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Revisiting the originals

Our fund manager takes a look at how the model portfolios would have fared had they been left untouched.

Dipen Sheth | Print Edition: May 1, 2008

• If the initial stock holdings of the Safe Wealth portfolio had been retained, today its NAV would have been Rs 11.32 instead of Rs 10.76.

• The initial Safe Wealth portfolio mirrors the 14.5% rise of the benchmark Nifty index more closely than the current portfolio.

• In case of Wealth Zoom, the initial portfolio would have given a small return of 2.6% instead of the 3.4% loss that it is in today.

• Both the hypothetical and actual gains of Wealth Zoom are nowhere near the 12.2% gain in the benchmark CNX Midcap index since their launch.

• But 10 months is a very short time frame for the back testing of two investment philosophies.buy and hold versus active trading.

• Also, the Indian economy is an emerging market and therefore more volatile.

We begin the new financial year with a portfolio review that’s pretty unusual. It is inspired by one of the best questions we have ever got from a reader: what if both our model portfolios were left untouched after launch date? And never mind the fact that we retained 29% cash in Safe Wealth and 25% in Wealth Zoom on that fateful first day. Would we have earned decent returns on the invested amount?

Innocuous as it may seem, Sameer Saxena’s question is a loaded one. It’s not just about returns being higher or lower, or even whether we need to adjust for the cash that we had retained during the launch of the model portfolios. The question is whether the fund manager, in his attempt to show that he’s working hard every fortnight, is trading recklessly in and out of stocks whereas all that is needed is unwavering conviction in a few good companies.

Alright, here are the results: Safe Wealth portfolio’s Rs 7.06 lakh of original stock purchases would have been worth Rs 8.37 lakh today. That’s a moderate but decent 18.6% gain in the nine months or so of plain tomfoolery disguised as regular stockpicking by your fund manager. In the interim, the Nifty has returned all of 14.5%, while our actual Safe Wealth portfolio has returned 7.6%. Note, however, that if we take into account the large cash position in the original portfolio, the overall gain would have been 13.2%, which would still beat the Safe Wealth’s actual gain of 7.6%.

Meanwhile, Wealth Zoom as of today is down 3.4%, while freezing it on the day we took our first tentative steps in the investing world would have yielded us a 2.6% gain on the equity part and 2% overall adjusting for the cash that we chose to retain initially. During the same period, the CNX Midcap index rose by 12.2%.

What are the lessons to be learnt? It certainly looks like buy and hold would have earned us better returns. And yes, our brokers would have been poorer too, if that is any added consolation.

Click here to see safe wealth portfolio
Click here to see wealth zoom portfolio

But frankly, I am not convinced with this back test that holding for the long term earns us consistently more returns. Firstly, this is a relatively smaller time interval in which we are testing two different philosophies of investing: active trading vs buy and hold. Second, let’s admit that the knowledge (and, therefore, confidence) with which the initial stock purchases were made was decidedly sketchy. It continues to be that way...

Third, and this is very important, India as an economy (and as a stock market) belongs to the “emerging” class and is much more volatile than some of the more sophisticated or mature economies. There is no way one can be even moderately sure that all the stocks that one buys with a view at one time will not become obvious sells as market and business events play out in future.

Stock markets are all about uncertainty. And a good portfolio manager attempts to create and manage a stock portfolio that appropriately addresses the riskreward appetite of the investor as expressed by a specific mandate given to him.

There are two clear investor mandates that we have: a relatively safer mandate that we address via the Safe Wealth portfolio with its bouquet of large caps, frontliners and stable companies. And then there is the Wealth Zoom portfolio, where we try to outwit the mid-cap maniacs, but include some more stable companies as well to retain a semblance of safety.

In all fairness, we were coasting merrily along till the January debacle. The real lesson to be learnt here is that risk management is as important (if not more so) as return maximisation.

Our macro call on continuously riding the overall risk in an overvalued and euphoric stock market proved to be our undoing, as did our tendency to ride the momentum with some decidedly worthless scrips.

How do we claw back into the game? I think some bigger portfolio surgery is called for, instead of the tentative jabs that I have made in the recent past. It will be driven by an appreciation of what is really a good business and what is not. And whether that good business is available at a fair price. Sounds simple, doesn’t it?

Note: our back testing on the launch-day portfolios has two adjustments. We have reworked the prices for those stocks that underwent splits or distributed bonuses. And, of course, we have incorporated dividends declared after our launch date. The one thing we have not adjusted for is the Tata Steel rights issue.

We should have done this even for our portfolios as they panned out over time, and applied for the rights. (For the frozen portfolios above, we could have added back the Tata Steel rights renunciation proceeds, but for simplicity we have avoided this part.)

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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