“”Sisyphus Challenge
JULY 2019 | ISSUE 79 Alpha Strategist | “Sisyphus Challenge”
Contents
Executive Summary………………………………………………………………...... ……...... 03 Section I………………………………………………………………...... ………..04-11 (Market through Graphs, Our advisory calls, Model Portfolio & performance, Outlook, Investment Opportunities & Investment articles) Section II……………………………………………………...... ………………...12-25 (Detailed views on Equities, Fixed Income, Alternative) Section III……………………………………………………...... …….……….26-65 (Advisory approach, 4C Framework, Update on our recommended products)
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This document is not valid without disclosure; refer the last page for the disclosure Alpha Strategist | “Sisyphus Challenge”
Executive Summary
The growth trend of the domestic economy over the last couple of years can be summed up as taking two steps forward & one step backward. We find an interesting analogy of this in Greek mythology wherein King Sisyphus was condemned till eternity to ceaselessly roll a large rock up asteephillonlytofinditrollingbackdownonnearingthetop.
While India has continued to remain one of the fastest growing economies in the world in the last few years, the pace of growth has been hampered in the past due to demonetization, implementation of GST, and currently due to the stressed situation faced by NBFCs. It is incumbent upon the current Govt. to take up this“Sisyphus Challenge” and work towards maintaining strong economic growth going forward.
The first budget of the new Govt. had numerous challenges to address, both on the domestic and external front. The Govt. has decided to adhere to fiscal prudence with expectation of additional revenues through higher custom duties, excisedutiesandbylevyinghighertaxesonthetopincomeslabs.
The Govt. has indicated that it could raise approx. 10% of its gross borrowing requirements from the overseas market in foreign currency given that external debt is currently low. The gross borrowing target has been kept the same at Rs. 7.1 lakh crore, which is a big positive for the bond market. Another positive was the announcement of purchase of high rated pooled assets of NBFCs, with the Govt. to provide a one-time 6 months partial credit guarantee for first loss up to 10% to banks for a pool of approx. Rs. 1.3 lakh crores. This is likely to potentially ease the liquidity stress faced by the NBFCsector.
The Divestment target has been maintained at Rs. 1.05 lakh crores & there is also a plan to invest Rs. 100 lakh crores into infrastructure over the next 5 years. A negative was the Govt's proposal to SEBI to bring down the promoter holding limitfrom75%to65%.
Going forward, equity markets are likely to shift focus to company specific fundamentals given the broader growth slowdown. With political stability for the next 5 years, interest rates likely to remain benign, and earnings growth expected to recover, market downside is likely to be limited while there is still potential for reasonable returns over the nextfewyears.
With the Govt. looking to ride through its own 'Sisyphus Challenge' of rolling the economy back into a high growth phase, it would be prudent for investors to maintain portfolio discipline by following their Investment Charter and not lettingshorttermsetbacksaffecttheirlongtermwealthcreationobjectives.
For equity investors, we favour a combination of Multi cap strategies and select Mid & Small cap strategies on the MF, PMS, AIF platforms. For fixed income investors, we continue to recommend allocation to high quality accrual schemes (primarily AAA portfolio) with duration up to 3-4 years. While there have been measures taken to increase liquidity in thesystem,whichisapositiveforcreditorientedstrategies,wewouldcontinuebewatchfulinthatspace.
Happy Investing!
Ashish Shanker (Head, Investments – Private Wealth Management)
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Section I
Budget through Graph...... 05
Portfolios Commentary...... 07
Estate Planning...... 08
Investment Charter...... 10
Sample Investment Charter...... 11
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This document is not valid without disclosure; refer the last page for the disclosure Alpha Strategist | “Sisyphus Challenge”
Budget through Graphs
Budget at a glance
Revenue Expenditure
Borrowings & Centrally other liabilites, Good and Other sponsored 20% Services Tax, 19% Expenditure, 8% schemes, 9% Pensions, 5% Central sector schemes, 13% Non-tax revenue, 3% Union Excise duties, 8% States' share of taxes & duties, Non-debt Capital 23% receipts, 9% Customs, 4% Interest payments, 18%
Finance Corporation Tax, Income Tax, 16% Commission, 7% Defence, 9% 21% Subsidies, 8% Source: Ministry of Finance Source: Ministry of Finance
Revenue receipts and expenditure forecast
21 Revenue Receipts (in INR Tn) Revenue Expense (inINR Tn ) 20 19.63 26 24.48 19 GR 16.9% CA 24 142 . % CAGR 18 17.25 17.29 22 21.42 21.41 17 20 16 18.78 15 14.35 18 14 16 13 12 14 2017-18 2018-19 2018-19 2019-20 2017-18 2018-19 2018-19 2019-20 (Actuals) (BE) (RE) (BE) (Actuals) (BE) (RE) (BE)
Source: Ministry of Finance
Capital receipts and expenditure forecast Capital Receipts (in INR Tn) Capital Expense (in INR Tn) 8.5 8.23 4 GR 8 13. 5 % CA . % CAGR 3.39 80 3.5 3.16 7.5 3 7.27 3 7.06 7.16 2.63 7 2.5
6.5 2 1.5 6 1 5.5 0.5 5 0 2017-18 2018-19 2018-19 2019-20 2017-18 2018-19 2018-19 2019-20 (Actuals) (BE) (RE) (BE) (Actuals) (BE) (RE) (BE) Source: Ministry of Finance
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BudgetD ashboard INR Bn YoY% % of GDP
F2020 F2020 F2020 Gross tax revenue growth of 18% is FY 2019 BE FY 2019 BE FY 2019 BE slightly optimistic as it assumes a 14% growth in GST when the Nominal I. Revenue Receipts 15,632 19,628 8.9% 25.6% 8.2% 9.3% GDP growth is estimated to grow by 11% (a)Tax Revenue (net to 13,170 16,496 6.0% 25.3% 6.9% 7.8% Centre) Gross tax revenue 20,802 24,612 8.4% 18.3% 10.9% 11.7% Indirect Taxes + Other Tax 9,550 11,262 4.1% 17.9% 5.0% 5.3% Customs 1,179 1,559 -8.6% 32.2% 0.6% 0.7% Revenues from higher excise duty is Excise 2,310 3,000 -11.0% 29.9% 1.2% 1.4% majorly on account of Re.1/L hike on motor spirit and diesel GST 5,816 6,633 31.4% 14.1% 3.1% 3.1% CGST 4,575 5,260 125.1% 15.0% 2.4% 2.5% IGST 289 280 -83.6% -3.3% 0.2% 0.1% Income tax growth of 23% looks a bit Compensation cess 951 1,093 51.9% 15.0% 0.5% 0.5% ambitious even considering the higher cess for individuals earning Direct Taxes 11,252 13,350 12.3% 18.6% 5.9% 6.3% more than INR 20 mn per annum Corporation tax 6,636 7,660 16.2% 15.4% 3.5% 3.6%
Income tax 4,617 5,690 7.2% 23.3% 2.4% 2.7% Net tax revenues for the Centre is expected to grow 25% due to lower Less share of states 7,615 8,091 13.1% 6.3% 4.0% 3.8% transfers to states (b) Non-tax Revenue 2,462 3,132 27.7% 27.2% 1.3% 1.5% The government has revised the FY20 II. Capital Receipts disinvestment target from INR 900 bn (ex-borrowings) 1,029 1,198 -11.1% 16.5% 0.5% 0.6% to INR 1,050 bn. Holding in PSUs can go below 51% as the government is looking to modify its policy to include Divestment 850 1,050 -15.0% 23.5% 0.4% 0.5% shareholding by government III. Total Expenditure 23,114 27,863 7.9% 20.5% 12.2% 13.2% Defense capital expenditure is (a) Capital expenditure 3,030 3,386 15.1% 11.8% 1.6% 1.6% estimated to rise by a modest 10% YoY to INR 1034 bn (b) Revenue expenditure 20,085 24,478 6.9% 21.9% 10.6% 11.6% Oil subsidy is estimated to rise 52% Interest 5,827 6,605 10.2% 13.4% 3.1% 3.1% YoY to Rs 375 bn; Fertilizer subsidy is up 14% YoY to INR 800 bn; Food Subsidy 2,110 3,389 -6.0% 60.7% 1.1% 1.6% subsidy to rise 7.5% YoY to INR Farmer Income Support (RE) 200 750 — 275.0% 0.1% 0.4% 1842bn The fiscal deficit has been pegged at IV. Fiscal Deficit (III-I-II) 6,454 7,038 9.2% 9.0% 3.4% 3.3% 3.3% of GDP and government's borrowing numbers are also V. Revenue Deficit (III b -I) 4,453 4,850 0.4% 8.9% 2.3% 2.3% unchanged. That's positive for the fixed income market. Further, VI. Primary Deficit (IV - tapping of overseas market as a part 627 433 0.9% -30.9% 0.3% 0.2% of its gross borrowing programme Interest Payments) should also be a welcome move
Source: Ministry of Finance, BNP Paribas
Summary
Recommended Strategies
Equity Bullish Combination of Multi cap and Mid & Small cap strategies in MF/PMS/AIF platforms Fixed Income Bullish on accrual strategies High quality accrual funds Gold Neutral Neutral Me-Gold
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Portfolios Commentary
Tactical changes and strategies ¡ December 15, 2012 – Replaced Income Funds with Dynamic Bond Funds based on the note released - “Interest”ing T i m e s Ahead” ¡ February 14, 2013 – Reduced allocation to Gold by 25% and increased to Dynamic Bond Funds based on discussion in the Investment Committee meeting ¡ April 1, 2013 – Reduced further allocation to Gold by 25% and increased to Dynamic Bond Funds based on discussion in the Investment Committee meeting ¡ May 17, 2013 – Exited Gilt Fund’s and moved to Short-term Funds (40%), Income Funds (40%) and Dynamic Bond Funds (20%) based on the note released - “Yields came tumbling after…to plummet further” ¡ July 29, 2013 – Exited Income Funds and other long duration investments and invested the redemption proceeds in Ultra Short-term Funds based on the note released – “Ride the Tide” ¡ September 20, 2013 – Cash allocation brought back to its strategic weight and invested the balance allocation into gilt funds based on the note released – “The Gilt Edge” ¡ September 27, 2013 – Switched 15% of equity allocation to Information Technology (IT) sector funds from large cap and multi cap funds, based on the note released – “Information Technology– In a position on strength” ¡ September 30, 2013 – Reduced 10% of equity allocation and switched to ultra short term funds based on the note released – “The Bear-nanke Hug – Underweight Equities” ¡ November 30, 2018 – Focus on multi cap and staggered investment to mid & small cap strategies; shift to high quality AAA rated high accrual debt funds ¡ November 20, 2013 – Switched 50% of Short-term Funds allocation to Gilt Funds, to increase duration of the portfolio, based on the note released – “Time to Rebuild Duration – A Déjà vu” ¡ November 25, 2013 – Deployed Cash in Nifty ETFs, based on the note released – “Equity Markets – An Update” ¡ December 3, 2013 – Switched all cash positions to gilt funds, to further increase duration of the portfolio ¡ May 5, 2014 – Reduced allocation to Gilts and moved to Ultra Short term Funds to create liquidity in the portfolio ¡ May 23, 2014 – Switched allocation from IT Sector Funds and Nifty ETFs to Infrastructure Funds and Small cap Funds respectively,based on the note released – “Good Times Ahead!” ¡ September 6, 2014 – Switched allocation from Cash to Gilt funds, to increase the duration of the portfolio based on the note “Way Ahead for Duration”. ¡ September 28, 2015 – Switched allocation from Small & Midcap funds to Large Cap funds, on the back of relatively higher valuations of midcaps as compared to large cap. ¡ September 24, 2015 – On the fundamental front, demand side continues to be supportive for gold. We have thereby revised out short term outlook on gold from underweight to neutral stance. ¡ February 29 , 2016 – Reduced Gilt exposure and allocated the proceeds towards Gold, on the back of better risk reward scenario for gold & bond yields coming below it long term average ¡ April 22, 2016 – Switched allocation from Duration strategies to Accrual strategies, based on the note released – “Time to Shift Gears” ¡ May 31, 2018 – In Fixed Income, we reiterate our stance on accrual strategy, however, given the current valuations, tactical allocation to dynamic bond funds can be considered by investors who can withstand interest rate volatility ¡ May 31, 2018 – Increase allocation towards value oriented multi-cap strategies ¡ November 30, 2018 – Increase allocation to mid & small cap strategies in a staggered manner--shift to high quality AAA rated accrual debt fund ¡ January 31,2019 – We favor a combination of multi cap strategies within Equity MFs and selected high conviction portfolios within the PMS/AIF platform, we recommend high quality accrual funds for incremental investment in fixed income; we have changed our stance to positive for gold in long term ¡ June 30, 2019- We favour a combination of Multi cap and Mid & Small cap strategies in MF/PMS/AIF platforms, we change our stance on gold to neutral in long term and maintain neutral stance in short term As on June 30, 2019 Investment Committee Committee Members Vijay Goel – Managing Director & CEO, Private Wealth Management Ashish Shanker – Head, Investments Gautam Duggad – Head of Research, Institutional Equities, MOSL Kishore Narne – Head, Commodities & Currency Nikhil Gupta – Economist, MOSL Nitin Shanbhag – Senior Group VP , Investment Product Products & Advisory Team,Private Wealth Management External Invitee- Mahesh Patil, Co-CIO-Equity,Birla Sun Life AMC
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Estate Planning
A private trust can be your ally in estate planning
In most cases, there is an overlay of time bound needs of cash flows in a family. It is difficult to foresee such issues.
Creating wealth is an art. Preserving the wealth created is equally an art. Very few people manage to pull off both when they are alive. Challenges emerge when one thinks of transferring wealth to the next generation. There is a web of complex issues. Sometimes, family members have multiple interests. Sometimes the wealth is held by a complex web of holding entities. In some cases, wealth accumulated does not seem to meet the ever-evolving needs of family members. In most cases, there is an overlay of time-bound needs of cash flows in a family. It is difficult to foresee such issues. To address these it is important to look at the nuances which go into making a fairly comprehensive estate plan. Is a will inadequate? It is important to understand that many people who are aware of the estate planning needs do not want to go beyond writing a Will. A Will is a legal unilateral declaration of the intention of an individual with respect to his or her property which he or she wants to bequeath after his or her death. Though a Will is well-accepted by law and society,there are some serious limitations when it comes to large estates. A Will comes into play only after the testator (creator of the Will) dies. This means a Will is fraught with certain amount of legal processes. It needs to be probated. It can be contested in the court of law. Changing a Will to suit evolving needs of the survivors may become a challenge if the testator is not fit enough because of physical or mental illness. In many cases, a will has caused sibling rivalry, which results in destruction of wealth. How to avoid hassles A certain way of avoiding any hassle related to a Will is setting up a private trust to take care of your estate planning needs. Private trusts have been around for decades and can be used as an effective means to transfer wealth to the next generation effectively. A trust is a vehicle through which the estate owner can transfer his property to some beneficiaries and at the same time benefit from it. The trust is managed by trustees. There are three important components of a trust — the creator/author of the trust (also known as Settlor), the trustee and the beneficiaries. Private trusts meant to protect the family's interests can be made as ring-fenced structures to take care of the generations to come. Key benefits of a trust There are three strategic advantages of a trust. Trusts are flexible in nature. They address diverse needs of distant or close relatives at various points in time.
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A combination of a trust and a Will should be followed if an estate owner wants to exercise varying levels of control on his or her assets. Appointments of external and independent individuals or institutional entities as trustees can iron out biases and protect beneficiaries' interests effectively. Trusts preserve a family's fortune. Even in situations of disagreements within the family, wealth is protected for future generations. A trust ensures that wealth is given to the intended beneficiaries only. The biggest advantage of the trust for business families is the business can continue through a trust. Succession planning in the business happens in a transparent and peaceful manner as it provides a high level of transparency. One can also separate management and ownership of the business. Estate owners and beneficiaries can achieve their goals, including philanthropy, effectively through a trust with the help of an independent and institutional trustees. Things to do If one is keen on effective succession planning and open to the idea of seeking assistance of institutions, then private family trusts make a good investment option. Private family trusts have few administrative hassles, are tax-efficient and transparent enough for successful implementation of estate planning. Estate Duty was abolished in India in 1985. However estate duties and inheritance tax is a common phenomenon in the advanced economies. However, the possibility of reintroduction of inheritance tax or estate duties should not be ruled out. Estate planning done through the trust structure is primarily aimed at minimising estate duty or inheritance tax which is imposed on the entire estate (i.e. all the properties and assets) transferred after the death of the estate owner. Given these nuances, it is important that at a suitable age one strategizes succession planning through a trust. Unplanned and unstructured estate planning defeats the very purpose of wealth creation — to bring happiness and reduce discontent not only in one's own life but also in the lives of those we care for.
