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Selling shares to reduce risk

With both portfolios taking a hit, Dipen Sheth gets into the fire-fighting mode by opting to increase the cash component and exiting from a number of stocks.

Dipen Sheth | Print Edition: April 17, 2008

Safe Wealth

Sell—NTPC, Reliance, HUL, Tata Power, RCom

Buy—Bharti

Wealth Zoom

Sell—Idea Cellular, Electrotherm

Buy—RCom

The rout is complete. After losing over 15% in the past 14 days, Wealth Zoom has slid into negative territory for the first time in its existence. Spectacular fall, indeed, for a portfolio that had scaled a 62.4% return in less than six months after inception. I resisted the temptation to book profits in early January.

The heavy beta slant of our midcap portfolio has clearly taken its toll on Zoom. During the same period, its benchmark CNX Midcap index receded by a little over 8%.

Not that Safe Wealth has done any better. We have somehow scraped through the past fortnight with the consolation that we are down a mere 2% or so while the benchmark Nifty is down almost 0.9%. Bellwethers stocks such as Infosys Technologies and Hindustan Unilever have, surprisingly, saved us the blushes this fortnight by holding rock steady in an otherwise volatile market. A few months ago, a reader had chided me for having allocated up to 5% of Safe Wealth’s corpus to a slowpoke like Hindustan Unilever when there were far better options available.

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

But it’s during turbulent times like these that the true virtue of a defensive FMCG stock comes into play. Ditto for Infosys. The stock is down 25% from the time we bought it but it has weathered the current downturn with amazing resilience. Even so, Safe Wealth’s NAV is down 21% from its January peak.

Onto our actions for the fortnight. After my clearly expressed pessimism on the global macro headwinds, it is obvious that I need to do some painful purging in both the portfolios. And I am doing this with the understanding that I can go horribly wrong in selling these stocks right now. Still, reducing risk by slowly increasing cash seems prudent, even if not smart.

• We have earned enough on NTPC (up 22% since we bought it), so I don’t mind an exit especially since returns to utilities are capped at 14% in this country. Let’s wait for a major crash before we latch on to this gem again.

• Reliance Industries is a stock where oil prices easing off are sure to lead to rerating of the value of its oil and gas reserves. Top-class management, no questions on capability, but right now we will choose to stay out till the gales of despair in the stock market die down.

• Then again, Hindustan Unilever, that allegedly dull FMCG counter, has returned a full 22% since we bought it when we launched Wealth Safe. Hats off to this steady performer, but we think it’s fully valued at over 20 times 2008 earnings at Rs 234. Exit Hindustan Unilever.

• The one stock where I have a genuine fear of mistiming my sell is Tata Power. Aiming to grow five times over the next six years, this company has also acquired coal mines in Indonesia. However, we will exit this counter for a “marketcaution” reason, rather than a “stock-specific” reason.

• Finally, Reliance Communications (RCom) needs to go for the reason that it cannot fit into this portfolio’s mandate any longer. We are getting Bharti Airtel at a 40% discount to recent highs and cannot ignore this compelling opportunity any more. Switching seems like a good idea. Enter Bharti Airtel, our only buy this fortnight in Safe Wealth. The Wealth Zoom portfolio entails more painful actions.

• Idea Cellular shows no appreciable traction in terms of competing successfully, whether in the market or in terms of financial ratios and parameters, with its more evolved competitors: RCom and Bharti. In fact, I’ve actually shifted our RCom holdings in Safe Wealth to Wealth Zoom, and exited Idea Cellular.

• Electrotherm is a leveraged player in steel furnaces, secondary steelmaking and now into electric vehicles. With no clear USP in the emerging electric vehicles space, and the furnace business in a decline, it looks like the taxincentivised steel business may not be able to support the high debtequity ratio on the company’s balance sheet.

The leading lemons of the Zoom Portfolio have been persisted with. Stalwarts like NIIT Tech, Hinduja Ventures, Ratnamani Metal, Radha Madhav Marble, Southern Biotech and Chowgule Steamship have got the better of my greed in the good times. Having bought them foolishly, the least I can do is not to sell them at recent lows with matching stupidity...

Meanwhile, reader Sameer Saksena has sent in a suggestion that should deal a final, decisive blow to my self-worth. He says that we should look at what might have happened had we not tweaked the portfolio from time to time, and instead just held the original cast for the past nine months or so... Dear Sameer, this is a suggestion of such earthshaking implications that I will take the entire fortnight trying to digest (and then present, hopefully) the real lessons it holds for investors.

Meanwhile, I can immediately tell you that our imaginary brokers would surely have been a wee bit poorer on the brokerage income front had we not gone about churning our portfolio. Interesting, isn’t it? Brokers make money irrespective of whether investors make profits or losses! Almost tempts me to add a brokerage stock to the Wealth Zoom portfolio. But I will resist the urge and wait for the markets to return to normalcy.

Footnote: For the past two months, we have neglected taking into account the dividend inflows to the two portfolio, driven as we were by greed. This fortnight’s NAV calculation for both portfolios thus takes into account all dividends earned on our stocks since 31 January. They add up to only Rs 7,925 but every rupee counts.

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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