Calm amid the storm

Click here to see Wealth Zoom portfolio Click here to see returns on Wealth Zoom

The savage downturn in the markets last month took even the most prudent of fund managers by surprise. Within a span of a few trading sessions, the markets were down to their August 2007 levels. As markets went into a tailspin, NAVs of equity funds came crashing down. No sector, index or fund escaped the bloodletting on Dalal Street.

Our model portfolios also got badly hit. Safe Wealth took a 10.56% hit while Wealth Zoom dropped sharply by 14.83%. And yet, it seems we have not done too badly. That’s because both the model portfolios managed to contain the downside to a large extent. The NAVs of both portfolios did not drop as much as their benchmark indices.

The conservative large-cap oriented Safe Wealth is benchmarked to the Nifty which fell 12.94% during the fortnight. Packed with mid caps, Wealth Zoom is benchmarked to the CNX Midcap which fell by 15.86%. Your fund manager was able to contain the fall during a time when even bluechip stocks slid 20-25%.

Readers' responses Why aren’t you tracking the model portfolios against a benchmark? It would be useful to compare how the portfolios have performed vis-as-vis the markets. —Amar Harolikar Thank you for your suggestion. From now on, we will also give the benchmark returns as well. Both model portfolios are benchmarked against major indices. The large-cap oriented Safe Wealth has the Nifty as its benchmark while Wealth Zoom, which is packed with mid caps, uses the CNX Midcap as its standard. Safe Wealth has mirrored the upside in the Nifty since inception. On the other hand, Wealth Zoom has underperformed the CNX Midcap by a small margin. What is notable is that both funds did not fall as much as their benchmarks in the past fortnight. I have been following your model portfolios for some time. They seem to be doing pretty well. I would like to invest on the basis of your portfolios and trade as and when you do. However, by the time the magazine is published and we come to know of the transactions, things may have changed. Is there a way to track your day-to-day transactions? —S Dhall Trading for the model portfolios is done once a fortnight, on alternate Wednesdays after close, at closing prices. We are working to give a daily NAV update of the two portfolios on the website. If you copy the investments of the model portfolios, the little bit of timing error will even out over time. Remember, both the model portfolios are for long-term investing.

For the long-term investor, it was like a dream come true—a mega discount sale with everything selling at last year’s prices. But we didn’t go shopping because it was not clear whether there would be a bigger sale happening two weeks down the line. In any case, both model portfolios are almost 94% invested, which limits our buying capacity.

And there is nothing in the portfolio worth sacrificing at these low prices so that we could pick something else. Indeed, jittery January was not so much about fundamentals as it was about technicals and sentiments. The crash in the market was due to a sudden liquidity crunch for overleveraged investors. If panic stricken investors were offloading Bhel shares it was not because India’s largest power equipment supplier had suddenly fallen on bad days.

It was only because they had to pay additional margin to hold their leveraged positions in Reliance Petroleum or IVR Prime. Flowers were being cut, the weeds were being watered. Away from the cacophony of the markets, our faith in our holdings is being validated in the board rooms of corporate India. The third quarter results announced so far show that as far as fundamentals go, we are on a sound footing. Some of the companies in the Safe Wealth model portfolio have done exceedingly well.

Reliance Industries’ net profit in the third quarter of 2007-8 grew 162% year-on-year. With a 6.6% allocation, it is the fifth largest holding in Safe Wealth. ICICI Bank, the largest holding in the conservative portfolio, has reported a healthy 35.18% year-on-year growth in net profit. The other finance stock in the portfolio, HDFC Bank, has done even better with a 45% year-on-year rise in net profit.

Despite growing competition and rising input costs, the net -profit of Maruti rose 24%. Infosys shrugged off the depreciating dollar to report a 23.8% year-on-year rise in third quarter profits. Profits of Larsen & Toubro, which has a 6.2% allocation in Safe Wealth, grew 40%. The biggest rise has been in the net profit of Britannia Industries. Its third quarter net profit shot up 177% year-on-year.

Only three companies missed this cavalcade of rising profits. Public-sector power generator NTPC’s third quarter net profit came down 15.38% year-on-year. Anil Ambani’s Reliance Communication also had a bad quarter with a 43.39% drop in net profit while Tata Power’s bottom line slipped 29.52%. But just as the correction (or crash) in share prices is probably temporary, these negative numbers are minor blips in the long-term performance of these companies.

Click here to see Safe Wealth portfolio Click here to see returns on Safe Wealth

The model portfolios have not been built for short-term trading opportunities but for long-term wealth creation. Long-term investors should not get worried by the daily ups and downs of the markets. When the markets turn volatile and stock indices start behaving like a roller coaster, they should just sit back and do nothing. That’s exactly what we did last fortnight. We will be doing a thorough review of the fundamentals of both portfolios in the next issue and provide actionable advice.

Disclaimer: Model portfolios are based on the independent opinion of Dipen Sheth, head of the research team at Wealth Management Advisory Services Ltd. They do not reflect the opinion of the firm.They are for personal reference and information of readers.The firm is not soliciting any action based on the portfolios.