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Investment Charter
Investment Charter – Purpose & Objectives
Define • Example: Portfolio designed to provide stability and protection from loss. Primary goal is Investment capital preservation with moderate growth Objective • Define any liquidity or cash flow requirements from the portfolio
• Degree of risk you are willing to undertake to achieve investment objectives Risk Tolerance • Understanding that portfolio returns and portfolio risk are positively correlated
• Defining investment horizon, consistent with risk tolerance and return expectations Investment • The longer the investment tenure, the greater likelihood of achieving investment Horizon objectives
• Return expectations has to be viewed in conjunction with risk undertaken, and the Return investment horizon Expectations • Ensuring return maximization, for a given level of risk • Optimizing returns through tax efficiency & legal mechanisms
Portfolio Process
Define & Review Investment Objectives
Ongoing Design Investment Monitoring & Charter In Line Evaluation With Objectives
Implement Analyze Existing Portfolio Changes Portfolio
JULY 2019 | ISSUE 79 10 Alpha Strategist | “Sisyphus Challenge” Sample Investment Charter
General Information & Client Profile Particulars Details Portfolio designed to provide stability and protection from loss. Primary goal is capital Portfolio Characteristics preservation with moderate growth Investment Horizon 3 to 5 Years
Liquidity Requirements 5% of the portfolio to be available for redemptions within 2 working days 80% of the portfolio to be available for redemptions within 7 working days Cash Flow Requirements No cashflows required from portfolio
Restricted Investments No exposure to a single issuer real estate NCD
Performance Benchmarking Fixed Income – CRISIL Short TermIndex Liquid Assets – CRISIL Liquid Fund Index Monthly Basis – Portfolio Advisor Portfolio Review Quarterly Basis – Head of Investment Advisory Annual Basis – CEO Review of Guidelines Guidelines to be reviewed every quarter and / or at the discretion of client / financial advisor Investment Charter – Asset Allocation Guidelines Mandate Criteria Portfolio Compliance Equity (Mutual Funds, Direct Equity, AIFs) – Equity – 3.7% Fixed Income (Mutual Funds, Structures, AIFs, Direct Debt) – Alternatives (Real Estate, Private Equity, Long Short Funds) – Liquid Assets (Liquid, Ultra Short-Term, and Arbitrage Funds) Fixed Income – 85.3% Asset Allocation – Liquid Assets – 11.0%
Return Expectations1 8% to 10% Pre Tax 8.2% Investment Time 2 3 Years to 5 Years Horizon 2.4 Years 1Return expectations for portfolio since inception for active and closed holdings. There is no guarantee that the performance will be achieved. 2Average age of portfolio holding – Including Closed Holdings Investment Charter – Exposure Guidelines Mandate Criteria Portfolio Compliance Large Cap (Top 100 Companies) – Large Cap – 48.2% Market Cap Limits Mid Cap (101 to 250th Company) – Mid Cap – 23.2% Small Cap (251st Company Onwards) – Small Cap – 28.6% Interest Rate Risk Modified Duration – Mod Duration – 1.85 AAA and Above – 60.2% Credit Quality AA & Above – 80.3% A & Below – 19.8% Closed Ended Maximum allocation to closed ended investments – 14% Investments Mutual Funds & Single AMC – Fund House A – 19.2% Managed Accounts Single Scheme – Fund B – 13.7%
Issuer 1 – 8.4% Other Instruments Single Instrument- Instrument 1 – 8.4%
Proprietary Products Own AMC/ Self-Managed Funds/ Structures/ Debt - AMC 1 – 12.1%
Green indicates compliance, meaning it is matching the criteria, whileRed indicates non-compliance, meaning it is not matching the criteria JULY 2019 | ISSUE 79 11 Alpha Strategist | “Sisyphus Challenge”
Section II
Macro Economy...... 13
Equities...... 18
Fixed Income...... 22
Alternatives...... 25
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This document is not valid without disclosure; refer the last page for the disclosure Alpha Strategist | “Sisyphus Challenge”
Macro Economy
Major Economies - Snapshot United US Japan China Germany France Euro Area Kingdom GDP YoY 3.20% 0.90% 6.40% 0.70% 1.20% 1.80% 1.20% Inflation rate 1.80% 0.70% 2.70% 1.60% 1.20% 2.00% 1.20% 10yr Gsec 1.96% -0.15% 3.18% -0.41% -0.13% 0.66% 0.58% Policy rate 2.50% -0.10% 4.35% 0.00% 0.00% 0.75% 0.00%
Emerging Economies - Snapshot India Indonesia Brazil Mexico South Korea Hong Kong Russia GDP YoY 5.80% 5.07% 0.50% 1.20% 1.70% 0.60% 0.50% Inflation rate 3.05% 3.28% 4.66% 4.28% 0.70% 2.80% 5.10% 10yr Gsec 6.77% 7.25% 7.35% 7.40% 1.52% 1.64% 7.40% Policy rate 5.75% 6.00% 6.50% 8.25% 1.75% 2.75% 7.50%
U.S. Federal Reserve holds interest rates steady for June; hints at future cut The US Federal Reserve kept the policy rate unchanged in the range of 2.25 - 2.50 per cent in its June monetary policy. Federal Reserve said that it does not expect any rate cut this year but forecasted one for 2020. U.S. stock market rallied post the Fed Policy with the S&P 500 climbing 6.3% in June. IMF has suggested reversal of all US tariffs The Fed officials have lowered inflation projection from 1.8 per cent to 1.5 per cent for the and avoiding any similar year and they also expect to miss their 2 per cent target next year as well. moves in the future Officials still expect a strong job market and economic expansion to continue but uncertainties about this outlook have increased. In light of these uncertainties and muted inflation pressures, the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion.
Fed projections June 2019 Projections (Median) March 2019 Projections (Median) Dec 2018 Projections (Median) 3.1 3.1 2.9 2.8 2.8 2.8 2.62.6 2.6 2.4 2.4 2.1
2019 2020 2021 Longer Run Source: Bloomberg
ECB President suggests possibility of monetary easing Mario Draghi announced in a defiantly dovish tone that if the economic situation deteriorates in the coming months, the ECB would announce further stimulus. On the back of the sovereign debt crisis of 2011, the ECB announced a series of measures to boost inflation and ensure price stability. These included rate cuts, purchases of corporate and government bonds, and cheaper loans to banks.
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In the second half of 2018, the ECB decided to lift some of this stimulus amid a recovery in the region. However, the recent dovish approach by the central bank suggests that it is too early to remove all the support to the economy and, more importantly, further interventions are likely to be required. The Eurozone gross domestic product (GDP) is set to grow by 0.3 percent in the second quarter of 2019. Ongoing trade conflicts and a cooling-off of the global economy would likely see GDP growth in the Eurozone decline slightly compared to the 0.4 percent growth registered in the first quarter of 2019. Eurozone inflation has fallen to just under 1.2 per cent, the lowest level since records began in 2003.The Eurozone's largest economy Germany was hit by the negative effects of global trade conflicts and the German 10-year bond yield hit -0.30% for the first time ever. Iran faces severe drop in oil exports while OPEC extends supply cut agreement Iran’s crude exports have dropped to 300,000 bpd in June from 2.5 million bpd in April last year before the U.S exited the nuclear deal and imposed sanctions. Due to these trade sanctions, oil output has fallen drastically in Iran, even more than the supply cut decided by the OPEC. In Jan 2019, the OPEC had decided to reduce supply by 1.2 million barrels a day. Washington in May The OPEC and its allies convened to discuss extending a 1.2 million barrel-a-day cut into the ended sanction waivers second half. The cartel’s three biggest members – Saudi Arabia, Iraq and the United Arab to importers of Iranian Emirates – were all eager to continue the policy of reduced production and now Russia, oil to cut Iranian which was initially skeptical, has agreed to extend this deal by six to nine months. sales to zero What is perhaps more worrying for OPEC is that oil prices reacted weakly to the news: Brent and WTI had both retreated from the spike that followed the initial announcement of the cuts agreement. The Brent crude, that had reached a high of $75 in April 2019, is currently trading in the range of $60-$65. This could be due to worry about the prospects of the global economy in the context of the U.S.-China trade war. Indian Economy GST collections fall below INR one trillion in June The GST collection fell slightly to INR 0.99 tn, after crossing the INR 1 tn mark for the past three consecutive months. On the second anniversary of the GST implementation, 20 states are government plans to bring down the multiple tax slabs to a two-tier one. independently The sluggish pace of revenue growth is largely due to two factors- tax rate cuts on multiple showing more than items in the past two years and also traders who have been indulging in GST frauds. Also 14% increase in their slowdown in economic activity has also contributed to lower tax collections. revenues through SGST The slow growth also leaves very little room for the GST Council to cut tax rates in the near future unless revenue collection sees a surge. It also implies that the authorities will now focus on improving compliance by taxpayers using data collected from various sources.
GST collections fall slightly GST collec ons (INR Bn) Average 1200 1139 1100 1035 1066 1007 1025 1002 1000 Avg : 960
900
800
700
600
Jul-18
Jan-19
Jan-18
Jun-19
Jun-18
Oct-17
Oct-18
Apr-19
Apr-18
Feb-19
Feb-18
Sep-17
Sep-18
Dec-17
Dec-18
Aug-17
Aug-18
Nov-17
Nov-18
Mar-19
Mar-18
May-19
May-18 Source: Ministry of Finance
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Q4FY19 CAD in line with expectations India's Q4FY19 current account deficit (CAD) at USD4.6b (0.7% of GDP) is much lower than USD 13.0 bn (1.8% of GDP) in Q4FY18 and USD 17.7 bn (2.7% of GDP) in the previous quarter. The number is way lower than the market consensus of USD 6.05 bn. This is because of lower oil prices, which averaged 1.9% lower YoY in Q4FY19 resulting in India's net oil import bill touching a 5-quarter low of ~USD 32 bn in Q4FY19 (4.5% of GDP) Capital flows, which is generally used to finance current account deficit, rose to USD 19.2 bn in Q4FY19 (2.7% of GDP) from USD 13.8 bn a quarter ago. A major reason for the rise in capital account surplus is an overall FPI inflow of USD 9.4 bn in Q4FY19. FDI inflows inched up to USD 6.42 bn in Q4FY19. Other investments, however, fell 84% YOY to USD2.7b in Q4FY19. Capital flows were more than sufficient to fund the CAD, resulting in an accretion of USD14.2b to India's foreign exchange reserves in Q4FY19-– the highest in sixteen quarters. Despite better performance in Q4FY19, CAD in FY19 was at USD57.2b (2.1% of GDP) – the highest in six years due to a 29% YoY surge in the oil bill to USD140.5b during the year. Gold import bill in FY19 declined 3% YoY to USD32.9b. CAD is expected to average at 2.2% in FY20.
CAD growth in line with expectations CAD (% of GDP) 2.9 2.5 2.4 2.5 2.1 1.8 1.4 1.1 0.6 0.7 0.4 0.1
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4 FY17 FY18 FY19 Source: CSO, MOSL Retail inflation marginally higher at 3.05% CPI-based retail inflation inched up marginally to a seven-month high of 3.05% in May'19 from 2.99% a month ago. Higher headline inflation can primarily be attributed to food inflation, which rose to an 11-month high of 1.9% in May'19 due to an uptick in inflation in vegetables from 2.9% in Apr'19 to 5.5% last month. After remaining in the deflationary zone for 29 months, pulses inflation came in at 2.1% in May'19. Overall, almost all sub-components of food posted higher inflation than a month ago, except fruits, which witnessed deflation from 4.9% in April to 5.2% in May'19. Components Core inflation (all items excluding 'food & beverages', 'pan, tobacco & intoxicants' and 'fuel of 'core services' & light') eased to 4.2% YoY in May'19, the lowest level in 22 months. Inflation in 'core witnessed lower services' decelerated to a 10-month low of 5.6% in May'19 from 5.9% a month ago, inflation supported by a decline in inflation across categories—household, health, transport and communication, education, recreation and personal care. Although marginally higher in May'19, retail inflation remains subdued. Lower level of retail inflation and subdued GDP growth raise the possibility of a 25bp rate cut in the RBI's August monetary policy meeting. Inflation is expected to cross 4% in Oct'19 and average 4.1% in FY20.
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Retail inflation up marginally to 3.05%..... …due to food inflation inching upwards
8.0 CPI (% YoY) Contribu on to change in infla on - MoM basis (%) Cereals & products 0.01 6.0 Pulses & products 0.06 Sugar & products 0.05 Vegetables 0.16 4.0 3.05 Other food & beverages 0.01 Pan, tobacco & intoxicants (0.01) 2.0 Fuel & light (0.01) Housing 0.00 0.0 Clothing & footwear (0.01) Fuel for vehicles (0.02)
Jan-19
Jan-17
Jan-18 Jan-16 Other misc. items (0.11)
Sep-15
Sep-17
Sep-18
Sep-16
May-15
May-19
May-17
May-18
May-16 Source: CSO, MOSL Source: CSO, MOSL
Wholesale inflation at a 22-month low Wholesale price-based inflation slipped to 22-month low at 2.45% in May aided by falling prices of food articles, fuel and power items. Inflation in food articles basket was 6.99%, down from 7.37% in April'19.Vegetable inflation eased to 33.15% in May this year, down from 40.65% in the previous month. Inflation in 'fuel and power' category cooled to 0.98% from 3.84% last month. Core WPI inflation Manufactured items too saw decline in prices with inflation at 1.28% in May'19, against at 1.2 per cent is 1.72% in April'19. Core inflation at 1.2% is at a 29 month low in May'19. at a 29-month low in May 2019 This is clearly an indication of the weakening of demand impulse in the economy. Dwindling auto and FMCG sales growth has been pointing towards this for the past several months. The government revised downwards the WPI for March to 3.1% from the provisional rate of 3.18% announced earlier. RBI projected upward bias in food inflation in near term due to uncertainty in monsoon, unseasonal spike in vegetable prices and crude oil prices fluctuations as risks to inflation.
Wholesale inflation falls… …due to falling food inflation
7.0 WPI (%YoY) % YoY Mar-19 Apr-19 May-19 6.0 7.4 5.0 7.0 4.0 5.4 3.0 5.1 2.0 2.45 3.8 1.0 0.0 2.2 1.7 -1.0 1.3 1.0 -2.0
Jul-17
Jul-18
Jul-16
Jan-19
Jan-17
Jan-18
Sep-17
Sep-18 Sep-16 Primary ar cles Fuel & Power Manufactured Products
Nov-17
Nov-18
Nov-16
Mar-19
Mar-17
Mar-18
May-19
May-17
May-18
May-16 Source: DIPP Source: DIPP Industrial Production at a 6-month high Index of Industrial Production (IIP) growth accelerated to a six-month high of 3.4% in Apr'19 v/s 0.4% a month ago. The rise was largely broad-based with the push coming from all the All segments except three categories— manufacturing, mining and electricity. infrastructure/ Manufacturing growth accelerated to a four-month-high of 2.8% in Apr'19 v/s 0.1% in construction Mar'19. Mining growth was at 5.1% v/s 0.8% a month ago, while electricity growth came in exhibit faster output at 6.0% v/s 2.2% in Mar'19. Growth accelerated in almost all the major categories within the growth in Apr'19 manufacturing sector. Growth in food products inched up to 11%, while that in chemicals accelerated to 2.8%, in pharmaceuticals to 4.3% and in basic metals to 3.1%. Growth in refined petroleum products decelerated to 4.2% in Apr'19 from 4.6% a month ago. Growth in infrastructure/construction however, decelerated to 1.7% in Apr'19 (lowest level in 19 months) from 6.4% a month ago.
JULY 2019 | ISSUE 79 16 Alpha Strategist | “Sisyphus Challenge”
IIP growth is expected to average at 3.7% in FY20, similar to that in FY19. Growth is expected to come in at 3.1% in 1QFY20, lower than 5.1% in 1QFY19.]
