small shopkeepers, traders, entrepreneurs, etc., they have the cash. They go and deposit the money in the bank. They are unable to withdraw it because of withdrawal limits and therefore, they are in a situation where they might have a temporary mismatch in terms of being able to pay. It is not ability to pay issue. In our case at Capital First, 100% of our customers can pay us in the form of PDCs, or electronic clearing instruments. Only the customers who return their cheque, which is the about 10%, when we go back and collect from them which is also close to about 5% That means about 5% pay by cash. Clearly, the moment cash comes back in people’s hands, the repayment cycle will start again. If this issue stretches on for three or four or eight months or something like that, that could become a solvency issue.

Your MSME segment operates mainly on the LAP book. What kind of an impact could we see there?

In our loan against property (LAP) book, 98.5% of our collection is coming through electronic instruments, that is only 1.5% is collected in the form of cash. In LAP, we should not forget it is not the property that is paying you, it is cash, it is the businesses that are earning money and paying you back.So as long as liquidity comes back, solvency remains same, customers will pay. This issue about loan against property is overdone.

But considering property is a critical factor do you not feel that there will be some cases where payments would bounce?

Usually about 90% customers clear their instalments in the first attempt.That leaves 10% of them. As I said, about 8.5% pay you back again in the form of cheques again that is 1.5%. I am saying it is not really a big deal.

This sudden change in our markets due to two most important events have left almost all the businesses in our country stare at huge loss of business. December Quarter results are going to be a washout, and it will take more than 4 months to get back to normalcy. With more than 10 lakh crores of cash moving into the banking system, which will increase the liquidity in the economy, interest rates are likely to fall by about a percent from here and that will be 6% interest on bank deposits.

Excess liquidity in the system, as there is no much demand for credit from the corporate will move into G Sec’s which will propel high government spending in the coming year and propel the economy to bigger growth.

As we are in the mid of the 3rd quarter, till results are out, much decision on the churn of portfolio will not be likely apart from a few stocks moving out and getting replaced by new one’s. The impact on portfolio performance is going to be prolonged.

 

 

 

 

 

 

 

 

Highest portfolio returns in October 2016

Our portfolio managed to give its investors 8.34% gains in the month of October, highest returns for the month of October, when compared to all other indices and Mutual funds in the Diversified funds category. Automated system based stock selection helped us be invested into the best businesses of India. When a portfolio contains only top performers, it shows up in the results.

For the October month, broad markets were subdued; SENSEX was flat with 0.23% gains. The broader 500 stock index too gave 1.44% in the same period. Diversified Mutual Funds fared better with maximum recorded gains of 5.40% by L&T India Value fund, while our portfolio achieved 8.34% in October 2016.

Outperforming all timeframes.03.11.16

We have been outperforming the NSE 500 benchmark across all time frames since inception date. Our portfolio has been tracked for the past 4 years since December 2012. We have achieved an absolute return of 91.30% as compared to 60.45% by the benchmark, more than 50% advantage to the broader benchmark.

Prominent sectors in our portfolio are Industrials with 25.60% exposure, Basic materials having 17.55% exposure followed by Financial Services with 17.45% exposure. And we have lowest exposure in the Utilities, have reduced exposure to the Healthcare Sector & have zero exposure to Technology.

Following continuous suits on the Pharma Industry by the USFDA, Healthcare Sector lost its shine with a lot of under performance. BREXIT has caused a severe dent on the Technology Sector, which is staring at the situation without any clue about solutions. There was no judgement or bias on decisions to keep off from these low performing sectors, our system takes care of the process and ensures that we are invested in the best always.

Some of the stocks like GNFC, ASTEC, RAMCO, Caplin Point, ADF Foods were stars in our portfolio, each of them giving more than 50% gains in October alone.

Our Discreet 12 month’s performance too has been outperforming both the major Benchmark SENSEX and the additional Benchmark NSE 500 in all the last 3 years, again with a wider margin. Where both the SENSEX and the NIFTY, the widely tracked economic benchmarks of India are yet to give a new high after their 2015 leads, our performance index has breached its historic and ventured into the uncharted territory.

How is the future?

While the longer term outlook for India is great, there are some immediate concerns which can have some stress on our markets, like the US presidential Elections and the Pakistan Insurgency. Time and again one or other incidences do crop in and have some destruction created, while all of them get passed off very soon and the markets get into their direction, which is always UP.