Get ready to bottom fish

The steady erosion in the NAVs of the model portfolios continues in line with the broad market indices. In spite of the 700-point rally on a day when our portfolios are marked to market, Wealth Zoom’s NAV has slipped below the psychologically important Rs 10 mark. This is the second time in the history of this portfolio that the NAV has fallen below Rs 10. The first time was on 26 March this year when the NAV touched Rs 9.26.

Safe Wealth has also slipped, but is running at a modest 6% absolute gain. The only comforting news is that we retain over 50% cash in both the portfolios. That’s the reason their NAVs have not fallen as much as the benchmark indices in the past fortnight. Safe Wealth has fallen 4.59% compared with the 10.67% fall in the Nifty. While Wealth Zoom has come down 8.54%, the CNX Midcap has crashed by 16.87%.

Meanwhile, the weather at Dalal Street is anything but comforting. The world is fighting a losing battle on the slippery slopes of oil, credit meltdowns and (consequent) risk aversion. While it is easy to claim that good times inevitably follow bad times, it’s equally true that there is no convincing reason to buy today. FIIs are selling and the recent rupee falls have only given them an additional excuse, while domestic mutual funds are not exactly buying. Retail investors are in a daze, paralysed into inaction by the swift fall over most of 2008.

And yet, as ‘Boom & Bust’ says quite emphatically , it is precisely at such times that good companies offer fantastic moneymaking opportunities to serious investors. It is in this belief that we have made small investments in four high-conviction stocks—two in each portfolio—and reduced cash a bit (only a bit, I must hasten to add).

We have added 110 shares of Suzlon in Wealth Zoom, enough to take it up to fourth position in the portfolio. Yes, most of the news emanating from Suzlon (blade retrofit programme plus a large order cancellation) has been depressing lately. But there is no denying the fact that this is a world-class company that has acquired leadership status in the lucrative and fast growing global wind energy market.

Suzlon’s European subsidiaries, Hansen and RE Power, give it an unmatched vertically integrated and varied product mix. Now, let’s wait for the profit margins to pan out.

Also, we have attempted some bottom fishing for Wealth Zoom with French multinational Areva T&D, an incredibly profitable power transmission and distribution equipment manufacturer. It is now on the verge of commissioning several new capacities across India, which should drive further growth given its bulging order books for all kinds of transmission and distribution equipment. Both Suzlon and Areva are in the currently out-offavour capital goods space, a portfolio allocation anomaly that will moderate somewhat if (and when) we deploy our remaining cash into other sectors.

In the Safe Wealth portfolio, the two new entrants are India-proxies in their own right. The National Thermal Power Corporation (NTPC) is the country’s largest power utility, available at about 45% discount from its recent peaks. A regulated return (government allows it a 14% RoE) utility business is ordinarily not a great idea. Except during really difficult times, when many other businesses might struggle just to break even. At roughly two times the book value, there’s very little by way of downside in NTPC today, and our allocation at under 4% is only a modest beginning, giving us the flexibility to average out should it fall from current levels.

Glaxo SmithKline Consumer has the dominant market share in maltand milk-based health drinks and owns all the brands that really matter in this space: Horlicks, Viva, Maltova and Boost. This ultraconservative company is zero-debt, cash-rich and (finally) investing in new capacities in the face of the steadily growing demand for its products. New product additions from the parent’s stable are also in the pipeline. We have bought Glaxo SmithKline Consumer at roughly 13 times the 2008 earnings per share in a market where Hindustan Unilever and Nestle quote for 22 times and above.

Our cash holdings in both the portfolios is well over 50%. The rapid erosion of the non-cash (stock) portion over the past few months has also played a role in this! At some point (in the 10,000-12,000 Sensex band, if I were to go by some of the feedback on the MT blog) we will aggressively use this cash to rebuild our once-great portfolios. Till then, we’ll patiently sit out the rough times.

Readers' responses

Now that the Sensex has breached 15,000, there is a 70% probability that it will go below 12,000 and 33% probability of it falling below 10,000. The situation across the world, especially in the US, is unbelievably bad and our economy is following with a six-month lag. I believe we are far from the bottom. It’s a great opportunity for investors over the next 12 months!
—Amar Harolikar

I do understand the rationale for increasing cash levels in the portfolio. But since the macro-economic risks are raising crude oil prices and inflation, will it not be a good idea to address some part of this risk through other means? One could be the addition of a gold ETF. Similarly, Cairn Energy could form a small part of the portfolio as a proxy oil play. These could be short-term measures until crude prices and inflation cool off.
—Sridhar Raghavan

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