IIP growth accelerates… …due to good performance across all sectors (% YoY) 10.0% IIP (%YoY) Manufacturing Electricity Mining 12.0% 8.0% 10.0% 8.0% 6.0% 6.0% 3.45 4.0% 4.0% 2.0% 0.0% 2.0% -2.0% 0.0% -4.0% -6.0% -2.0% -8.0%
Jul-18
Jul-17 Jul-16 Jul-18
Jan-19
Jan-18 Jan-17 Jan-19
Jun-18
Oct-18
Oct-17 Oct-16 Oct-18
Apr-19
Apr-18
Apr-17 Apr-16 Apr-19 Apr-18
Feb-19
Sep-18
Dec-18
Aug-18
Nov-18
Mar-19
May-18 Source: MOSPI Source: MOSPI Trade deficit increases slightly to USD15.4bn in May Exports have risen 3.9% to USD29.9bn. Within exports, growth of 51% was seen in electronic goods, 21% in chemicals, 14% in textiles raw materials and 4% in engineering goods. These four items together accounted for 40% of total exports in May'19. However, exports of other products like petroleum products fell by 1% and gems & jewellery by 7%. Imports grew by only 4.3% to USD45.4bn. Apart from petroleum and gold which accounted for 38% of imports in May'19, imports of products like silver fell by 14%, pearls and precious stones by 24%, and transport equipment by 3%, which helped offset a higher rise in overall imports. Therefore India's trade deficit widened slightly by 5% YoY to USD15.4bn during May'19 as compared to USD14.6bn during Apr'18. The rise is largely because of higher petroleum and gold imports, as non-oil non-gold imports fell in the month. Overall trade balance in Apr- May'19 stood at USD30.7b, 8.3% higher than USD28.3b in Apr-May'18.
Trade deficit widens…. …as imports grew faster than exports
50 Exports Imports Trade Balance 40 Exports (YoY %) Imports (YoY %) 35 30 25 25 20 15 10 5 0 0 -5 -10 -25 -15
Jul-17
Jul-18
Jul-17 Jul-18
Jan-19
Jan-18
Jan-19
Jan-18
Sep-17
Sep-18
Sep-17 Sep-18
Nov-17
Nov-18
Mar-19
Mar-18
Nov-17 Nov-18
May-19
May-17
Mar-19
Mar-18
May-18
May-19
May-17 May-18 Source: Ministry of Commerce Source: Ministry of Commerce
JULY 2019 | ISSUE 79 17 Alpha Strategist | “Sisyphus Challenge”
Equities
Performance suggests expectations from budget are low Key equity benchmark indices fell in the month of June, with Nifty, CNX Midcap and CNX Small Cap down -1.12%, -1.70% and -5.32% respectively. During the month the market factored the negatives of retaliatory high tariffs by India after US withdrew duty free benefits for Indian Exports under Generalized System of Preference (GSP), jump in crude oil prices, liquidity concerns for NBFCs, escalating tensions between Iran and US. However the losses trimmed as the US Fed's dovish stance boosted investor confidence. Volatility was seen in the Mid and Small Cap space. Performance across market capitalization Ni y 50 (%) CNX Mid Cap (%) CNX Small Cap (%) 9.48 7.64 7.00 5.99 4.01 5.37 4.72 2.53 3.75 3.83 2.95 2.69 2.24 1.83 2.12 1.32 1.07 1.49 0.09 1.25 -0.13 -0.20 -0.73 -1.12 -0.56 -2.08 -3.07 -3.82 -1.69 -1.70 -6.42 -5.65 -5.53 -5.31 -3.79 -5.32 -8.33
-13.89
-19.79
Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Source: Bloomberg From the valuations perspective, the Nifty is trading at a 1-year forward P/E of 19.3x (MOSL estimates), above its long term average of 17.9x. Nifty 1-year forward P/B is at 2.7x (MOSL estimates), also trading slightly above its long term average of 2.6x. While valuations look slightly expensive, these are on the back of depressed earnings growth over the last few years.
Nifty 50 Forward P/E (x) - Long term average Nifty 50 Forward P/B (x) - Long term average 27 3.9
22 19.3 3.0 10-Yr Avg: 17.9x 10-Yr Avg: 2.6x 17 2.7
2.1 12
7 1.2
Jun-09
Jun-10
Jun-11
Jun-12
Jun-13
Jun-14
Jun-15
Jun-16
Jun-17
Jun-18
Jun-19
Jun-09
Jun-10
Jun-11
Jun-12
Jun-13 Jun-17 Jun-16 Jun-14 Jun-15 Jun-18
Jun-19 Source: MOSL Source: MOSL Long term outlook in favor of Multi cap and Mid & Small cap strategies Favor a combination Stability in government for the next five years is a huge positive for implementation of of multi cap strategies reforms and augurs well for India from a GDP growth perspective. We believe that the as well as mid & small market will now focus on fundamentals and earnings rather than sentiments. We favor cap strategies multi cap strategies as well as mid & small cap strategies.
JULY 2019 | ISSUE 79 18 Alpha Strategist | “Sisyphus Challenge”
Midcaps trading at slight premium to large caps 2.3 Mid to Large Cap Premium Avg. Premium 2.1 1.9 1.7 1.5 1.3 10 Year Average Premium - 1.14x 1.1 0.9 0.7 0.5
Jun-13
Jun-15
Jun-19
Jun-17
Jun-18
Jun-16
Jun-14
Dec-13
Dec-15
Dec-17
Dec-18
Dec-16
Dec-14 Source: Bloomberg The PE premium for Midcaps have sharply corrected from its peak in June 2018 and currently it is at 1.15x times Nifty,which is nearly equal to its 10 Yearaverage of 1.14x. Performance Divergence: The Nifty index in the month of May touched its all-time high, however the returns of the Index was moderated in the month of June and continued to be largely biased due to lack of market diversity and narrowness of the equity rally. The narrowness can be gauged by the advances to decline ratio which stood at 0.71.
Nifty-50 Top-15 Stock (Re-based) Next-35 Stock (Re-based) Nifty Midcap-100 Top-15 Stock (Re-based) Next-85 Stock (Re-based) 14,500 24,500 Top 15 stocks delivered Top 15 stocks delivered 13,686 22,901 13,000 return of 30% 22,000 21,134 return of 8%
Index delivered 11% 11,500 10,531 11,700 19,500 Index delivered return -18% return 17,353 Next 35 stocks delivered 10,000 17,000 16,748 negative return of 11% 9,333 Next 85 stocks delivered negative return of 21% 8,500 14,500
Jul-18
Jul-18
Jan-19
Jan-18
Jun-19
Jun-18
Oct-18
Jan-19
Jan-18
Apr-19
Apr-18
Jun-19
Jun-18
Feb-19
Feb-18
Oct-18
Sep-18
Apr-19
Apr-18
Feb-19
Sep-18
Feb-18
Dec-17
Dec-18
Dec-18
Aug-18
Aug-18
Nov-18
Dec-17
Nov-18
Mar-19
Mar-18
Mar-19
Mar-18
May-19
May-18
May-19
May-18 Source: Bloomberg, MOSL Polarization of stock market is visible in both Nifty 50 and Nifty Midcap 100, wherein the positive returns of both the indices are contributed by only a handful of stocks. In the Nifty, the top 15 stocks has delivered a return of 30%, whereas the rest 35 stocks delivered a negative return of 11% For the Nifty Midcap 100, the top 15 stocks delivered a return of 8% and the next 85 stocks delivered a negative return of 21% Fundamental valuation indicators trade in fair value to slightly overbought zone To gauge the investment attractiveness of the markets, we track two indicators viz. Motilal Oswal Value Index (MOVI) and Earnings yield to Bond yield (EY-BY). Both these indicators help us understand if the markets are cheap or expensive.
We suggest investors MOVI comprises of price to earnings, price to book value and dividend yield. A low MOVI to invest in lumpsum level indicates that the market valuation appears to be cheap and vice versa. Based on our in the next few months analysis, for a three-year holding period, there has been no instance of negative return when the entry point in the market based on 90-day average MOVI level is below 100. Currently, the 90-day moving average ratio stands at 115.1, indicating that equity markets are trading at fag end of fair value zone. Investors have made positive returns 71% of times for 3-year holding period even at these levels.
JULY 2019 | ISSUE 79 19 Alpha Strategist | “Sisyphus Challenge”
Similarly, earnings yield to bond yield also trades in fair value to slightly overbought zone. Based on historical data, equity as an asset class becomes very attractive when EY/BY trades above 0.8. Currently, EY/BY trades at 0.54 below its 10-year average of 0.67. Even at current level, investors have made money 86% of times for a 3-year holding period. Taking both valuation indicators into consideration, we suggest investors to invest in lumpsum in the next few months and capitalize on any sharp decline by incremental deployment.
Valuation indicators suggest markets in overbought zone
150 MOVI Base 1.2 Earnings:Bond Yield Average 140 Current Level: 119.6 1.1 130 90-DMA: 113.4 1.0 120 110 0.9 100 100 0.8 Current EY-BY: 0.55 90 0.7 10-year average: 0.67 80 0.6 70 60 0.5 50 0.4
May-13
May-15
May-12
May-11
May-19 May-09
May-13
May-17
May-15
May-12
May-18
May-11
May-16
May-09 May-19
May-10
May-17
May-14
May-18
May-16
May-10
May-14 Source:Bloomberg Source:Bloomberg 3-year forward returns % of % of At current Max Min Average Median times Max Min Average Median times 90-DMA above 0% At current above 0% MOVI EY-BY level level 29% -16% 2% 4% 71% 12% -3% 4% 0% 86%
FIIs remain net buyers for three consecutive months Foreign investors remained net buyers in June. FIIs contributed around INR 1,032cr in this month. DII's, also remained net buyers for the second consecutive month with an inflow of Participation of INR 3,613cr in June 2019. FIIs decline in The DIIs inflow for the current month was due to domestic mutual funds. Domestic MFs equity market were net buyers for the third consecutive months with net inflow of INR 6,107cr in June 2019. Insurance remained net sellers for the second consecutive month with a net outflow of INR 2463cr. FIIs remain net buyers in the month of June (in INR '000 crore)
40 DII FII Nifty (RHS) 30 11,500 20 10,500 10 0 9,500 -10
-20 8,500 -30 -40 7,500
Jun-19 Jun-18 Jun-17
Sep-18 Sep-17
Dec-18 Dec-17
Mar-19 Mar-18 Source: Bloomberg, MOSL Flows in INR Cr. June - 2019 May - 2019 Mutual Fund 6,107 5,133 Domestic Institutional Insurance -2,463 -210 Investors (DIIs) Total 3,644 4,923 Foreign Institutional Investors (FIIs) 1,033 8,832 As on June 30, 2019 JULY 2019 | ISSUE 79 20 Alpha Strategist | “Sisyphus Challenge”
Sectoral Performance for the month of June 2019 For the month of June, majority of the sectors closed in red. S&P BSE Consumer durables was the top gainer, up 5.8% followed by Power (4.2%) and Metals (3.3%). The factors that led the gains were increased sales of ACs/fridges due to extensive heat wave, expectation of hike in import duty for steel. The top looser was Oil and Gas, down -5.9%, followed by Healthcare (-3.1%), Auto (-2.9%) and Telecom (-2.7%). The factors that contributed to the loses were rising crude oil prices, USFDA compliance related issues, sluggish auto sales and slowdown in consumption. Sectoral performance sector wise
5.8% 4.2% 3.3% 0.1% 0.0%
-0.4% -0.8% -1.2% -1.4% -2.7% -2.9% -3.1% -5.9%
e
IT
PSU
Auto
Bank
Metal
FMCG
Realty
Power
Telecom
Oil & Gas
Durables
Consumer
Health Car
Capital Goods Capital
Source: MOSL
BSE Mid BSE Small Health Capital Consumer Date Sensex FMCG Bank Telecome IT Oil & Gas Auto PSU Realty Metal Power Cap Cap Care Goods Durables Jan/18 5.6% -2.6% -2.7% 0.2% 7.4% -11.8% -1.6% 6.6% 0.5% -3.0% 6.4% -0.6% 0.0% -0.9% 3.3% -2.6% Feb/18 -5.0% -4.6% -3.1% -1.9% -8.6% -2.9% -3.1% -1.3% -5.3% -4.3% -6.3% -8.6% -5.4% -5.7% -1.6% -4.2% Mar/18 -3.6% -3.6% -6.3% -2.1% -3.9% -7.9% -6.8% -3.4% -5.7% -3.1% -3.1% -5.7% -9.7% 5.1% -12.2% -4.4% Apr/18 6.6% 6.6% 8.3% 9.9% 5.3% -1.8% 7.6% 9.0% -1.3% 7.4% 5.8% 0.0% 9.0% 0.5% 7.2% 5.3% May/18 0.5% -5.9% -6.3% -0.1% 4.7% -7.1% -8.1% -1.8% 0.0% -5.3% -3.7% 0.5% -8.0% -7.6% -4.7% -4.9% Jun/18 0.3% -3.5% -7.1% -0.7% -2.5% -1.7% 7.7% 2.9% -5.3% -2.6% -7.1% -7.6% -7.2% -2.2% -4.0% -8.6% Jul/18 6.2% 3.6% 3.4% 7.1% 6.0% 0.4% 1.4% 3.1% 10.0% 2.8% 4.6% 5.4% 1.0% 3.4% -3.1% 1.5% Aug/18 2.8% 5.4% 3.7% 6.3% 2.4% -0.9% 12.2% 5.9% 0.4% 0.9% 3.8% 2.9% 2.2% 3.8% 9.2% 8.4% Sep/18 -6.3% -12.5% -16.1% -9.9% -11.8% -13.4% -5.8% -1.1% -1.5% -13.1% -9.9% -9.3% -20.5% -11.8% -3.9% -9.9% Oct/18 -4.9% -1.0% -1.6% -3.3% 1.3% -4.1% -2.0% -6.4% -10.8% -7.4% 2.2% -1.3% -1.4% 0.0% -5.7% 1.5% Nov/18 5.1% 2.9% 1.6% 4.7% 5.6% 1.2% -2.7% -0.9% 0.0% 5.1% 6.6% -3.4% 6.7% 7.2% -5.5% -2.4% Dec/18 -0.3% 2.7% 1.9% 1.6% 1.4% -0.3% -2.9% -1.5% 3.8% -0.3% 1.0% 5.8% 0.3% 0.8% 0.1% 4.6% Jan/19 0.5% -5.7% -5.3% -1.8% 1.2% -1.2% -0.3% 6.4% -1.0% -11.2% -8.0% -4.6% -1.3% 2.7% -7.4% -5.9% Feb/19 -1.1% -1.7% -1.7% -2.3% -2.3% 1.1% -0.9% 0.9% 1.4% 1.7% -1.3% -2.4% 1.2% 0.7% -1.8% -2.8% Mar/19 7.8% 8.1% 9.8% 3.4% 13.7% 4.1% 4.7% 0.4% 10.6% 0.1% 8.1% 13.4% 15.7% 11.4% 5.5% 11.3% Apr/19 0.9% -5.5% -0.9% 0.2% -2.4% -5.0% -0.3% 4.7% 0.6% 0.1% -2.4% -2.5% -3.3% 0.1% 1.4% -3.2% May/19 1.7% 1.7% 1.4% -2.1% 5.8% 4.1% -7.4% -2.7% 2.5% -2.1% 10.6% 5.1% 9.6% 3.5% -6.6% 2.1% Jun/19 -0.8% -4.2% -1.9% -1.4% -0.8% -2.7% -3.1% -1.2% -5.9% -2.9% -0.4% 0.1% 0.0% 5.8% 3.3% 4.2% CYTD 9.2% -7.8% 0.7% -3.9% 15.1% 0.1% -7.4% 8.6% 7.7% -14.1% 5.5% 8.2% 22.4% 26.3% -6.2% 4.7% FYTD 1.9% -8.0% -1.5% -3.2% 2.4% -3.7% 0.7% -10.5% -3.1% -4.9% 7.5% 2.5% 6.0% 9.5% -2.2% 2.9% Source: Bloomberg Note: Performance in absolute terms Outlook From valuation perspective the market seems to be reasonably valued. The rising household income and increased spending in rural is likely to lead to revival of consumption and any cyclical uptick in demand should eventually translate in corporate earnings which has remained subdued in the previous years. Fundamentally, after tepid four years, earnings appear set for a recovery, especially led by Banking (with credit growth pick-up, return of pricing power, moderation in fresh slippages and lower credit costs). The sharp moderation in valuations for mid-caps opens up the space for bottom-up opportunities. We suggest investors to invest in lumpsum and capitalize on any sharp market decline through incremental deployment. We favor a combination of Multi cap strategies and Mid & Small cap strategies in MF/PMS/AIF platforms.
