| Safe Wealth and Wealth Zoom portfolio |
At a time when the stock market is becoming increasingly volatile and there is little reason for cheer in the near term, our large cash positions in both portfolios must earn small but (nearly) risk-free returns. We are, therefore, introducing a fundamental change in both the model portfolios by making a sizeable allocation to a new asset class—the fixed maturity plan (FMP) mutual fund.
This is an important change that merits a more detailed explanation. Most mutual fund houses offer FMPs ranging from 90 days to over two years. These are fixed-tenure, debt-type mutual fund products with a difference: the entire investment is made directly by subscribing to debt issued by leading corporates with a high credit rating. Also, the tenure of the debt roughly coincides with the FMP’s tenure—90 days, 180 days, 370 days, etc.
There is virtually no trading of debt instruments during the tenure of the fund. This insulates the investor from the vagaries of trading losses (and write-downs induced by interest rate fluctuations). Investors usually have the option to exit before the end of the tenure by paying a hefty exit load. Considering that there’s very little chance the markets might turn up drastically in the next 90 days, I have a feeling we can wait it out.
The obvious question is, are these investments 100% safe? No, they aren’t, but they come pretty close, considering the kind of companies involved. With interest rates going through the roof (the 10-year G-sec yield is over 9.55% today and is poised to rise after the RBI’s unexpected hawkish stance), equities are facing the twin shocks of declining corporate profitability and PE downgrades. Naturally, high-quality debt becomes an attractive, even if an unglamorous, option.
The second tough question is, are we chickening out? I do not think so. Capital preservation with low-to-moderate gains is as important as the more glamorous, but considerably more risky, task of multi-bagger hunting. It certainly looks like we will hold cash for a fairly long time, perhaps more than the 90-day tenure of these FMPs that we are signing up for.
Even after allocating sizeable chunks to our generic, un-named FMP (which promises to earn us some 2.25% absolute returns over the tenure), we have a significant amount of cash left over in both portfolios, should we find some really compelling stocks to pick in these not-so-compelling times.
Meanwhile, it’s earnings season again on Dalal Street. The first quarter results are out for most companies. Here are two outstanding performances from the companies in our model portfolios:
Areva T&D:
Leadership in the high-voltage segment of power transmission and distribution equipment is clearly visible. Sales are up 44% and net profit up 39% for the quarter. Areva is now growing faster than ABB. I expect Areva to post an EPS of Rs 58 in 2008, and perhaps over Rs 75 in 2009. No slowdown is visible in the order intake. Instead, the company is aggressively increasing its capacity across three locations. Quality never comes cheap. Areva trades for well over Rs 1,600 even in today’s depressed market conditions. We bought it a month ago in Wealth Zoom for Rs 1,300.
Bartronics:
Quarterly revenues of Rs 119 crore seem to be galloping away compared with just Rs 25.5 crore a year ago. The commissioning and volume ramp-up at Bartronics’ smart card manufacturing facility is showing. So is the contribution from its US and Singapore subsidiaries, which now stands at over Rs 52 crore. In a world where smart cards have virtually limitless possibilities, this is India’s only manufacturer collaborating with a global leader. Expect this quarter’s net profit of about Rs 23 crore to lead to profits of over Rs 100 crore by March 2009. Market capitalisation: less than Rs 670 crore. Where can we go wrong?
Meanwhile, a 5% gain in both our model portfolios (Safe Wealth and Wealth Zoom) over the past fortnight has given us some muchneeded relief. Our recent picks have posted minor-to-moderate gains— Areva T&D, NTPC, Glaxo Consumer and Suzlon are all trading at a higher rate than our entry price.
Instead of becoming excited, I will dismiss these gains (and the overall uptick in both portfolios) as mere randomness in the midst of a difficult (and deteriorating) business environment. And wait patiently till the market cracks.
