Category Archives: General

Carnage in Mid & SmallCap Stocks pulls down MF Returns

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Greetings from PenguWIN:

                                        Over the past few weeks, I received questions from half a dozen investors on the performance of the Equity funds and wanted to know whether their portfolio needs to be rejigged. My answer is “please hold” as it’s a phenomenon across different categories of funds, pronounced in Small and MidCap funds. The Sensex and Nifty are at all-time high with returns of 2.57% and 4.87% over the past 6 months while the mid and small caps have been battered with negative returns of (11.42%) and (16.46%). Over 50% of Mid and Small Cap stocks listed in NSE have lost more than 25% of their value.

            I am outlining some of the key reasons that has resulted in this poor performance.

  • Huge valuation of Mid and Small Cap stocks. Typically, in the past Mid and Small Cap stocks have traded at a discount to LargeCap. However, in the recent run till 2017 end, Mid and Small Cap stocks were trading at more than 200% of Price to Earnings of LargeCap (Nifty and Sensex)

 

  • SEBIs mandate on Categorization and Rationalization of MF Schemes in Oct 2017. Mutual Funds did not have clear definition of boundaries of Large, Mid and Small Caps and each fund house had its own definition. There were also multiple schemes of the same category, like 3 LargeCap funds in the same fund house. As a result of the SEBI mandate, fund houses have to merge/modify existing funds and also clean up the stocks that a scheme owns. Many funds, even Large Cap had sizeable allocation to Mid and SmallCap stocks forcing them to sell to adhere to SEBIs definition. When all fund houses tried to reduce their Mid and Small Cap stocks at the same time, there were not enough buyers resulting in steep valuation drop. Thus, MFs pressure to sell Mid and SmallCap stocks was a key driver

 

  • Surveillance Measures. Mid and SmallCap stocks are happy playgrounds for speculators and valuations go sky high without any change to the company fundamentals. SEBI in coordination with the BSE and NSE stock exchanges had been subjecting speculative stocks to surveillance measures since 2017. This covers both the changes not attributed to the fundamentals of stocks and also high volatility. Some of the highly traded stocks came under the scanner resulting in steep falls in price.

 

  • Governance Risks. Governance issues have surfaced among Mid and SmallCap companies where Auditors like Deloitte and PwC quit just before the results announcement citing inadequate disclosure. Auditors of over 30 listed companies have quit in 2018, till date, wherever they doubted the veracity of numbers. Both individual as well as institutional investors were caught unaware resulting in a selling spree bringing down the valuations to more than 50% in many stocks

 

Conclusion: While the Mid and Small Cap stocks correction might continue further, investors with higher risk appetite, investing systematically, will be rewarded handsomely. Just make sure that your asset allocation commensurate with your Risk Appetite and Risk Tolerance.

I believe the returns on investment in the poor are just as exciting as successes achieved in the business arena, and they are even more meaningful! - Bill Gates

<Blog # PenguWIN 1061 – Carnage in Mid & SmallCap Stocks pulls down MF Returns>

PenguWIN is 4 Years Old !

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Greetings from PenguWIN:

                                             Today, the 4th July 2018, we have successfully completed 4 years of operation and entering the 5th year.

Customers are key to any business and I love this quote by Sam Walton of Wal-Mart; “There is only one boss – the customer. And he can fire everybody in the company from the chairman on down, simply by spending his money somewhere else.”  With a small tweak, “Spending to Investing” it is very much applicable to us.

There are ups and downs in any business and will continue to be there, but the support received from our Investors, Friends and Well-wishers keeps us motivated and do better. One of the key reasons why I chose this profession is the change and investment discipline that we will be able to inculcate on individuals and families, as it is directly related to their personal finance and financial goals. I am happy that we have been able to start making that impact and hope that it continues to grow. The feeling that a customer is able to accumulate his medical corpus (achieve one of his financial goals) and we playing a small role in that, gives immense satisfaction. This is why many financial advisors have titled themselves as “Finance Doctors”

On the positive side, our customer loyalty is extremely high and I try to make sure that we do our best to service them. Referrals is one of the best marketing tools and in financial services business it’s the key that helps build your client base. Some of our clients go out of the way to talk to their acquaintances about their good experience, encourage them to connect with us and even follow up with us and check if those people have reached out.   

Expanding our scope of services has always been on my agenda and a few customers have also suggested this. On this front, I am happy to convey that we have added 3 new services.

  1. Partner with ICICI Life with specific focus on Term Insurance (Pure Risk Cover) and critical illness as they act as a hedge to protect our family in case of a contingency
  2. Partner with Monexo on Peer to Peer (P2P) lending. Monexo is an RBI registered, Peer to Peer lending platform. P2P lending is an emerging trend that is changing how investing and borrowing works. This needs a separate writeup, which I will share later.
  3. Partner with NSDL e-Governance Infrastructure and Warmond Trustees and Executors to offer Will preparation services. This is one area that I have been keen on and finally made some progress.