JULY 2019 | ISSUE 79 21 Alpha Strategist | “Sisyphus Challenge”
Fixed Income
Room for further monetary easing in the near to medium term RBI has further cut rates by 25bps in its June 2019 monetary policy, along with shifting from neutral stance to accommodative. This reflects the central bank's concerns about sluggish economic growth in India and abroad. The repo rate has reached a 9-year low. RBI's own inflation projection is likely to remain less than 4% for the next 12 months. The real concern is lack of transmission of rate cuts into effective lending rates. The MPC rate cut decision led to the dropping of the 10-year G-sec yield by 10bps to 6.9%. Third consecutive rate cut on back of weaker growth and benign inflation projections
12.0 10 Yr Gsec (Yield %) Repo Rate (%) CPI (%) 11.0 RBI changes stance 10.0 9.0 from Neutral to 8.0 7.0 6.9 Accommodative 6.0 5.0 5.75
4.0 3.1 3.0 2.0 1.0
-15 -16
Jul-13
Jul-14
Jul-15 Jul-16
Jan-14
Jan-15 Jan-16
Jan-17
Jun-18
Jun-19
Oct-17
Oct-18
Apr-18
Apr-19
Sep-13
Sep-14 Sep-15
Sep-16
Feb-18
Feb-19
Dec-12
Dec-17
Dec-18
Aug-17
Aug-18
Nov-13
Nov-14 Nov-15
Nov-16
Mar-13 Mar-14
Mar-15 Mar-16
Mar-17
May-13
May-14
May May
May-17 Source: Bloomberg, MOSL Going forward, we believe that the reasonable headline fiscal targets and benign inflation may allow RBI to continue with its monetary easing. Having said, the Central Bank would also want to see how the certain risks play out such as the uncertainty in oil prices, probability of El Nino effects in 2019. Liquidity situation seems to be under control The liquidity in the system has moved from deficit to surplus territory in early June after a RBI resorts to OMOs large injection of durable liquidity by RBI in previous months. The Central Bank has also resorted to other liquidity measures like Forex Swap in addition to OMOs to ease liquidity in and Forex swaps for the system. The quantum of OMOs has been to the tune of Rs.3 Lakh Crs in FY19 and Rs.52, maintaining neutral 000 Crs in FY20 till date. Forex swap has also helped in giving signals for a strong rupee, durable liquidity reduce hedging costs and has added nearly Rs.70, 000 Crs to the durable liquidity. Such measures signal RBI's efforts for effective transmission of rates and its reduced dependency on OMOs only for managing durable liquidity.
580,000 System Cash Liquidity OMO Purchase/(Sale) INR Bn 530,000 480,000 3000 430,000 380,000 330,000 280,000 230,000 180,000 1100
Rs. Crs 130,000 80,000 30,000 631 520 (20,000) (70,000) (120,000) (170,000) (220,000) -293 (270,000) -900
Jul-19 Jul-18 Jul-17 Jul-16
Jan-19 Jan-18 Jan-17 Jan-16
Sep-18 Sep-17 Sep-16 FY15 FY16 FY17 FY18 FY19 FY20
Nov-18 Nov-17 Nov-16
Mar-19 Mar-18 Mar-17 Mar-16
May-19 May-18 May-17 May-16 Source:Bloomberg, MOPWM Research, RBI Source:Bloomberg, MOPWM Research, RBI High quality accrual strategies offers visibility of returns with higher margin of safety We find absolute value in high quality (AAA) strategies with duration in the range of 2-6 years since the bonds in this bucket are currently trading at a premium of 100 – 140 bps over G-Secs with similar maturities.
JULY 2019 | ISSUE 79 22 Alpha Strategist | “Sisyphus Challenge”
The recent unfolding of credit related defaults resulting in risk aversion and liquidity squeeze in the system has also led to artificial increase in corporate bond yields. We recommend incremental allocation towards high quality AAA oriented strategies in order to lock in at higher yields with relatively higher margin of safety. We advise our investors to avoid incremental allocation to credit oriented strategies and within existing fixed income portfolios restrict credit oriented allocation to not more than 20% -25%.
Credit related events and liquidity crunch has led to increase in corporate bond yields over the last few months
Trend in 3 Yr Maturity Spreads Trend in 5 Yr Maturity Spreads 3 yr AAA-Gsec 3 yr AA-Gsec 3 yr A-Gsec 400 5 yr AAA-Gsec 5 yr AA-Gsec 5 yr A-Gsec 350 Linear (3 yr AAA-Gsec) Linear (3 yr AA-Gsec) Linear (3 yr A-Gsec) Linear (5 yr AAA-Gsec) Linear (5 yr AA-Gsec) Linear (5 yr A-Gsec) 350 300 300 Focus on stable 250 250 200 200 risk adjusted 150 150 returns 100 100 50 50 0 0
Jul-17
Jul-16
Jul-15
Jul-17
Jan-19
Jan-18
Jan-16
Jun-15
Jun-19
Jun-18
Jun-16
Oct-15
Oct-17
Oct-18
Apr-19
Apr-17
Apr-16
Feb-17
Feb-16
Sep-17
Sep-16
Jan-19
Jan-17
Dec-17
Jan-18
Jan-16
Dec-16
Aug-15
Jun-19
Aug-18
Jun-18
Jun-16
Oct-15
Nov-15
Oct-17
Nov-18
Oct-18
Nov-16
Apr-15
Apr-19
Apr-17
Mar-19
Mar-18
Feb-19
Feb-17
Sep-17
Sep-16
Dec-15
May-15
Dec-17
May-17
May-18
Aug-15
Aug-18
Aug-16
Nov-18
Nov-16
Mar-18
Mar-16
May-15
May-17
May-18
May-16 Source:Bloomberg Source:Bloomberg Sweet spot lies in 3-5 year AAA oriented Segment
Gsec AAA AA A 10.5 9.9 10.0 9.8 9.4 9.5 9.5 9.0 8.4 8.5 8.5 8.5 8.2 8.0 8.1 8.0 7.6 7.7
Yield (%) Yield 7.5 6.8 6.9 7.0 6.6 6.5 6.2 6.0 1 Yr 3 Yr 5 Yr 10 yr Maturity Source:Bloomberg FII inflows in debt market revive since May'19 As against net debt outflows of INR 5,000 Crs in April 2019, foreign investors net bought ~INR 9.500 Cr since May 2019. Moderating oil prices, fall in U.S. Treasury yields, NDA government coming back at the helm of the state and RBI resorting to accommodative stance along with policy rate cuts were among the key reasons for the inflows in the last two Global and domestic months. factors to decide future trend of FII flows Globally, ~34% of the total global sovereign debt of USD 38.6 Tn is yielding negative yields. India appears to be in an advantageous position with nominal and real yields looking still attractive. However, factors like trend in crude oil prices, stance by Global Central Banks on monetary easing and impact of Central Budget and domestic monsoon would be the deciding factors for the future trend in FII investments. Foreign investors turn net buyers since May 2019
15,000 FPI/FII Debt Flows (Rs. Crs)
10,000
5,000
-
(5,000)
(10,000)
(15,000)
(20,000)
Source: Bloomberg, MOSL
JULY 2019 | ISSUE 79 23 Alpha Strategist | “Sisyphus Challenge”
India in an advantageous position offering a relatively attractive real interest rates
Total Global Sovereign Debt (38.6 USD Tn) Real Rate of Returns (10 yr G-Sec - Inflation) 13.1 3.7% 4.0% 10.8 3.1% 2.7% 2.3% 8.9 0.8% 0.2% 0.5% 5.8
-0.9% -0.6% -1.3% -1.3% -1.2% -2.0%
US
UK
Less Than 0% Between 0% - 1% Between 1% - 2% More Than 2% India
Brazil
China
Japan
Russia
France
Mexico
S Korea
Germany
Indonesia Interest Rate Range Area Euro
Hong Kong Source:Bloomberg Source:Bloomberg
Outlook From the Union Budget point of view, the bond market participants had a sigh of relief since the Government adhered to fiscal consolidation map and the borrowing numbers remain unchanged. Also, Government's proposal to issue foreign currency sovereign bond would help in balancing the demand supply mismatch in domestic market. Going forward, we may see further monetary easing by the Central Bank, thus resulting in better transmission of rates and easing of liquidity. However, concerns regarding the health of the NBFCs, volatility in crude oil prices, and effect of monsoon on inflation would remain some of the concerns, keeping market participants jittery. We recommend incremental allocation towards AAA oriented accrual strategies in order to lock in at higher yields with relatively higher margin of safety. We advise our investors to avoid incremental allocation to credit oriented strategies (portfolio skewed towards A & below rated papers) and within existing fixed income portfolios restrict credit oriented allocation to not more than 20% -25%.
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Alternatives
Gold
Gold sparkled the brightest in the previous month, with prices hitting six-year high of $1440, after uncertainty related to trade war escalated and as the FOMC turned dovish. As the uncertainties continued and escalated without any signs of easing, metal had a very good start from the first day of the month. With all the uncertainties in the market, previous month proved to be very supportive for the metal. Things got more aggressive for gold after the dovish policy statements reported from most of the major central banks.
As the month started tussle between US and China trade war escalated with Mexico too on the radar to get its immigrants issue resolved. President Trump again threatened to increase the tariff rate to 25% from 10% on the remaining $300 billion worth of goods, with the condition that China should attend the G20 summit. Almost a week before the summit, China agreed to attend the summit where trade war was the underlined topic. We saw the summit ending on a positive note, where President Trump said that the trade talks have resumed and is back on track. The US representatives mentioned beforehand only that the trade talks are 90% complete.
Dovish commentary by major central banks extended gains for the yellow metal. In terms of policy action major central banks decided to hold rates unchanged until the end of 2019. BOE, BOJ, PBoC, ECB and almost every major central bank have had similar stance with respect to the economy and interest rate decision. With central banks decisions any updates on the Brexit, Middle East tensions and ongoing tussle between US and Iran will be watched by market participants. Central bank diversifying their portfolio from dollar and buying gold has also been one of the supporting factors for gold. Other developing countries are getting in the race to buy gold, although Russia and China remain the leaders. Russian central bank bought another ~6 tn of the metal in May increasing its total gold holdings to 2190 tn. On the other hand, China bought ~15 tn of gold for the sixth consecutive month in May, increasing its total holdings to 1916 tn. China has bought ~74 tn of gold since the end of November. Economic numbers released from the US have had little impact on gold prices, although few of them justify growing concerns of economic slowdown. Latest growth number showed the economy grew in Q1 grew in-line with expectation. Apart from that the non-farm payroll data was pretty disappointing, also manufacturing PMI and retail sales numbers did not hold up well to the expectations. The CFTC speculative positions saw an increase in the previous month suggesting market participants were net long in June. Also, SPDR holdings moved from 743 tn at the start of the month to 799 tn at the end of June, which means there was a net inflow of approximate 56 tn on monthly basis.
Gold prices rally to 5-year high Gold (INR) - Neutral stance for both long and short term
1450 GOLD Spot ($/Oz) 37,000 Crisil Gold Index 36,000 1400 35,000 1350 34,000 33,000 1300 32,000 1250 31,000 30,000 1200 29,000 1150 28,000
Jul-18
Jul-18
Jan-19
Jan-19
Jun-19
Jun-19
Jun-18
Jun-18
Oct-18
Oct-18
Apr-19
Apr-19
Feb-19
Feb-19
Sep-18
Sep-18
Dec-18
Dec-18
Aug-18
Nov-18
Aug-18
Nov-18
Mar-19
Mar-19
May-19
May-19 Source: Bloomberg Source: CRISIL
Outlook In July, economic calendar from the US is filled with a number of data starting from non-farm payrolls that was disappointing last month, retail sales and final GDP will also be important to gauge a view for gold. Apart from economic numbers, geo political issues will also play and important role in triggering a move. Central bank statements are less likely to have an impact as most of them have already hinted towards being dovish. Also at the same time, any further update on US-China trade war could impact not only gold prices but also the US dollar.
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Section III
Investment Grid ...... 27
Our Recommendations ...... 28
Advisory Approach...... 31
Risk Return Matrix...... 32
Power of Asset Allocation...... 33
Temperature Gauge...... 35
Model Portfolios...... 36
Fixed Income Manager Selection Framework ...... 37
4C Framework For Equity Funds...... 39
Hind-sight Investing...... 40
Decoding Investment Style...... 41
Alchemy Capital Management ...... 42
Managed Strategies...... 43
Real Estate Offering...... 51
Fund Insight...... 52
Investment Charter Template...... 65
JULY 2019 | ISSUE 79 26
This document is not valid without disclosure; refer the last page for the disclosure Alpha Strategist | “Sisyphus Challenge” Investment Grid
MOTILAL OSWAL PRIVATE WEALTH MANAGEMENT (MOPWM) - INVESTMENT GRID (July, 2019)
Asset Class Holding Period Theme Strategy Managed Solutions
ABSL Frontline Equity, ABSL Focused Equity, HDFC Top 100, ICICI Pru Nifty Next 50 Index Fund, Mirae Asset Large Cap Fund, MO F25, SBI Outperformance to Nifty Large Cap Bluechip, UTI Nifty Index Fund, MO Value PMS, Avendus ERF-II AIF
ABSL Equity, Axis Focused 25, Franklin India Equity, Franklin India Focused Equity, HDFC Equity, ICICI Pru India Opportunities, ICICI Pru Multicap, Invesco India Contra, Kotak Standard Multicap, L&T India Value, MO F35, Sectors agnostic of Market cap and style Multi-Cap Equity Alchemy High Growth PMS, ASK Indian Entrepreneur PMS, ASK Select 3 Years & above PMS, Invesco DAWN PMS, Marcellus PMS, MO NTDOP PMS, Renaissance India Next PMS, Renaissance Opportunities PMS
