Tag Archives: Mutual Funds Distributor

SENSEX See-Saw

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Greetings from PenguWIN:

I presume you are aware of the volatility and battering of stocks in the Indian Equity markets.

Experts attribute this carnage to a variety of reasons including Rupee depreciation, continuous increase of Crude oil price, build-up of Non-Performing Assets (NPAs), Global trade war, bank frauds, rise in bond yields, high valuation of Small and Mid-Cap stocks, Mutual Funds Recategorization and introduction of long-term capital gains tax.

Investors who started investing in Equity markets in the last couple of years and have seen their portfolio value go up significantly, have experienced the first shock of their Equity investment. Advising them on bringing in only the long-term money (5+ years for 100% equity exposure and 4 years for 65% equity exposure through MFs), align investment to financial goals, condition them to be prepared for 20%+ market falls (2008 is a different story altogether) will face the acid test now. Investors who started working with PenguWIN for over 3 years have witnessed couple of situations like this in the past and will be able to withstand the shock relatively better.

Though the key market Indices Sensex 30 and Nifty 50, have changed only a little (courtesy the weight of giant stocks like Reliance, TCS, HDFC, HDFC Bank) Small and Midcap stocks have taken a huge beating.

So, the question that comes to everyone’s mind is should we really need to worry whenever market takes huge hits?

  • First and foremost, stop looking at your portfolio on a daily, weekly or monthly basis. It’s like buying a house for 1 crore to live and keeping an eye on price movements. Please remember that whether the value goes up by 10% (1.1 Crore) or falls by 10% (90 Lakhs), it is of no consequence as you are not going to sell it (at a profit or loss) and start looking for another house. Similarly, the interim portfolio values are notional numbers and do not read too much into it. Disciplined and patient investment will be adequately rewarded by markets and I have personally experienced this. Some of you may think as “how do I know if my fund/portfolio is performing well?” Well, that is the reason why we exist and you can be assured that you are in safe hands.
  • Well, if the next question is “how can we expect PenguWIN to keep a track on all investors portfolio?” That’s true, but I have answered this in the past and reiterate it once again. My personal portfolio is extremely complex and I have kept it that way to ensure that almost all equity funds that we prescribe finds a place. Whenever I look at my portfolio, mostly once in 2 days, I keep a track on changes that a fund has undergone like stock or sector specific bet going wrong, change in fund manager, change in fundamental attributes, change in CIOs (chief investment officer).
  • Market falls happen all the time during the equity investment journey. It has happened in the past, it’s happening now and will happen in future too. This is the premium that we have to pay for the superior returns that equities generate. No pain, No gain.
  • Markets have been positive for about 75% of the time and negative for only the rest 25%. Equity market gains are never linear (like fixed deposits and other Fixed income instruments) and gains accrue in very short periods. Investment approach varies when you directly buy and sell shares vis-a-vis Mutual Fund based approach. Booking profits and trying to re-enter at attractive price points don’t work for Mutual Funds (Fund Manager has the responsibility). It has been proven many a times, when a fund manager attempts to cut the losses, hold cash and waits in side-lines trying to predict the market upturn to re-enter, has been a poor strategy and a few popular fund managers who tried to practice this approach have been exited from the MF Industry.
  • It might sound a little harsh for a few (that I am already sitting on losses), but the market provides excellent opportunities like this to deploy lump-sums. A few investors have had discussions with me on this. You could do this only if you have accumulated cash that is not required for the next 5 years. Else, stick to systematic investing. The worst thing that an investor can do in a downward market is trying to sell and move out. So, please refrain from that. If you think your risk appetite is less and can’t withstand 20 to 25% losses, then once the markets are up (no one knows when though), we can discuss and try to alter the asset allocation i.e. increasing fixed income proportion and reduce equity.
  • Lastly, financial goal definition and tracking is extremely critical. What happens when there is a market fall in the year of your goal? We need to categorize the financial goals into negotiable and non-negotiable.

