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Opting for a gradual exit

With both global and domestic cues far from encouraging, our fund manager Dipen Sheth decides to cash out to reduce volatility shocks.

Dipen Sheth | Print Edition: May 15, 2008

Dipen Sheth

WEALTH ZOOM

Sell—Alpha Geo, MCLeod Russel, Apollo Tyres, BEL, NIIT Technologies

Click here to see wealth zoom portfolio

SAFE WEALTH

Sell—Tata Steel, Sterlite

Click here to see safe wealth portfolio

Our model portfolios have recovered a bit over the past fortnight, after three months of merciless battering. Wealth Zoom is back into positive territory; it’s up over 10% from its last score, and has hit Rs 10.68 on its net asset value (NAV) score. The portfolio did better than its benchmark, outperforming the CNX Midcap by a good 2%. Safe Wealth too has regained lost ground in the past two weeks.

It has clawed back to an NAV of Rs 11.11 and has gained a little over 3% for the fortnight. That’s good going, though 2.5% less than the rise in the benchmark Nifty during the same period.

The big question is, what do we do now? It’s as tempting to ride this mild recovery, as it is to chicken out and raise cash, now that we have got some recovery in both portfolios.

At times like this it is not important where you are, but where you are going. What is the economic barometer telling us? We have had over three years of record global growth, and almost five years of a bull run in the Indian economy.

Can this continue indefinitely, or is there is a blip on the horizon? Let’s begin with a serious look at the economic fundamentals that confront Indian businesses today. First, inflation is showing no signs of cooling down from 7% plus levels.

And a tightening of money supply (cash reserve ratio cuts, or interest rate hikes) may not be the real answer. The commodity price rise phenomenon is globally driven by a shortage on the supply side, and government intervention in an election year will perhaps only aggravate things for Indian producers.

What else is wrong? Crude oil prices are at an all-time high of $120 a barrel. Consider what oil and energy prices are doing to our already creaking government finances. The oil bond bill is likely to cross Rs 1,00,000 crore for 2007-8 from the initial estimates of under Rs 70,000 crore. The fertiliser subsidy bill, too, is likely to cross the Rs 1,00,000-crore mark, at least twice the original estimate. Add to this the effect of the Sixth Pay Commission on public sector undertaking salaries and farmer loan write-offs.

Global cues, too, are anything but encouraging. The last of the subprime worries are not yet out of the system, as bank after bank in the US reveals scary news. Consumer spend in the US— that big driver of production around the globe—is showing clear signs of slowing down, and the shortfall is not likely to be compensated significantly.

Under the circumstances, we continue to maintain our defensive stance on both portfolios, cashing out slowly (and I admit, belatedly) and executing what is called a time-averaged exit. This way we are able to reduce the volatility that comes from poor timing (what if the market rises inexplicably just after we have exited?).

In Safe Wealth, cash has now swollen to over 32% and is likely to increase over the next few fortnights, as the worst effects of global slowdown and fourth quarter corporate results shocks sink in. Correspondingly, the Wealth Zoom portfolio has increased cash from 9% to well over 25%, reflecting the risk-averse attitude with which I am now encashing on its recent recovery.

Wealth Zoom has exited tea producer McLeod Russel with over 60% gain, a rare achievement for your fund manager. The other exits have been less exciting, with moderate profits in oil and gas exploration major Alpha Geo India (13% gain) and Apollo Tyres (23% gain), and awful losses being booked in smaller holdings like Bharat Electronics (-32%) and NIIT Technologies (-53%). In Safe Wealth, we have reduced our exposure to Tata Steel a bit after its sharp recovery in recent times, and exited metals and mining major Sterlite Industries at almost break even levels altogether in view of adverse business dynamics for most metal producers.

So where do we go from here? After some reckless driving, followed by the inevitable crash, we have landed in hospital. The portfolio surgery is going on. But the question remains will we heal? And how? As ever, debate this possibility on our blog, and via your e-mails. Next fortnight, we will carry a review of all your feedback, with a special prize for the best comment!

Share your comments and reviews of the two portfolios. Email it to mtportfolio@intoday.com

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.

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