Franklin India Prima, Franklin India Smaller Cos, HDFC Midcap, HDFC High conviction Mid & Small Cap strategies Mid & Small Cap Small Cap, Kotak Emerging Equity, MO F30, Sundaram Mid Cap, MO IOP PMS, MO IOP 2 PMS, Invesco RISE PMS, Renaissance Mid Cap PMS, Unifi Blend PMS, Ashmore AIF,Unifi Blend AIF ICICI Liquid, ICICI Overnight, IDFC Cash, HDFC Liquid, HDFC Overnight, Liquid Overnight/Liquid <6 months SBI Overnight
Ultra Short Term Fund HDFC Ultra Short Term, IDFC Ultra Short Term, 6 months- Ultra Short Term/ Arbitrage Roll Down strategy IDFC Corporate Bond 1 year Arbitrage ICICI Prudential Equity Arbitrage, IDFC Arbitrage, Invesco India Arbitrage, Fixed Income Kotak Equity Arbitrage Roll Down strategy Axis Banking and PSU, IDFC Banking and PSU, ICICI Banking and PSU, Kotak Banking and PSU 1-3 years+ High quality accrual strategies Short Term IDFC Bond- Short Term Plan Corporate Bond ICICI Prudential Corporate Bond, HDFC Corporate Bond, L&T Triple AAA Given the expected volatility in the market, opportunity >1 year present to generate alpha through active management of Long – Short fund Franklin India Long Short Equity AIF long and short positions Accommodative central bank policies and reduced likelihood of > 3 Years -- Me-Gold US rate hike Alternatives Investing in early stage mezzanine/ 5 - 7 years Affordable Housing space structured equity transactions with India Realty Excellence Fund IV reputed developers from top 6 cities Invest in high growth consumer tech and Select companies that can grow 8x to 10x in 7 years >7 years consumer offline brands leveraging growth Orios Select Fund in very large markets in online consumption, FMCG and Lifestyle
JULY 2019 | ISSUE 79 27 Alpha Strategist | “Sisyphus Challenge”
Our Recommendations Portfolio Management Services (PMS) AUM Absolute CAGR 1 Year Rolling Return 3 Year Rolling Return Std Dev Beta Scheme Name (in RS Cr.) 1 Year 3 Years 5 Years MaxMinMean Max Min Mean PMS Strategies* MOSt Value Strategy 2,210 5.7 9.4 11.4 29.7 -10.7 8.7 28.4 4.8 13.5 13.5 1.0 MOST NTDOP Strategy 9,020 -1.0 12.4 19.6 47.0 -6.6 15.9 49.5 12.0 25.6 16.9 0.8 ASK IEP Strategy 8,620 3.4 13.0 17.1 37.2 0.1 14.7 37.0 10.2 20.1 15.9 1.0 ASK SELECT Strategy 2,974 2.8 10.7 16.7 38.7 -11.4 11.7 39.5 7.8 20.3 15.5 1.0 Invesco RISE Strategy 717 -13.1 9.4 — 65.2 -20.4 14.5 — — — 17.8 0.9 MOST IOP Strategy 3,406 -6.2 10.3 12.8 65.8 -27.5 15.7 34.1 9.3 21.3 20.4 1.0 Equity Mutual Funds AUM Absolute CAGR 1 Year Rolling Return 3 Year Rolling Return Std Dev Beta Scheme Name (in RS Cr.) 1 Year 3 Years 5 Years MaxMinMean Max Min Mean Large Cap Funds SBI BlueChip Fund 22,754 9.0 10.9 12.8 32.3 -9.4 11.0 29.8 6.3 15.0 12.3 0.92 ICICI Pru BlueChip Equity Fund 22,182 10.5 13.6 11.6 34.6 -7.1 13.9 23.1 9.3 14.2 11.0 0.85 Aditya Birla SL Focused Equity Fund 4,374 9.9 11.8 10.8 33.0 -9.9 11.8 27.0 6.8 14.1 11.9 0.89 HDFC Top 100 Fund 17,475 20.2 15.9 10.8 43.6 -6.6 14.9 24.4 8.2 13.9 13.7 1.03 Motilal Oswal Focused 25 Fund 1,129 5.9 12.6 12.7 34.7 -9.6 11.7 24.9 6.1 14.3 13.3 0.94 Aditya Birla SL Frontline Equity Fund 22,002 7.5 11.2 10.8 32.5 -8.6 12.0 26.3 7.2 14.1 12.1 0.94 Mirae Asset Large Cap Fund 13,065 13.7 16.1 14.8 40.1 -6.5 16.2 30.0 10.9 17.8 12.4 0.97 Category Average — 9.5 11.9 10.3 — — — — — — — — ICICI Pru Nifty Next 50 Index Fund 517 -1.4 11.3 11.3 48.1 -14.6 14.5 30.1 9.1 17.8 16.5 1.08 UTI Nifty Index Fund 1,374 12.4 14.2 10.4 31.4 -2.6 13.8 18.2 6.8 11.5 12.2 0.99 NIFTY 50 - TRI — 12.7 14.7 10.8 32.0 -2.3 14.2 18.9 7.0 11.9 12.3 1.00 Multi Cap Funds Motilal Oswal Multicap 35 Fund 13,635 3.1 13.8 17.7 45.8 -12.9 15.1 33.1 8.6 18.5 14.3 0.97 Kotak Standard Multicap Fund 25,531 12.3 14.8 15.2 38.4 -7.4 15.2 30.5 9.2 18.0 12.7 0.97 Franklin India Focused Equity 8,653 15.7 13.3 14.9 38.9 -11.8 12.2 35.3 5.6 17.1 13.7 0.95 Franklin India Equity Fund 11,541 3.4 8.9 11.9 32.4 -9.5 10.4 30.3 5.8 15.0 12.0 0.89 ICICI Pru Value Discovery Fund 16,363 3.6 7.6 10.5 30.6 -10.0 9.2 36.5 6.3 15.2 10.1 0.72 HDFC Equity Fund 23,231 20.6 15.9 10.9 44.6 -9.9 14.8 27.1 7.5 14.5 14.8 1.06 ICICI Pru India Opp Fund 1,764 — — — — — — — — — — — Invesco India Contra Fund 3,929 6.6 15.4 14.5 47.8 -9.5 16.6 35.2 11.2 19.2 13.6 1.00 L&T India Value Fund 8,404 5.7 12.2 14.3 44.6 -17.5 14.0 38.0 8.2 21.1 14.6 1.04 Aditya Birla SL Equity Fund 11,299 5.3 13.7 12.3 46.2 -9.6 15.2 34.3 9.8 18.7 13.3 0.95 ICICI Pru Multicap Fund 3,847 11.4 12.1 12.6 35.4 -5.8 13.3 29.5 8.4 15.9 11.7 0.82 Axis Focused 25 Fund 7,978 5.0 16.8 14.6 46.6 -6.9 17.1 23.9 11.7 16.8 14.7 1.00 Sundaram Rural & Consumption Fund 2,347 0.2 10.8 14.3 51.6 -14.1 16.8 34.2 10.8 21.2 15.1 1.07 Category Average — 6.0 11.7 11.5 — — — — — — — — NIFTY 500 - TRI — 8.1 13.6 11.0 39.6 -8.3 14.3 23.2 8.6 14.1 13.2 1.00 Mid Cap Funds Motilal Oswal Midcap 30 Fund 1,437 0.8 6.5 12.6 32.6 -14.2 8.2 33.4 3.1 14.0 15.6 0.76 Kotak Emerging Equity Scheme 4,326 4.7 11.4 16.5 46.8 -15.2 14.1 46.7 8.6 22.6 14.8 0.78 HDFC Mid-Cap Opportunities Fund 22,825 0.7 11.3 13.6 46.0 -15.8 14.4 42.2 9.2 20.9 16.1 0.86 Franklin India Prima Fund 7,148 3.8 10.2 14.3 40.9 -12.1 13.0 41.1 8.5 20.0 13.6 0.71 Sundaram Mid Cap Fund 6,090 -2.7 8.7 12.7 48.2 -19.3 12.3 43.0 6.8 21.0 15.5 0.81 Category Average — 1.8 9.8 11.9 — — — — — — — — Nifty Midcap 100 - TRI — -0.2 10.5 11.4 51.6 -21.6 13.9 34.3 8.1 19.0 18.2 1.00 Small Cap Funds Franklin India Smaller Cos Fund 7,577 -5.4 7.6 13.8 45.0 -19.9 12.5 47.3 7.6 21.9 14.3 0.72 DSPBR Small Cap Fund 5,273 -2.4 5.7 15.4 50.9 -28.2 11.2 55.8 5.7 25.1 17.8 0.90 HDFC Small Cap Fund 8,403 -0.8 15.7 15.3 62.8 -13.4 19.8 29.6 14.9 20.9 15.8 0.80 Category Average — -3.3 8.8 12.4 — — — — — — — — Nifty Smallcap 100 - TRI — -10.6 4.4 4.4 60.9 -33.2 12.1 34.4 3.0 16.8 22.9 1.00 Balanced Funds Aditya Birla SL Equity Hybrid ’95 Fund 13,083 3.9 8.8 10.5 30.0 -8.2 10.4 26.2 6.9 14.3 9.5 1.08 ICICI Pru Equity & Debt Fund 26,036 11.6 12.9 12.2 34.7 -6.4 13.1 26.1 9.6 15.4 8.5 0.93 Franklin India Equity Hybrid Fund 1,947 7.4 8.9 11.6 23.1 -4.6 9.1 26.4 5.8 13.2 8.0 0.91 HDFC Hybrid Equity Fund 22,665 10.0 10.2 7.1 40.2 -15.3 9.9 25.9 4.0 11.9 9.6 1.10 Category Average — 5.3 9.5 9.4 — — — — — — — — CRISIL Hybrid 35+65 - Aggressive — 10.6 12.1 10.7 25.2 -2.0 12.1 18.9 8.3 12.4 8.4 1.00 * PMS performance are net of all expenses & fees. Std. Div. is calculated for the period 3 years on monthly basis. ^Less than 1 year period from date of recommendation; Returns less than or equal to 1 year are absolute return & more than 1 year period calculated by CAGR JULY 2019 | ISSUE 79 28 Alpha Strategist | “Sisyphus Challenge”
Fixed Income Mutual Funds AUM 1 Year Rolling Return 3 Year Rolling Return Mod Dur Gross Sov, AAA AA+ Scheme Name 3 Month 6 Month 1 Year 3 Years 5 Years & Unrated (in Rs. Cr.) MaxMinMean Max Min Mean (Years) YTM(%) Cash & below Corporate Bond Fund Aditya Birla SL Corp Bond Fund 15,575 10.0 9.9 9.7 8.0 8.6 11.3 4.8 7.9 10.5 7.5 8.8 1.8 8.1 88.3 11.7 — HDFC Corp Bond Fund 12,321 9.7 10.8 10.0 8.1 8.6 11.8 4.0 7.9 10.9 7.4 8.8 3.0 7.9 100.0 — — ICICI Pru Corp Bond Fund 7,087 8.5 9.7 8.9 7.6 8.1 10.9 4.7 7.5 9.8 7.2 8.4 1.6 8.1 100.0 — — IDFC Corp Bond Fund 16,068 7.9 8.8 8.7 7.6 — 11.5 4.2 7.1 8.1 7.5 7.7 0.7 7.6 100.0 — — L&T Triple Ace Bond Fund 1,120 15.5 13.3 11.7 7.1 7.7 14.9 -0.3 6.3 10.7 5.1 7.3 5.9 8.0 100.0 — — Category Average — -6.0 1.6 4.2 5.7 7.0 — — — — — — — — — — — Crisil Composite Bond Fund Index — 14.6 11.3 11.7 8.1 9.1 14.8 0.5 7.5 12.5 6.7 9.3 — — — — — Short Term Income Fund Axis Short Term Fund 2,618 7.9 9.0 8.7 7.3 7.9 10.4 4.4 7.3 9.9 6.9 8.2 1.9 8.0 95.2 4.7 — Franklin India ST Income Plan 13,368 2.4 5.6 8.5 8.7 8.7 11.6 6.0 8.6 10.3 7.8 9.0 2.2 11.3 14.5 80.6 4.9 ICICI Pru Short Term Fund 8,446 8.4 9.2 8.6 7.6 8.2 12.2 3.8 7.6 10.7 7.1 8.7 1.9 8.3 82.4 17.6 — IDFC Bond Fund - Short Term Plan 7,525 7.5 9.3 9.1 7.2 7.8 9.5 4.2 7.1 9.8 6.6 7.9 2.2 7.7 100.0 — — Category Average — -4.5 1.9 4.7 6.0 6.9 — — — — — — — — — — — Crisil Short Term Bond Fund Index — 8.2 9.0 9.1 7.5 8.2 10.5 4.2 7.4 10.2 7.1 8.4 — — — — — Banking & PSU Debt Funds Axis Banking & PSU Debt Fund 6,451 7.0 9.9 10.1 7.9 8.2 10.1 5.4 7.6 9.3 7.1 8.1 2.3 7.8 100.0 — — IDFC Banking & PSU Debt Fund 6,126 8.1 10.9 10.6 7.3 7.8 10.9 4.2 6.9 9.3 6.3 7.6 3.6 7.8 100.0 — — Kotak Banking and PSU Debt Fund 1,617 10.8 10.8 10.1 8.0 8.2 10.9 4.1 7.6 10.0 7.1 8.4 3.2 7.9 78.5 17.8 — ICICI Pru Banking & PSU Debt Fund 5,612 10.2 10.1 8.7 7.9 8.5 14.0 3.6 8.0 11.1 7.5 9.1 2.3 7.9 99.6 0.4 — Category Average — 7.9 9.1 9.0 7.4 7.9 — — — — — — — — — — — Crisil Composite Bond Fund Index — 14.6 11.3 11.7 8.1 9.1 14.8 0.5 7.5 12.5 6.7 9.3 — — — — — Medium Duration Fund — Franklin India Income Opportunities Fund 3,705 2.7 5.6 7.7 8.4 8.6 11.9 5.8 8.4 10.5 7.8 9.0 3.3 11.3 12.9 84.2 3.0 L&T Resurgent India Bond Fund 2,012 2.8 5.2 6.0 6.5 — 12.0 2.1 7.0 8.6 6.5 7.3 3.5 9.3 71.5 28.5 — Reliance Strategic Debt Fund 4,698 -22.8 -8.1 -1.1 4.6 6.7 12.6 -1.1 7.3 10.5 4.6 8.3 2.8 10.9 17.0 83.0 — Category Average — 6.7 7.4 8.6 6.5 7.6 — — — — — — — — — — — Crisil Composite Bond Fund Index — 14.6 11.3 11.7 8.1 9.1 14.8 0.5 7.5 12.5 6.7 9.3 — — — — — Low Duration Fund Franklin India Low Duration Fund 6,920 3.9 6.9 8.2 8.5 8.9 10.9 7.0 8.8 10.1 8.5 9.3 0.9 10.9 19.2 77.1 3.7 ICICI Pru Savings Fund 20,323 8.2 8.5 8.4 7.8 8.2 9.6 6.3 7.8 9.5 7.7 8.4 0.7 7.9 85.4 13.2 1.4 Category Average — -11.0 -1.5 3.0 5.7 6.7 — — — — — — — — — — — Crisil Composite Bond Fund Index — 8.2 9.0 9.1 7.5 8.2 10.5 4.2 7.4 10.2 7.1 8.4 — — — — — Credit Risk Fund HDFC Credit Risk Debt Fund 15,415 7.4 8.0 7.8 7.4 8.5 12.4 3.1 7.6 10.5 7.2 8.6 1.9 9.9 28.7 71.3 — ICICI Pru Credit Risk Fund 10,942 7.5 7.8 7.8 7.8 8.3 11.1 5.1 7.7 10.6 7.3 8.7 1.4 10.7 18.5 77.8 3.7 IDFC Credit Risk Fund 1,330 8.0 8.7 7.7 — — 7.7 3.0 5.1 — — — 2.8 8.7 45.9 54.1 — Reliance Credit Risk Fund 8,534 -8.4 -0.1 3.6 6.1 7.4 10.8 3.6 7.5 10.4 6.1 8.7 1.6 11.6 14.2 77.9 8.0 Category Average — -13.8 -3.9 0.6 4.8 7.4 — — — — — — — — — — — Crisil Composite Bond Fund Index — 14.6 11.3 11.7 8.1 9.1 14.8 0.5 7.5 12.5 6.7 9.3 — — — — — * Annulized ^Less than 1 year period from date of recommendation; Returns less than or equal to 1 year are annulized return & more than 1 year period calculated by CAGR Data as on June 30, 2019; JULY 2019 | ISSUE 79 29 Alpha Strategist | “Sisyphus Challenge”
Fixed Income Mutual Funds AUM 3 Month Rolling Return 1 Year Rolling Return Mod Dur Gross Sov, AAA AA+ Scheme Name 1 Month 3 Month 6 Month 1 Years 3 Years & Unrated (in Rs. Cr.) Max Min Mean Max Min Mean (Years) YTM(%) Cash & below Liquid /Overnight Fund Aditya Birla SL Liquid Fund 61,143 7.1 7.3 7.5 7.1 7.7 7.7 6.4 6.9 8.1 6.6 7.2 0.1 7.1 90.6 1.9 7.5 Franklin India Liquid Fund-Super Inst 12,783 7.2 7.4 7.6 7.2 7.7 7.8 6.3 7.0 8.2 6.7 7.2 0.1 7.1 96.7 3.3 — HDFC Liquid Fund 87,799 7.0 7.2 7.4 7.0 7.6 7.6 6.1 6.8 8.0 6.5 7.0 0.1 6.5 99.8 0.2 — HDFC Overnight Fund 6,858 5.7 6.0 6.2 6.0 6.6 6.2 5.6 5.9 6.7 5.9 6.1 0.0 6.0 100.0 — — ICICI Pru Liquid Fund 68,727 7.1 7.3 7.4 7.1 7.6 7.7 6.3 6.9 8.0 6.6 7.1 0.1 6.6 100.0 — — IDFC Cash Fund 13,185 6.8 7.0 7.3 7.0 7.6 7.6 6.3 6.8 8.0 6.6 7.1 0.1 6.3 100.0 — — Reliance Liquid Fund 31,841 7.2 7.4 7.6 7.1 7.7 7.7 6.4 7.0 8.0 6.7 7.2 0.1 6.3 100.0 — — SBI Overnight Fund 1,737 5.8 6.0 6.2 6.0 6.8 7.2 5.7 6.2 8.2 6.0 6.9 0.0 6.5 100.0 — — Category Average — 6.8 7.0 6.9 6.7 7.4 — — — — — — — — — — — Crisil Liquid Fund Index — 7.3 7.4 7.6 7.2 7.6 7.7 6.3 7.0 7.9 6.6 7.2 — — — — — Ultra Short Term Fund HDFC Ultra Short Term Fund 6,196 8.0 8.1 — — — 9.0 7.9 8.4 — — — 0.4 7.3 99.0 0.1 0.9 Franklin India Ultra Short Bond Fund- 19,091 8.8 9.4 9.6 8.9 9.2 11.7 6.0 8.6 10.0 7.6 9.2 0.5 9.3 65.2 29.3 5.5 Super Inst IDFC Ultra Short Term Fund 2,549 8.3 8.4 — — — 9.3 7.2 8.3 — — — 0.2 7.2 100.0 — — Category Average — 5.1 6.5 6.0 6.6 7.4 — — — — — — — — — — — Crisil Liquid Fund Index AUM— 7.3 7.4 7.6 7.2 7.6 7.7 6.3 7.0 7.9 6.6 7.2 — — — — — (in Rs. Cr.) 3 Month Rolling Return 1 Year Rolling Return Futures/ Scheme Name 1 Month 3 Month 6 Month 1 Years 3 Years Equity Debt Others Cash Max Min Mean Max Min Mean Option Arbitrage Fund IDFC Arbitrage Fund 4,643 7.7 6.7 6.6 6.2 6.6 7.7 4.9 6.0 6.6 5.5 6.1 62.7 16.0 — 19.8 — ICICI Pru Equity-Arbitrage Fund 9,604 7.7 6.2 6.4 6.2 6.6 7.7 4.5 6.0 6.9 5.5 6.2 66.2 29.9 — — 3.9 Kotak Equity Arbitrage Scheme 13,360 7.6 6.4 6.5 6.3 6.7 7.8 4.8 6.2 6.8 5.8 6.3 64.8 19.8 0.0 12.1 3.2 Invesco India Arbitrage Fund 230 7.0 6.0 5.9 6.0 6.5 7.1 4.3 5.8 6.6 5.4 6.0 66.0 10.8 -66.1 15.7 73.7 Category Average — 7.5 6.2 5.8 5.9 6.6 — — — — — — — — — — — Crisil Liquid Fund Index — 7.3 7.4 7.6 7.2 7.6 7.7 6.3 7.0 7.9 6.6 7.2 — — — — —
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Advisory Approach
Our Methodology
True portfolio of clients and asset allocation is best determined through Financial Planning strategy. If not, the clients can follow a model portfolio approach. Following steps are followed for Model Portfolio construction:
1) Investors are classified according to their risk profile viz. Aggressive, Moderately Aggressive, Balanced, Moderately Conservative and Conservative.