 

I firmly believe that just becoming a partner doesn’t mean anything and I would be following my “skin in the game approach” in these new services too. I have already bought a term cover from ICICI Life and started lending using the Monexo Platform. However, my Will writing is Work in Progress.

I have always wanted to be recognized as a trusted partner in the personal finance space, maintaining high levels of business ethics and not service people with pure financial interest, that is rampant in this business. I think we still have a lot of scope to expand our business and service clients in new areas and also increase the customer base. I hope your patronage towards PenguWIN increases during the years to come.  

"Investing is not supposed to be easy, and anybody who finds it easy is stupid.”  Charlie Munger 

<Blog # PenguWIN 1060 – PenguWIN is 4 Years Old ! >   

Is your Investment in Real Estate and Gold Safe?

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Warm Greetings from PenguWIN:

            The crux of this article is about the volatility in asset classes, physical and financial with specific reference to Real Estate, Gold and Equity investing, more specifically Equity MFs

Investors who started investing in equity funds since 2017 and seen the value go up and up, will probably be a little impatient, experiencing the 2000+ points correction in Sensex in the recent past and the associated high level of volatility. I make sure that I tell this to all our clients (at times more than once), that Equity funds are long-term investment products and needs to be looked at only for 5+ years, more the better. There may be a few who are lucky to enter the market when it was low, make money and exited before the fall. Even these people will fail if they try to replicate it for the second time. But, accepting the reality is always difficult.

Let me take couple of my favourite examples.

Let’s assume that a person buys an apartment in Adyar/Besant Nagar area. A 1000 sqft 2 BHK (basic price of 16,000/Sq. Ft.) will set him back by 2 crores, including registration, car park, corpus fund, club fees, EB, water, sewer etc. Once he takes possession of the apartment and moves in, within a couple of months, let’s say there is a slump in the RE (Real Estate) market and basic price drops to 15,000/- per Sq. ft. The investor will feel bad as his Networth has gone down by 10 Lakhs. On the other side, if the price increases to 18,000/- sq. ft, he feels happy that he has got a good deal, saving 20 Lakhs. Whether it is a question of 10L loss or 20L gain, there will no action of purchase/sale of the house as its notional and he has to live in the house. The value matters when he moves to a different place within or outside the country and decides to sell it or when he bequeaths the property to his children and they decide to sell it.

The same holds good when people buy gold jewellery or even coins. Gold has lost about 35% of its value since 2012 (35% is the consumer price Inflation) and the current price in INR is lower than the Sep/Oct 2012 price which was Rs. 3000/- plus. Several people have asked me this question – Is it a good time to buy gold? No one has asked me if it was time to sell gold. The worst thing is if its close friends or relatives and you tell them the facts of Gold (inflation hedge, intrinsic value and so on) which may be negative at that particular time, they feel that this guy is keen to drive Goddess Lakshmi away from our house.

Though many of the investors I encounter, have significant allocation to RE and Gold, they don’t get perturbed due to changes in price while even minor changes to stock markets (going down) is something that makes them anxious as they can easily relate numbers. So, even if the investor buys a fund for 1 lakh, that turns out to 1.25L in a year, the subsequent fall to say 1.1L is apparent as the mind relates to only the 1.25L figure, forgetting that the original investment of 1L.

Equity investing is for the long term (may not be that long as in the case of RE) and our patience will be tested by the market similar to RE and Gold, more severe at times. Some are unable to digest the volatility, especially people who have invested for short term that is just 1/2/3 years, going by the healthy returns of 2017. They tend to think that if 2017 has given 30% returns, then our investment should be able to fetch atleast 24% or 12% per year, in 2 years (fair assumption from their perspective). There are others who get excited by the returns that their friends and family members have made and move huge money to equity funds (Big Bang Investing), in a matter of few days, trying to make up for opportunity loss.

Whether 2018 or 2019 turns out to be as rewarding like 2017 (I will also be delighted to see my portfolio go up further), a time horizon of more than 5 years, higher the better, will definitely reward us with good returns and will continue to be the asset class that will provide the best returns.

People who hold less than 100% equity portfolios – Balanced Funds, Equity Savings, MIP can expect stability of returns in less than 5 years, approx. 3 to 4 years

What is the basis for my confidence? Equity market growth is a reflection of how the economy (GDP) does in the country, growth of companies in revenue and profitability, increase in consumption, increase in per capita income. The scepticism that prevailed in the market for the past few quarters is attributed to some of these indicators, not in green, while the markets were scaling new peaks. However, the Dec 2017, Q3, results have been positive and analysts expect that this momentum will continue in the coming quarters. Excluding the troubled Banking and Financial Services sector, Net Profit of a sample of 2043 companies rose to a six-quarter high of 27.5%, Net Sales by 11.5% YoY. We practice what we preach and your money is in safe hands.

We will only do with your money what we do with our won – Warren Buffett

 

<Blog # PenguWIN 1058 – Is your Investment in Real Estate and Gold Safe ! >