If you have a goal of trying to buy a new house in 5 years and wanted to invest for that, you start moving funds from equity to fixed income before specific time horizons and not the week or month you need the corpus for buying. We need to balance the attractive returns that equities provide vs safety and below average returns (mostly negative net of taxes and retail Inflation) that fixed income instruments provide. In the case of a new house, if you can afford to wait a little more time (negotiable goal) then we could try to leverage the equity returns better. But for a goal like daughters or sons higher education or retirement (non-negotiable), we have no leeway and some gains need to be compromised

“Stock markets almost follow Pareto Principle:

20% of the efforts lead to 80% of results. In the past 18 years markets were down for 43 months (and up for 173 months) of the total time frame of 216 months i.s. 20% of the time. Fall is always faster due to negative news flows"

<Blog # PenguWIN 1062 – SENSEX See-Saw>

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>

Mystery of Missing Returns

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Warm Greetings from PenguWIN:

            I wanted to share this message with you before you might observe and become anxious. A couple of our investors have noticed it and requested for clarification. It has no effect on the value of the fund but portrays the performance in poor light. The details might be slightly technical (no impact to you) which is the reason why I was holding this message but thought that this note be shared when investors started asking for the clarification.   

The Categorization and Rationalization of Mutual Fund Schemes was initiated by SEBI, last year, to ensure that the schemes are clearly distinct in terms of investment strategy, asset allocation, uniformity in characteristics of similar type of schemes to help investors take informed decisions.

SEBI had discussed this with the MFAC (Mutual Fund Advisory Committee) and as a result of deliberations, the committee proposed the following changes in Oct 2017 to be implemented by the fund houses by June 2018.

  • Group Mutual Fund Schemes, into 5 groups including Equity (investing in stock), Debt (investing in overnight securities with 1-day maturity, money market, debt for varying durations), Hybrid (mix of stocks and debt instruments – typical balanced funds), Solution Oriented (Retirement, Children) and others (Index Funds, Exchange Traded Funds, Fund of Funds, International Funds
  • Rationalization of the Market Cap (product of no. of shares and prevailing price) definition by ranking them in descending order:   
    • Top 100 companies in terms of market cap to be referred as Large Cap
    • Companies with market cap from 101 to 250 market cap to be referred as Mid Cap
    • Companies from 251 and above in terms of market cap to be referred as Small Cap

 

This exercise resulted in Mutual Funds to adopt a uniform definition of Market Cap which was different for each fund house earlier as there were no standard definitions, like a small cap company as per Fund house A referred as mid cap company by Fund house B. The exercise also limited fund houses to have only 1 scheme per category, specifically in Equity, Debt and Hybrid resulting in merger of funds, changes to attributes and nomenclature of funds. In the past several fund houses had more than 1 Large Cap, Mid Cap, Balanced Fund and so on.  

As part of the merger of 2 funds into a new category, the assets from each fund had to be transferred into a new pool and either 1 of the exiting fund managers or a new fund manager had to be designated as the fund manager for the merged entity.

For better understanding, I am taking the case of HDFC Balanced fund which is one of the top performers in the erstwhile balanced category and a significant number of our investors own this fund. HDFC MF also had HDFC Prudence, which is also a well-known name, managed by Prashant Jain, though the risk profile is higher. In this instance, HDFC Balanced fund and Premier Multi-Cap fund were merged to form HDFC Hybrid Equity fund.  As part of the merger, the value of holdings in HDFC Balanced and the invested amount has been presented in a way that all gains accrued by the fund is lost (refer to the attached picture that displays the actual transactions for an investor). The amount obtained by moving out of the old fund is portrayed as the cost of new fund (Hybrid Equity). As a result, the investment amount in the portfolio is bumped up to that extent resulting in poor returns.

In this case the actual investment made by investor was Rs. 3,61,854 (accumulated 3230 units @ 112 Rs.) and the amount received during exit from old fund was Rs. 4,75,010 which is a gain of Rs. 1,13,156/-. However, the current transaction shows a loss of Rs. 9,575/-

The only sure thing about luck is that it will change - Bret Harte 

<Blog # PenguWIN 1059 – Mystery of Missing Returns ! >