2) Asset Allocation is done at two levels:
(a) Static – Based on the risk profile, asset allocation is defined at a broad level:
Equity Fixed Income Liquid Gold Conservative 0.0% 85.0% 10.0% 5.0% Moderately Conservative 20.0% 65.0% 10.0% 5.0% Balanced 40.0% 40.0% 10.0% 10.0% Moderately Aggressive 65.0% 20.0% 5.0% 10.0% Aggressive 85.0% 0.0% 5.0% 10.0% Aggressive+ 100% - - -
(b) Dynamic – Asset Allocation based on the market conditions
Since different clients have different risk return preferences, based on our comprehensive risk profiling process we have categorized the clients broadly into6 categories viz. Aggressive+, Aggressive, Moderately Aggressive, Balanced, Moderately Conservative and Conservative
Advisory Process We follow a robust Advisory Process to generate “Alpha” in the client’s portfolio. The entire approach is governed by a stringent risk management framework.
Product & Advisory Committee View on asset Portfolio classes Construction Asset Allocation Product Selection Alpha across asset classes Manager Alpha
Investment Financial Strategy Committee
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Risk Return Matrix
Risk Return profile helps to determine one’s asset allocation frame work. The next logical step is to look at the different investment strategies that would enable one to eventually achieve their financial goals. Risk Return matrix of various investment strategies Large Cap Multi Cap Midcap Small cap ST & Accrual Credit Dynamic Long short 0.2
0.15 Multi Cap Small cap Long short Large Cap Midcap 0.1
Credit Dynamic ST & Accrual 0.05
Average 1 - year rolling period rolling 1 - year Average
0 0 0.05 0.1 0.15 0.2 0.25 Standard Deviation (monthly data)
High Quality Credit Risk Dynamic Long Short Large Cap Multi Cap Mid Cap Small Cap Accrual Average 6.9% 7.1% 6.4% 12.4% 11.7% 13.7% 12.1% 13.5% Max 10.2% 11.1% 14.9% 16.5% 31.1% 36.9% 43.4% 48.8% Min 3.8% 3.3% 0.2% 8.7% -7.4% -6.8% -14.0% -17.3% Data used from December 2015 to June 2019, 1-year rolling returns for two years; Source:Ace MF *Every category consists of fund equally wieghted From the above chart we can conclude that in debt, a high quality accrual startegy would have lower volatility as compared to a dynamic startegy while generating similar average return over a 1 year holding period While in equity, a large cap strategy has historically exhibited relatively lower volatility and generated lower return as compared to the small cap strategy. Thereby, one has to carefully examine if a particular investment strategy is aligned with their risk appetite before making an investment decision. Strategies considered for the analysis: Large cap fund category: ABSL frontline, ABSL focused equity, SBI bluechip, Motilal Value PMS,I-Pru Blue chip & Motilal Oswal focused 25 Multi cap fund category: ABSL equity, ASK IEP PMS, ASK Select PMS, Motilal NTDOP PMS, DHFL Deep Value PMS, Franklin India equity, Franklin focused equity, I-Pru multi cap, I-Pru value discovery, Invesco contra, L&T value & Kotak standard multicap Mid cap category: Franklin prima, HDFC midcap opps, Motilal IOP PMS, Kotak emerging equities, Sundaram midcap & Motilal focused 30 Small cap category: Franklin smaller cos, DSP small Cap & HDFC small cap High quality accrual: ABSL Corp Bond, Axis Banking PSU, BNP Corp bond, ICICI Short term bond fund, IDFC Banking & PSU & IDFC bond fund –ST Credit risk: BOI AXA credit risk, Franklin India ST income, ICICI credit risk, L&T resurgent, Reliance credit risk & Reliance strategic debt fund Dynamic: IDFC Dynamic, SBI Dynamic, UTI Dynamic & ABSL Dynamic Long/Short: Performance of Ambit Alpha fund from 31 May 2013 – 30 Sep 2016, Liquid return assumed from 1st Oct 16- 29th Feb 17 and performance of Avendus Absolute Return Fund from 31st Mar 2017 onwards
JULY 2019 | ISSUE 79 32 Alpha Strategist | “Sisyphus Challenge” Power of Asset Allocation
Historically equity has been viewed as a wealth creating asset class and debt and gold being inflation beating asset class. That said, little do people know that both debt and gold have rarely beaten inflation. At the same time while equity offers superior returns in the long run, it also exposes one to certain volatility inherent to the nature of the asset class. Asset allocation enables you to maximize your return potential while reduce your risk. Industry research has shown that 92% of the returns are attributable to the correct asset allocation. We thought it to be prudent to substantiate it with some data. The table below highlights calendar year performance of different asset classes such as equity, debt, gold and cash. As you would observe no asset class has been a consistent winner. Having said that, it is very clear that if one were to do a very simple asset allocation of equal investing in different asset classes, there would have been only 1 instance in last 15 years where the strategy would have given negative returns. This includes period of global financial crisis where most of the markets were battered. Thus there is a clear merit in diversifying assets across different asset classes as it reduces dependency on single asset classes and protect from market turbulence.
2003 2004 2005 2006 2007 2008 2009 20102011 2012 2013 2014 2015 2016 2017 2018 2019*
Equity Equity Equity Equity Equity Gold Equity Gold Gold Equity Liquid Equity Debt Gold Equity Gold Gold 71.9% 10.7% 36.3% 39.8% 54.8% 30.1% 75.8% 24.1% 31.9% 27.7% 9.0% 31.4% 8.7% 12.0% 28.6% 7.5% 8.7% Gold Liquid Gold Gold Gold Debt Gold Equity Liquid Gold Debt Debt Liquid Debt Liquid Debt Equity 13.5% 4.0% 22.3% 20.8% 16.7% 9.5% 19.7% 17.9% 8.2% 10.2% 8.3% 10.5% 8.2% 9.8% 6.6% 6.7% 8.5% Debt Debt Liquid Liquid Debt Liquid Debt Liquid Debt Debt Equity Liquid Equity Liquid Gold Liquid Debt 5.4% 2.7% 4.6% 6.0% 8.0% 8.4% 6.6% 5.1% 7.9% 9.1% 6.8% 9.2% -4.1% 7.5% 5.9% 6.1% 4.4% Liquid Gold Debt Debt Liquid Equity Liquid Debt Equity Liquid Gold Gold Gold Equity Debt Equity Liquid 4.6% 0.5% 4.5% 5.5% 7.5% -51.8% 4.9% 4.7% -24.6% 8.5% -19.2% 0.6% -6.2% 3.0% 5.4% 3.2% 3.6% Average
23.8% 4.5% 17.0% 18.0% 21.7% -0.9% 26.7% 13.0% 5.8% 13.9% 1.2% 12.9% 1.7% 8.1% 11.6% 5.9% 6.3%
*Performance as on: June 30, 2019 CAGR of underlying asset classes Equity is represented by Nifty 50 Debt is represented by CRISIL Short term bond Index, Liquid is represented by CRISIL Liquid fund Index 11.09% Equity Gold Debt Liquid Gold is represented by Bloomberg data, CAGR 15.5% 11.3% 7.1% 6.9% Average: Equal allocation to each asset class in the calendar year Multi-asset approach tends to deliver smoother returns than what15.4% is achieved 11.1% by investing 6.7% in just a single 6.8% asset class In our mind while return certainly matters, but so does risk. Based on your risk taking appetite, one should decide on how much money needs to be allocated to different asset classes. There are multiple factors that define your risk tolerance level such as investment horizon, liquidity needs, investment goals and so on. An investor with high risk tolerance may be willing to accept greater volatility in pursuit to generate higher potential returns and may allocate higher percentage of the portfolio towards higher risk assets. On the other hand, an investor with low risk tolerance may have to forego higher potential returns for a steadier and less volatile portfolio.
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By selecting a portfolio with equity and fixed income, the potential gains that the equity component can give are much higher and the associated risk can be well taken care of by the fixed investment portfolio. Thus a portfolio invested across asset classes has the ability to generate superior risk adjusted return.
To prove our hypothesis, we carried out back-testing with just two asset classes, equity and fixed income. We created three model portfolios with 75:25, 50:50 and 25:75 exposures to fixed income and equity respectively. Over 5-year holding period, none of these portfolio generated negative returns. Also, it is worth highlighting that over 3-year holding period, portfolio which has high exposure to equity (75%) gave positive returns 98.7% of time over the last 12 years. For indices:
Portfolio Fixed Income 75%; Equity: 25% Fixed Income 50%; Equity: 50% Fixed Income 25%; Equity: 75% Holding Period 1 year 3 year 5 year 1 year 3 year 5 year 1 year 3 year 5 year Average 10.3% 9.8% 9.8% 13.3% 12.0% 11.6% 16.4% 13.9% 13.1% Max 28.1% 21.7% 20.3% 48.9% 35.2% 30.2% 70.6% 46.4% 37.8% Min -8.2% 5.2% 5.6% -22.7% 2.4% 3.6% -37.4% -0.6% 1.4% Number of observation 194 172 146 194 172 146 194 172 146 Number of times below 0% 9 (4.6%) 0.0% 0.0% 19 (09.8%) 0.0% 0.0% 30 (15.5%) 2 (1.2%) 0.0% Number of times below 6% 42 (21.6%) 13 (7.6%) 3 (2.1%) 44 (22.7%) 27 (15.7%) 14 (9.6%) 46 (23.7%) 32 (18.6%) 18 (12.3%)
Period of analysis: March 2002 to June 2019 Equity is represented by Nifty 50 & Debt is represented by CRISIL Short term bond Index
The above illustration has been carried out for indices which are passively managed. Our experience has been that actively managed strategies have been able to generate significant alpha. Thereby, we believe the upside benefit is higher in case of actively managed strategies. Consequently,the same can be depicted from the below table.
For actively managed strategies:
Portfolio Fixed Income 75%; Equity: 25% Fixed Income 50%; Equity: 50% Fixed Income 25%; Equity: 75% Holding Period 1 year 3 year 5 year 1 year 3 year 5 year 1 year 3 year 5 year Average 13.3% 13.1% 12.9% 18.8% 17.4% 16.6% 24.3% 21.2% 19.8% Max 38.3% 33.9% 30.6% 70.2% 54.1% 44.3% 102.2% 70.0% 54.1% Min -6.2% 6.0% 6.9% -21.1% 2.7% 6.0% -36.2% -1.0% 5.2% Number of observation 194 172 146 194 172 146 194 172 146 Number of times below 0% 7 (3.6%) 0.0% 0.0% 17 (8.8%) 0.0% 0.0% 26 (13.4%) 2 (1.2%) 0.0% Number of times below 6% 30 (15.5%) 0 (0.0%) 0 (0.0%) 42 (21.6%) 9 (5.2%) 0 (0.0%) 49 (25.3%) 14 (8.1%) 2 (1.4%)
For active managers, Franklin India Prima Plus, HDFC Equity Fund and Sundaram Select Midcap have been considered for Equity and Aditya Birla SL Short Term and SBI Magnum InstaCash Cash has been considered for Debt
• Multi-asset class strategies smoothen the ride • Protects on the downside during extreme falls witnessed from a single asset class • Makes returns more predictable
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Temperature Gauge
We are cognizant of the fact that investments are tuned to meet your objectives and thus calling for a suitable asset mix basis your investment objective. However the challenge always remains to accurately estimate when the market is cheap or expensive. In order to arrive at the decision of preferring equity over debt or vice versa, we believe earning yield to bond yield is an excellent parameter to consider. This ratio indicates the perceived risk differential between equityandbonds. Historicallywheneverearningsyieldandbondyieldspreadsareabove0.8,equitiesareconsideredtobeundervalued. The earning yield to bond yield parameter along with our in-house indicator of market valuations named as MOVI – The Motilal Oswal Valuation Index enables us to arrive at a well-researched and thought through asset class outlook. MOVI is basically an index which is calculated based on the Price to Earnings (PE), Price to Book Value (PB) and Dividend Yield (DY) on the components of Nifty 50. By means of an algorithm the weighted average PE, PB and DY of the components of Nifty 50, one arrives at index. A higher level on the MOVI means markets are expensive and hence one should reduce equityexposureandviceversa. With the above mentioned input variables, we have crafted a unique model coined asTemperature Gauge which help in making investment choices across asset classes. In the above graph,X axis-EY-BY and Y axis-MOVI. The data considered is represented from the bottom of the market in 2002 till date which basically encompasses two full market cycles of boom and bust. It is quite evident from the above graph that as the market tends to move towards top right corner, there are several instances of negative returns and a cautious approach is recommended. However, as the market moves towards bottom left corner,there are more instances of 18%+ returns from a 3-year forward perspective andrecommendinvestorstoinvestaggressively. This qualitative and quantitative process would enable us to construct “winning portfolios” for our clients. In line with ourphilosophyofprovidingbetterinsightstoyou,wehopeyoufindthesameinformative. Temperature Gauge – Our internal market thermometer
Active MOVI 3-yr forward Nifty Less than 0% Manager 160 0% - 10% Average 11% 20% 10% - 18% Max 26% 53% 69% of the Min -7% -8% Expensive EY-BY MOVI 18%+ observation % times >0% 98% 98% Zone 0.56 116 Current lies in this area 140 0.4- -140
0.6- -120 120 1.8 1.6 1.4 1.2 1.0 0.8 0. 6 0.4 0.8- -100 1.0- -80 100 1.2- Current Level -60 EY BY : 0.56 1.4- MOVI 116 -40 (as on 30 80 June 2019) 1.6-
60 Attractive Zone Fair Value Zone 68% 95% 40 1.53 1.2 0.62 0.54
Period of analysis: January 2002 to June 30, 2019
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Model Portfolios
Client Profile Performance Snapshot Aggressive+
Aggressive+ Portfolio Aggressive+ Index 134.7 Agg + Model Portfolio 105.0
49.5 14% 36.0 PMS % Return 31.4 30.3 0.03 6.1 5.0 6.8 5.7 8.2 9.2 Large Cap 3.3 4.6 4.3 52% 22% Mid & Small Cap Multi Cap -4.1 -6.3 12%
Balanced 84.7 Balanced Model Portfolio Balanced Portfolio Balanced Index 73.7
6% 11% Large Cap 11% 9% Mid & Small Cap 30.2 Multi Cap % Return 17.5 18.015.5 Balanced 9.5 6.8 3.1 6.0 4.5 7.5 6.1 4.0 20% 2.0 3.5 1.9 0.3 34% Short Term Corporate Bond Gold 9%
Conservative Conservative Portfolio Conservative Index 64.9 61.1
Corp Bond
30% 25%
Banking & % Return 15.4 9.9 7.4 9.9 7.7 10.6 6.4 6.8 PSU 1.7 5.7 6.5 6.1 6.0 4.6 1.9 3.5
45% Ultra Short Term
Key Ratios 1 year rolling return 3 year rolling return Max Max Draw Beta Std Dev Sharpe AverageMinMax Average Min Max Drawdown Down Period Aggressive+ 17.6% -12.2% 63.2% 16.4% 6.6% 29.7% -17.5% Aug-15 - Feb-16 0.9 12.9% 0.4 Balanced 11.4% -4.7% 34.5% 11.5% 6.4% 17.4% -8.3% Aug-15 - Feb-16 1.1 6.1% 0.4 Conservative 8.6% 2.7% 18.1% 9.1% 6.7% 11.5% -4.3% May-13 - Aug-13 1.2 2.0% 0.6
Note: Portfolio inception date: October 01, 2012 All ratios calculated for 3 years period. Risk free rate at 6.45% Performance as on: June 30, 2019 C Y12 is from October 31st to December 31 st
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Fixed Income Manager Selection Framework
Adding objectivity to fixed income investing The battle of objective vs. subjective decision making often makes appearance in investing. To our mind, having an objective oriented approach gives purpose to investment which helps in avoiding any impulsive calls. Traditionally, equity has always been viewed as an asset class for capital appreciation while fixed income is seen as an avenue for capital preservation. Amongst the fixed income instruments, the most commonly accepted investment avenue is fixed deposits. There is a psychological comfort that investors draw on account of the fixed return provided by such instruments. However investors must realize that an instrument like a fixed deposit is tax inefficient. As a result, it does not even meet the core objective preserving the purchasing power.That raises the obvious question – what kind of fixed income options should investors seek?
