A twist in the portfolio tale

A twist in the portfolio tale

As Dipen Sheth indulges in introspection, he proposes a change in the management of portfolios. An interactive style, he hopes, will help deal with the crisis in a better way.

As we get ready to face 2009 with our model portfolios, it’s time to look back at what we have really achieved with them in terms of performance (the obvious thing to look for). We also need to see whether these models have helped in our evolution as rational and intelligent investors.

In January 2008, the Indian economy (and markets) were clearly peaking after four straight years of terrific batting. An across-theboard spike, driven by our faith in continuous growth, took the BSE Sensex to beyond 20K. Wealth Zoom rocketed to an NAV of Rs 16.24. I remember using the words ‘mid-cap momentum’ to justify staying invested at those levels. How naive of me! To make me look like the complete genius that I never was, the more serious-minded Safe Wealth, too, hit Rs 13.99, adding a halo of respectability to my ‘shining’ fund management record.

Immediately afterwards, the first rumblings of a fall and, indeed, a crack in the India story began to emerge. As did the excesses of the credit expansion via the collapse of the sub-prime bond market in the US. Since then, it has been uniformly downhill for the world and the Sensex. And for both our models as well. From the year’s peak NAVs, as on 2 January 2008, Safe Wealth has now slipped 34% to Rs 9.23, while Wealth Zoom has crashed 56% to Rs 7.07. The only consolation is that the BSE Sensex has fallen 57% in the same period. We have achieved this tardy performance via some late-in-the-day appetite for cash (as also an illustrative 90-day parking of 40% of our original Rs 10 lakh in an FMP at 9% yield).

Apart from outperforming a benchmark index such as the BSE Sensex, the objective of any fund manager is to deliver absolute returns. This implies an emphasis on capital preservation during difficult times. It is in this respect that I have failed (or at least stumbled), often lurching from one bunch of stocks to another, and missing out on the reality that all stocks were under selling pressure through 2008. Had this appreciation of the big picture occurred a little earlier, we would have outperformed many a respectable fund by miles by now.

But why am I digging out corpses? Because the big picture is still murky, and getting murkier daily. It’s one thing to say that money is to be made by getting greedy (and buying), when others are fearful (selling). And totally another when entire economies are staring at a long recession, potentially laying the ground for a multiyear downgrade of corporate earnings, depreciation of currency, decreased inflow by FIIs and derating of PEs. All of which, of course, make equities unattractive.

The recent disillusionment among readers (as is evident from our blog) is well-placed. I have not been able to come up with any radically new process for managing the portfolios in these troubled times, nor have I unearthed any alleged multi-bagger that we can buy for the long term. A bad phase in the markets calls for caution (we are high on cash already), but beyond that, I’m afraid, there doesn’t seem to be a convincing strategy for hauling our two portfolios out of the mess that they are in today. What is required is a new way to manage our model portfolios.

Interactive portfolios

Let us begin 2009 by creating a separate blog called ‘Model Portfolios Ideas’, where readers can write in about their ideas for the two portfolios. So, what’s new?

Well, from now on, I will run the portfolios only on the basis of these recommendations, nothing else. I may choose not to implement some of your suggestions, but will offer a (hopefully valid) reason for doing so.

Likewise, I will announce in advance on this new blog about the stocks I am looking to buy/sell over the next 2-3 fortnights. And you, dear reader, will have the option of shooting down my ideas before I can mess up!

What does this mean? Simply that we will now run the portfolios through a moderated consensus between readers and the fund manager. While some learning hiccups might occur, I am hoping that the increased interaction will lead to a richer idea bank and a more robust process for stock selection. Maybe we won’t time our trades too well, or maybe we’ll agonise over some good stocks for a little too long. But that’s a price I am willing to pay for reverting to sanity. Are you? Blog away and tell me whether you want this new process or not.

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.