For those readers who have tuned in late, MONEY TODAY has introduced two model stock portfolios. While both will attempt to earn sustainable and attractive returns, Safe Wealth will focus on picking safer stocks with an emphasis on wealth preservation. Wealth Zoom will look for deep value midcaps with a slightly more aggressive risk-reward proposition.
We started with Rs 10 lakh in each portfolio as on 18 June, achieved some initial thrills and minor hiccups, and achieved a mixed bag of results. It’s time now to finetune not only the portfolio but some rules as well.
First, we’d like to address the unfair advantage that we have: that of taking buy or sell decisions “in retrospect”. We discovered that for both portfolios we could file our transactions with closing prices of a date earlier than the date we took the decisions.
This is unfair as it gives us the chance to look at the markets for a few days and then decide with retrospective effect.
So, here’s the modified rule: we will take all buy and sell decisions based on closing prices every alternate Friday. And we’ll do this before Monday, so that we don’t get the advantage of looking at the market before we take our calls.
Next, many readers have told us that we can (and should) earn a low return on undeployed cash. But this defeats the purpose of earning a return from an equities portfolio. It will only add to the mathematical clutter, while earning small (and we dare say this) insignificant returns.
However, we do recognise that we might want to hold cash for large intervals. In such an eventuality, we’ll put out a request for earning debtlike returns on our cash piles. Else, we’ll stick to zero returns.
Instead of harping on the returns from cash, I would be happy to add on the dividends that our stocks earn to the portfolio. This can be quite significant, since the portfolio will have a 1-2% dividend yield. Our Safe Wealth portfolio, in particular, may benefit more from dividends than Wealth Zoom, whose constituents are likely to conserve cash. Finally, here are the portfolio changes we have made this fortnight.
Siemens came out with very depressing numbers for the April-June quarter. There is a clear margin erosion in its mainline business, and the company has also provided for losses on projects and contracts without explaining the details.
This is not in keeping with the standards we expect from a multinational and are therefore selling this stock from our Safe Wealth portfolio at a 3% loss. At under 3% weight, we think Hindustan Unilever’s (HUL) presence is too small given its stability in these volatile times in the market.
For a company that earns more than half its shareholder funds in post-tax profits every year, HUL is somewhat underpriced. So let’s double HUL to 318 shares, which drives up our “consumer” sector allocation.
With the exit of Siemens, our capital goods allocation has come down a little, which will be compensated in the energy sector with the entry of Petronet, a company whose recent quarterly showing demonstrates strong operating leverage and trading profits on spot cargoes on LNG.
Petronet looks cheap at around 10 times 2007-8 estimated earnings, especially if you can appreciate that the natural gas shortage in India is likely to persist for a while notwithstanding the KG and Cauvery basin gas finds. We’ll tweak Wealth Zoom as well, once the results for April-June quarter trickle in.