If the veil of ignorance is done away with and the fixed income market is probed into, one will realize that there are various market linked investment avenues that investors can invest in. To our mind, fixed income mutual funds are one example of an efficient investment option that investors can avail of as they have various benefits like diversification, professional management and tax efficiency. However,the question of prudent selection still remains unanswered.
Avg. 1 Yr RR of worst performing fund Category Average Avg. 1 Yr RR of best performing fund
12.6 11.9 10.8 10.8 10.3 9.3 8.9 9.9 9.8 9.2 8.6 9.0 8.9 8.3 9.2
7.4 7.7 6.6 6.7 6.7 6.9
s.
Gilt
UST
ome
Liquid
Bond
Dynamic
Short Term
Credit Opp Credit
Long Inc
In the above graph, we have taken the Average 1 yr rolling return for 5 years (December 2012 to December 2017) for various funds across categories. The result was that there was a significant difference between the top performer and bottom performer in almost every category, making a case for choosing fund managers over the funds. The ability to generate enhanced returns varies from manager to manager within the same category, thus laying emphasis on the skills of a fund manager.But one must also realize that past performance cannot be the only criteria to judge a fund. It is almost hazardous to do so. Different market cycles present different opportunities.
So what strategy will help investors so that their investments are relevant for the ongoing market cycle? Even in fixed income, there are risks associated with interest rates, credit and liquidity. With the numerous funds at one's disposal, choosing the correct one can be quite a challenge. Before we venture into the framework of choosing a manager let us take a sneak-peak into the two kinds of strategies adopted for “enhancing” returns – Credit and Duration.
The credit opportunities style looks for companies that have the ability to repay and mitigates risks such as default and liquidity. This benefits investors via higher coupons, thus enhancing their overall return. However, the duration style plays on interest rate cycles and requires an intricate macroeconomic understanding as the manager must get the interest rate cycles right. Both these strategies play out at various points of time. At a time one anticipates interest rates to peak, duration strategies would be a preferred option as any subsequent decline in interest rates would enhance the portfolio returns. Likewise, in a rising interest rate scenario, duration strategies would not augur well, calling for investment in credit strategies.
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Just like a fast bowler cannot bowl spin and vice versa, a manager cannot mimic both approaches simultaneously. A manager must be clear on his stance and having experienced two to three market cycles will be of huge significance.
To our mind, good performance is an outcome of a robust process. Hence, one needs to be cognizant of the latter at the time of evaluation. This thought process has given birth to our“4C framework of manager selection” . By evaluating the pilot rather than just the plane, each“C” would enable us to unmask the different hues of investment process from the performance which is the ultimate outcome.
This framework implies a paradigm shift from the industry norm of ranking funds only on the basis of past performance. This qualitative and quantitative process would enable us to construct“winning portfolios” for our clients. In line with our philosophy of providing better insights to you, we hope you find the same informative.
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4C Framework For Equity Funds
The 4C Fund Manager Selection Process
Evaluating Manager Expertise
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Hind-sight Investing
We are well aware of the disclaimer “past performance is no guarantee of future results”. Despite this the most common method of investing in mutual funds remains by looking at the past performance. It’s quite intuitive to assume that something that was a good investment in the recent past is still a good investment. However, it’s not that simple. Our study shows that there is a limited probability of getting investment decisions right which are solely based on historical data. Let us illustrate this with some examples of the recent past. The below table comprises of last 17 years of data which to our mind is comprehensive. Funds were ranked based solely on performance for pre-defined time buckets. As you can see, in the 1 year bucket 36% of the funds continued to be top performers and 64% could not retain their position. Similarly, in the 3 year bucket 68% of the funds could not retain their position.
Review period: 2000 - 2017 Investments in top performing funds based on 1 – 3 yr track record
Top funds basis Top funds basis Top funds basis 1 yr performance 1 yr performance 3 yr performance
Rank after Rank after Rank after 1 year 3 year 3 year
Q1 - 36% Q1 - 33% Q1 - 32%
Q2 - 24% Q2 - 34% Q2 - 33%
Q3 - 20% Q3 - 16% Q3 - 18%
Q4 – 20% Q4 – 17% Q4 – 17%
The top 25% of the funds on basis of performance are assigned Q1, next 25% are assigned Q2 and so on. If we translate the above numbers in terms of probability, your chance of selecting a top performing fund basis past performance is lesser than winning a coin toss! Just like we don't drive a car looking at the rear view mirror, investment decisions too should not be based on mere past performance. In fact to our mind one needs to go beyond the norm of return based analysis to arrive at investment decisions. As the age old adage goes “bet on the jockey, not the horse”,the same holds true for investment wherein you lay your bet on the manager and not the fund. So how does one go about it? In line with our philosophy of empowering you, we take this opportunity to provide you an understanding of our “manager selection methodology”. (Methodology notes: Date range period 2000-2017, calendar year returns, all open-ended equity schemes, AUM cut off 250cr as on 31st Dec 2017)
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Decoding Investment Style
Past performance is just the tip of the iceberg - A consistent and a transparent portfolio management approach contributestothesustainablelongtermreturns As investors and advisors, we tend to get swayed by the recent past performance while making our investment decisions and overlook the underlying philosophy and process which would contribute towards the future returns. Moreover, history suggests that the process for selecting funds only on the basis of past performance may not be a full proof procedure in the future. Thus, we believe that in generating sustainable long term performance, skill plays a major role rather than luck and to assess the skills of a fund manager, it becomes pertinent to understand the consistencyintheirfundmanagementapproach. Like any sportsman who demonstrates their styles in different terrains, we are of the view that every manager has a different style and approach for stock picking and portfolio construction. Through our detailed due diligence process, we aim to understand the capabilities, consistency and experience of the Fund manager and substantiate their investmentstylewiththeirpastandcurrentinvestments. Through our analysis and research, we have devised a‘Fund Stylometer’ which basically states that an investment style oscillates between two extremes of investing i.e.Mean reversion and Earnings Momentum while the other blended styles of investment likeValue, Blended and Growth lies in between the two extremes. When a manager sticks to picking stocks which are out of favor or below their average valuations and expect these stocks to revert back, then these managers are demonstrating a mean reversion investment style. For example, ICICI Fund Managers are known for their value style of investing. On the other hand, if the manager foresees a sustainable growth in the earnings of a company and is ready to pay a premium for the stock, then the fund manager belongs to growth style of investing. For example,MotilalOswalFund Managersbelievein ‘QGLP’and exhibitearningsmomentuminvestmentstyle. In an investment world where more choices may lead to more confusion, it is important to understand the style of the Fund Manager rather than the standalone performance of the funds. Also, since different managers exhibit their strengths in different market conditions, it is viable to construct a portfolio with appropriate combination of investmentstyleswhichinturnwouldminimizeduplicationandoverdiversification. To put into the perspective of quantifiable numbers, we have exhibited the styles of the managers through portfolio attributes (P/E, P/B and RoE) over a period of three years, as shown in the bubble chart. The bubble chart aims to show the relative positioning of each fund with respect to their investment style with the peers and benchmark. For example, a fund with relatively low P/B and low P/E would represent a mean reversion style of investing, while a fund with relatively high P/B, high P/E and higher RoE would represent earnings momentum style. Except for a few funds, mostofthefundsrepresentablendedinvestmentstylewhichisamixofvalueandgrowthstyle
Positioning of Multi Cap Funds NIFTY 500 L&T Value Franklin Focused Equity ICICI Value Discovery Axis Focused 25 Kotak Standard Multicap Invesco India Contra ICICI Multicap MOSt Multicap 35 Franklin Equity Birla Equity HDFC Equity ICICI Pru India Opp
Bubble size 47.0 3 yrs Average RoE High P/E 45.0 43.0 19.8 41.0 39.0 37.0 Low P/B 35.0 10.2 15.8 21.7 33.0 13.4 31.0 29.0 10.9 19.9 16.9 3 yrs Average P/E Average 3 yrs 27.0 12.9 13.3 Mean Value Blended Growth Earnings 25.0 17.2 Reversion Momentum 23.0 13.7 21.0 19.0 13.2 17.0 Low P/E 3 yrs Average P/B 15.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 11.0 Period: June 2016 - May 2019 Note: Over a period of 3 years, X Axis represents monthly average of P/B , Y Axis represents monthly average of P/E , Size of the bubble represents monthly average of RoE
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Alchemy Capital Management
Through ‘4C’ Lens
Hiren Ved CIO – Alchemy Capital PG in Management Accountancy (ICWAI) Mean Value Blended Growth Earnings Bachelors in Accounting (Mumbai Reversion Momentum University), • A great believer in the philosophy of high quality earnings growth however does not shy away from investing in turnaround opportunities • Focus on ‘buy & hold’ and Bottom up stock picking. Clarity of • Believes in buying a stocks with favorable risk –reward philosophy & • Investment philosophy has kept on evolving over the year and has made style necessary adjustment to his investment process accordingly • Follower of “Growth at Reasonable Price” philosophy • Instead of a model portfolio approach Fund Manager has a pool of 30-40 investable companies ranked as per their risk reward ratio
Consistency • One of the most experienced PMS manager,since 2002: of • Alchemy High Growth Diversified – 67% of the times in top 2 quartiles since performance inception (Since 2002)(Multicap Space) & approach
• AUM of ~Rs. 7,700 Crores (May19; including offshore mandate) • Hiren Ved has been associated with Alchemy Capital Management since 1999 • Instrumental in setting up AMC business for Alchemy Capital and co-managed Capabilities its private equity investments from 1999-2001. Also manages offshore of Manager strategies. & AMC • Previous stints of Mr.Ved – K R Choksey & Co, Prime Securities • Experienced investment team with the core team being associated with Alchemy from early days • Teamincludes the Head of Research, 4 Portfolio Managers and 2 Analysts
• AUM of ~Rs. 7,700 Crores (May19; including offshore mandate) • Hiren Ved has been associated with Alchemy Capital Management since 1999 • Instrumental in setting up AMC business for Alchemy Capital and co-managed its private equity investments from 1999-2001. Also manages offshore Class of the strategies. Manager • Previous stints of Mr.Ved – K R Choksey & Co, Prime Securities • Experienced investment team with the core team being associated with Alchemy from early days • Teamincludes the Head of Research, 4 Portfolio Managers and 2 Analysts
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Managed Strategies
Invesco PMS
RISE PMS Top 10 Holdings Fund Stylometer 18 RISE BSE 500 Stocks Allocation 17 Apollo Hospitals 7.46 16 Equitas Holdings 5.93 1.5x 15 AIA Engg. 5.92 14 Guj.St.Petronet 5.92 Mean Value Blended Growth Earnings 13 M & M Fin. Serv. 5.77 Reversion Momentum Motherson Sumi 5.73 12 1.3x P/E P/B Div Particulars ROE Torrent Pharma. 5.62 Ratio Ratio Yield 11 Shriram Trans. 5.54 RISE PMS 23.2 3.3 14.2 0.6 10 V I P Inds. 5.42 9 Nifty 500 28.1 2.7 9.7 1.5 Cipla 5.22
Jul-17
Jul-16
Jan-19
Jan-18
Jun-19
Jun-18
Jun-16
Oct-17
Oct-18
Apr-19
Apr-17
Apr-16
Feb-17
Sep-16
Dec-17
Dec-16
Aug-17
Aug-18
Nov-18
Nov-16
Mar-19 Others Mar-18
May-17 41.47 May-18
DAWN PMS Top 10 Holdings Fund Stylometer 12 DAWN BSE 500 1.1x Stocks Allocation 11 ICICI Bank 11.45 Axis Bank 6.22 10 ITC 5.43 0.9x
Guj.St.Petronet 4.81 Mean Value Blended Growth Earnings 9 Exide Inds. 4.80 Reversion Momentum 8 Infosys 4.73 P/E P/B Div Particulars ROE IndusInd Bank Ratio Ratio Yield 4.67 7 Reliance Inds. 4.56 DAWN 24.2 3.1 12.8 0.9 Apollo Hospitals 4.37 6 Nifty 500 28.1 2.7 9.7 1.5 Cipla 4.20
Jul-18
Jan-19
Jan-18
Jun-19
Jun-18
Oct-17
Oct-18
Apr-19
Apr-18
Feb-19
Feb-18
Sep-17
Sep-18
Dec-17
Dec-18
Aug-18
Nov-17
Nov-18
Mar-19
Mar-18
May-19 Others 44.76 May-18
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Marcellus PMS
Consistent Compounders PMS Top 10 Holdings Fund Stylometer 12.0 Marcellus CC PMS NIFTY 50 Stocks Allocation HDFC Bank 11.80 11.0 Pidilite Inds. 10.80 Asian Paints 10.80
Page Industries 10.80 Mean Value Blended Growth Earnings 10.0 Relaxo Footwear 9.80 Reversion Momentum Berger Paints 8.80 P/E P/B Div Particulars ROE 9.0 Nestle India 8.80 Ratio Ratio Yield Bajaj Fin. 6.90 Marcellus 49.2 9.2 18.6 0.6 CC PMS Dr Lal Pathlabs 5.90 8.0 Nifty 500 28.1 2.7 9.7 1.5 Kotak Mah. Bank 5.90
Jan-19
Jun-19
Apr-19
Others Feb-19
9.70 Dec-18
Mar-19
May-19 Ashmore
Ashmore India Opportunities Fund Top 10 Holdings Fund Stylometer Ashmore BSE Small Cap (in %) Stocks Allocation 1.28 Essel Propack 5.83 Solara Active 5.64 Muthoot Finance 5.62 Dishman Carbogen 5.48 Mean Value Blended Growth Earnings -3.18 Ahluwalia Contr. 5.30 Reversion Momentum -3.46 -4.22 -4.42 Parag Milk Foods 5.16 P/E P/B Div -5.24 Particulars ROE -5.90 Allcargo Logist. 4.92 Ratio Ratio Yield Granules India 4.76 Ashmore AIF 15.5 1.7 10.8 0.8
Rico Auto Inds 4.74 Nifty Small -10.06 Cap 55.1 1.7 2.3 1.3 -10.31 RBL Bank 4.65 -11.18 Others 47.90 1M 3M 6M 1Y Since inception
Alchemy
Alchemy High Growth Diversified 450 Top 10 Holdings Fund Stylometer Alchemy High Growth NSE 500 Stocks Allocation 400 Bajaj Finserv 6.70 350 Bajaj Fin. 5.90 300 Sundram Fasten. 5.70 250 5.70 HDFC Bank Mean Value Blended Growth Earnings 200 Info Edg.(India) 5.20 Reversion Momentum Avenue Super. 4.70 150 P/E P/B Div Particulars ROE Bandhan Bank 4.10 Ratio Ratio Yield 100 M & M 3.90 Alchemy 34.0 6.0 17.6 0.5 High Growth 50 Varun Beverages 3.40 Nifty 500 28.1 2.7 9.7 1.5 0 L&T Technology 3.30
Feb-03
Feb-15
Feb-12
Feb-09
Feb-18
Feb-06
Aug-13
Aug-07
Aug-16
Nov-03
Nov-15
Aug-10
Nov-12
Aug-04
Nov-09
Others Nov-18 51.40 Nov-06
May-05
May-02
May-11
May-17
May-08
May-14
JULY 2019 | ISSUE 79 44 Alpha Strategist | “Sisyphus Challenge”
Renaissance Investment Managers
Renaissance Midcap Portfolio Top 10 Holdings Fund Stylometer 11.50 Ren. Midcap Nifty Midcap Stocks Allocation DCB Bank 9.34 10.50 Syngene Intl. 9.08 Federal Bank 8.45 9.50
Info Edg.(India) 7.59 Mean Value Blended Growth Earnings Just Dial 6.21 Reversi on Momentum 8.50 Team Lease Serv. 5.37 P/E P/B Div Particulars ROE Motil.Oswal.Fin. 4.68 Ratio Ratio Yield 7.50 Renaissance Tata Global 18.8 2.3 12.3 1.0 4.56 Midcap REC Ltd 4.42 Nifty Free Float 6.50 Mid Cap 100 30.6 2.1 8.0 1.6 Aditya Bir. Fas. 4.19
Jul-18
Jan-19
Jun-19
Oct-18
Feb-18
Dec-17
Dec-18
Aug-18
Nov-17
Mar-19
Others Mar-18
36.11 May-19
May-18
Renaissance Opportunities Portfolio Top 10 Holdings Fund Stylometer Ren. Opps. BSE 200 Stocks Allocation 11.5 1.1x St Bk of India 9.07 11.0 Axis Bank 9.01 10.5 ICICI Bank 7.80 1.1x 10.0 Larsen & Toubro 7.69 Mean Value Blended Growth Earnings Reversi on Momentum HDFC Bank 7.45 9.5
Info Edg.(India) 7.19 P/E P/B Div Particulars ROE 9.0 Reliance Inds. 6.54 Ratio Ratio Yield Renaissance 8.5 Kotak Mah. Bank 6.51 Opportunities 34.6 3.7 10.7 0.6
Indian Hotels 6.06 Nifty 500 28.1 2.7 9.7 1.5 8.0 Tata Motors 5.69
Jul-18
Jan-18
Jun-19
Apr-18
Feb-19
Feb-18
Sep-18
Dec-17
Dec-18
Others Aug-18
Nov-18
26.99 Mar-19
May-19
May-18
Renaissance India Next Top 10 Holdings Ren. India Next NIFTY 50 Fund Stylometer 12.0 Stocks Allocation ICICI Bank 12.31 Axis Bank 12.16 11.0 St Bk of India 11.17 Indian Hotels 7.84 Mean Value Blended Growth Earnings 10.0 Gateway Distr. 6.55 Reversi on Momentum Sanghvi Movers 6.11 P/E P/B Div Particulars ROE 9.0 CESC 5.28 Ratio Ratio Yield Volt.Transform. Renaissance 5.15 India Next 17.6 2.1 12.2 1.1 Mahindra Life. 4.97 8.0 Nifty 50 25.3 3.0 11.9 1.5 Mahindra Holiday 4.84
Jul-18
Jan-19
Jun-19
Jun-18
Oct-18
Apr-19
Apr-18
Feb-19
Sep-18
Dec-18
Aug-18
Nov-18
Mar-19
Others May-19 23.62 May-18
JULY 2019 | ISSUE 79 45 Alpha Strategist | “Sisyphus Challenge”
Motilal Oswal
Value PMS Top 10 Holdings Fund Stylometer 300 Value Nifty 50 27.0x Stocks Allocation HDFC Bank 12.82 250 HDFC Life Insur. 9.04 200 Bajaj Finserv 8.74
Kotak Mah. Bank 8.55 Mean Value Blended Growth Earnings 150 B P C L 6.47 Reversion Momentum 11.7x Larsen & Toubro 6.32 100 P/E P/B Div Particulars ROE ICICI Bank 5.94 Ratio Ratio Yield 50 Bharat Forge 3.85 Value PMS 27.3 4.0 14.8 1.0 Ipca Labs. 3.85 Nifty 50 25.3 3.0 11.9 1.5 0 Maruti Suzuki 3.74
Jul-13
Jul-15
Jul-17
Jul-18
Jul-16
Jul-14
Jan-13
Jan-15
Jan-17
Jan-18
Jan-16
Jan-14
Jun-19
Feb-12
Feb-11
Feb-09
Sep-03
Sep-05
Feb-08
Feb-10
Sep-06
Sep-04
Dec-18
Aug-12
Aug-11
Aug-09
Aug-07
Aug-08
Aug-10
Mar-03
Mar-05
Mar-07
Mar-06 Others 30.66 Mar-04
NTDOP PMS Top 10 Holdings Fund Stylometer 70 NTDOP Nifty 500 5.7x Stocks Allocation 60 Kotak Mah. Bank 13.02 Voltas 10.25 50 Page Industries 7.67 40 City Union Bank 5.27 Mean Value Blended Growth Earnings L&T Technology 4.90 Reversion Momentum 30 1.9x Bajaj Fin. 4.76 P/E P/B Div 20 Particulars ROE ICICI Bank 4.43 Ratio Ratio Yield 10 Eicher Motors 4.28 NTDOP PMS 26.5 4.0 15.1 0.9 Bosch 0 3.66 Nifty 500 28.1 2.7 9.7 1.5 Max Financial 3.60
Jul-10
Jan-11
Jan-10
Jun-09 Jun-19
Jun-08
Oct-15
Oct-16
Apr-15
Apr-16
Feb-13
Feb-12
Sep-13
Sep-14
Dec-07
Dec-08
Aug-12
Aug-11
Nov-17
Nov-18
Mar-14
May-17 Others 38.16 May-18
IOP PMS Top 10 Holdings Fund Stylometer 45 IOP Nifty Small Cap Stocks Allocation 40 DCB Bank 12.75 35 2.90x AU Small Finance 7.59 30 TTK Prestige 7.46 25 Birla Corpn. 6.85 Mean Value Blended Growth Earnings 20 Aegis Logistics 6.66 Reversion Momentum 15 Blue Star 5.55 1.79x P/E P/B Div Particulars ROE Kajaria Ceramics 5.52 Ratio Ratio Yield 10 Mahanagar Gas 5.24 IOP PMS 23.9 2.7 11.2 0.7 5 Gabriel India 5.07 Nifty Small 0 Cap 55.1 1.7 2.3 1.3 Can Fin Homes 4.76
Jul-11
Jul-17
Jul-18
Jan-11
Jan-18
Jun-12
Jun-19
Oct-14
Apr-14
Feb-17
Sep-15
Feb-10
Dec-12
Dec-11
Dec-18
Aug-16
Nov-13
Aug-10
Mar-15
Mar-16 Others 32.54 May-13
JULY 2019 | ISSUE 79 46 Alpha Strategist | “Sisyphus Challenge”
IOP 2 PMS Top 10 Holdings IOP2 Nifty Small Cap Fund Stylometer 12.0 Stocks Allocation Ipca Labs. 9.15 11.0 Cholaman.Inv.&Fn 8.45 10.0 L & T Infotech 7.61 0.9x
Bata India 7.22 Mean Value Blended Growth Earnings 9.0 Godrej Agrovet 6.81 Reversion Momentum 0.8x Bajaj Electrical 6.80 8.0 P/E P/B Div Particulars ROE Ratio Ratio Yield Sobha 6.74 7.0 Coffee Day Enter 5.83 IOP 2 PMS 16.1 3.2 20.0 1.0 JK Lakshmi Cem. 5.72 6.0 Nifty Small 55.1 1.7 2.3 1.3 Sundram Fasten. 4.72 Cap
Jul/18
Jan/19
Jun/19
Oct/18
Apr/18
Feb/18 Feb/19 Sep/18
Dec/18
Aug/18
Mar/18 Mar/19
May/18 Others 30.95 May/19
Motilal Oswal Focused Multicap Opportunities Fund (AIF) Top 10 Holdings Fund Stylometer MO AIF B1 MO AIF B2 BSE 200 (in %)
Stocks Allocation 7.6 6.9 DCB Bank 13.10 5.9 Voltas 11.56 Asian Paints 9.73
Kotak Mah. Bank 8.43 Mean Value Blended Growth Earnings 1.9 2.0 Reversion 0.4 Federal Bank 8.13 Momentum Quess Corp 7.21 P/E P/B Div Particulars ROE -1.2 TCI Express 7.05 Ratio Ratio Yield -2.5 -2.4 -2.8 -2.8 -2.8 -3.0 Colgate-Palm. 6.84 Multicap AIF 28.9 3.0 10.5 0.6 AU Small Finance 6.43 -5.8 -5.5 Godrej Inds. 6.24 Nifty 500 28.1 2.7 9.7 1.5 Others 15.28 1M 3M 6M 1Y 2Y
Motilal Oswal Emergence Fund (AIF)
Top 10 Holdings Fund Stylometer MO Emergence B1 MO Emergence B2 (in %) Stocks Allocation MO Emergence B3 BSE Small Cap Team Lease Serv. 14.25 V I P Inds. 10.13 -2.2 -2.2 -2.2 -4.2 -3.2 V-Mart Retail 10.09 -5.2 -6.7 -6.6 Mahindra Logis. 9.00 Mean Value Blended Growth Earnings -7.6 -7.5 -6.6 -7.5 8.58 Reversion Momentum Can Fin Homes -11.2 MAS FINANC SER 6.87 P/E P/B Div Particulars ROE -14.8 Persistent Sys 6.73 Ratio Ratio Yield -15.0 -14.8 Emergence APL Apollo 5.28 25.4 3.8 15.1 0.7 -17.9 AIF Mastek 4.53 -18.2 -17.9 Nifty Small -20.4 Ent.Network 4.48 Cap 55.1 1.7 2.3 1.3 Others 20.06 1M 3M 6M 1Y SI
JULY 2019 | ISSUE 79 47 Alpha Strategist | “Sisyphus Challenge”
ASK PMS
IEP PMS Top 10 Holdings Fund Stylometer 60 ASK IEP BSE 500 Stocks Allocation 5.0x Bajaj Fin. 9.36 50 Bajaj Finserv 8.08 40 P I Inds. 6.58
Havells India 6.29 Mean Value Blended Growth Earnings 30 Cholaman.Inv.&Fn 6.03 Reversion Momentum 2.3x Kotak Mah. Bank 5.88 20 P/E P/B Div Particulars ROE Astral Poly 5.67 Ratio Ratio Yield 10 Asian Paints 5.38 IEP PMS 43.3 7.2 16.7 0.5 Britannia Inds. 5.25 0 Nifty 500 28.1 2.7 9.7 1.5 Dabur India 5.24
Jul-18
Jul-10
Jul-14
Jan-10
Jan-14
Jun-15
Jun-19
Oct-16
Apr-12
Apr-16
Feb-18
Sep-12
Dec-18
Dec-10
Dec-14
Aug-13
Aug-17
Nov-15
Nov-11
Mar-13
Mar-17 Others 36.24 May-11
ASK Select Top 10 Holdings Fund Stylometer 50 ASK Select BSE 100 4.3x Stocks Allocation 45 Bajaj Fin. 8.74 40 Bajaj Finserv 8.49 35 HDFC Bank 7.21 30 GRUH Finance 5.82 Mean Value Blended Growth Earnings Reversion Momentum 25 2.2x Titan Company 7.12 20 P/E P/B Div P I Inds. 6.35 Particulars ROE Ratio Ratio Yield 15 Kajaria Ceramics 5.25 ASK Select 44.3 7.8 17.6 0.5 10 Asian Paints 5.51 5 Nifty Small 55.1 1.7 2.3 1.3 Britannia Inds. 4.87 Cap 0 Dabur India 5.03
Jul-11
Jul-10
Jan-11
Jan-10
Jun-13
Jun-15
Jun-12
Jun-19
Jun-17
Jun-18
Jun-16
Jun-14
Dec-13
Dec-15
Dec-12
Dec-11
Dec-17
Dec-18
Dec-16 Others 35.61 Dec-14
ASK 2025 AIF Top 10 Holdings Fund Stylometer ASK 2025 AIF Nifty 50 (in %) Stocks Allocation Bajaj Fin. 5.60 8.53 Bajaj Finserv 5.52 HDFC Bank 5.49 Cholaman.Inv.&Fn 5.21 Mean Value Blended Growth Earnings Reversion Momentum 4.26 Dabur India 4.60 P/E P/B Div GRUH Finance 4.49 Particulars ROE Ratio Ratio Yield 2.21 HDFC AMC 4.48 1.42 0.93 ASK 2025 44.6 8.1 18.2 0.5 Berger Paints 4.28 0.27 Britannia Inds. 4.28 Nifty 50 25.3 3.0 11.9 1.5 -0.25 ICICI Lombard 4.24 -1.12 Others 51.80 1M 3M 6M SI
JULY 2019 | ISSUE 79 48 Alpha Strategist | “Sisyphus Challenge”
Old Bridge PMS
All Cap PMS Top 10 Holdings Fund Stylometer Old Bridge All Cap BSE 500 (in %) Stocks Allocation 10.2 10.8 Power Mech Proj. 6.49 8.6 10.8 7.1 7.5 Kaveri Seed Co. 6.19 2.4 Chambal Fert. 5.28 1.3 1.6 Coromandel Inter 5.21 -0.1 KEI Inds. 5.16 SRF 5.11 -4.0 Mean Value Blended Growth Earnings JSW Energy 4.86 Reversion Momentum Syngene Intl. 4.79 Va Tech Wabag 4.36 -17.5 1M 3M 6M 1Y 2Y Since Others 52.55 inception
Old Bridge Thematic PMS Top 10 Holdings Fund Stylometer Old Bridge Thematic Nifty 50 (in %) Stocks Allocation 13.1 12.4 12.4 Kaveri Seed Co. 24.93 8.5 9.4 8.3 Chambal Fert. 15.77 Balrampur Chini 11.64 1.1 1.4 Escorts 8.24 -2.1 -1.5 Coromandel Inter 10.08 -3.8 Shakti Pumps 5.82 Mean Value Blended Growth Earnings Reversion Momentum
-18.8
1M 3M 6M 1Y 2Y Since Others 23.52 inception
Old Bridge Vantage Equity Top 10 Holdings Fund Stylometer Old Bridge Vantage Equity Class A Old Bridge Vantage Equity Class B BSE 500 Stocks Allocation (in %) SRF 7.50 9.8 9.8 9.3 JSW Energy 5.90 7.5 Kaveri Seed Co. 5.70 5.6 5.6 5.1 4.0 KEI Inds. 5.40 Mean Value Blended Growth Earnings 4.0 Reversion Momentum 4.0 Power Mech Proj. 5.00 1.5 P/E P/B Div Syngene Intl. 4.80 Particulars ROE Ratio Ratio Yield Chambal Fert. 4.80 OBCM 15.4 2.4 15.7 0.9 AIA Engg. 4.60 Vantage Equity NCC 4.40 Nifty 500 28.1 2.7 9.7 1.5 -4.9 -4.9 Ashok Leyland 4.40 -6.2 -6.2 Others 47.50 1M 3M 6M 1Y Since inception
JULY 2019 | ISSUE 79 49 Alpha Strategist | “Sisyphus Challenge”
Unifi PMS
Unifi Blended PMS Top 10 Holdings 140.00 Fund Stylometer UNIFI BSE Midcap Stocks Allocation Himadri Specialt 9.83 130.00 Sonata Software 7.40 Bank of Baroda 5.18 120.00
KPIT Technologi. 5.14 Mean Value Blended Growth Earnings 110.00 Suven Life Scie. 5.04 Reversion Momentum Crompton Gr. Con 5.03 P/E P/B Div Particulars ROE 100.00 Can Fin Homes 5.02 Ratio Ratio Yield Unifi Blended Godawari Power 5.00 16.3 2.1 12.9 1.5 PMS 90.00 TVS Srichakra 4.98 Nifty Free Float Mid Cap 100 30.6 2.1 8.0 1.6 V I P Inds. 4.98 80.00 Others 42.40 May-17 Sep-17 Jan-18 May-18 Sep-18 Jan-19 May-19
Unifi Blended AIF Top 10 Holdings Fund Stylometer UNIFI BSE Midcap 7.0% Stocks Allocation Coal India 10.95 6.0% Crompton Gr. Con 10.60 5.0% Bank of Baroda 9.71
Himadri Specialt 8.10 Mean Value Blended Growth Earnings 4.0% V I P Inds. 5.76 Reversion Momentum 3.0% Sheela Foam 5.14 P/E P/B Div Particulars ROE Garware Tech. 5.07 Ratio Ratio Yield 2.0% Unifi Blended IIFL Finance 4.58 16.3 2.1 12.9 1.5 AIF TVS Srichakra 4.31 Nifty Free Float 1.0% 30.6 2.1 8.0 1.6 Intellect Design Mid Cap 100 3.57 0.0% Others 32.21 Since Inception
The Portfolio data and Fundamental attributes As on June 30, 2019
JULY 2019 | ISSUE 79 50 Alpha Strategist | “Sisyphus Challenge”
Real Estate Offering
India Realty Excellence Fund IV
Capturing the real estate recovery cycle
Demand expected to Higher demand & Supply had outpace supply leading to rising prices will lead overtaken demand fall in inventory level to more supply
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Inventory levels peaked Inventory expected to and average price bottom-out and prices growth slowed down expected to rise
Fund’s Investment Fund’s Exit Period Timeline Investment Strategy
City Strategy Project Strategy • City focus: MMR, Delhi NCR, • Residential segment with focus on Bengaluru, Pune, Chennai & affordable segment Hyderabad • Commercial projects (selectively) • City concentration (except MMR & • Single project concentration: <20% of Bengaluru): <30% of fund fund size size iref IV Developer Strategy Investment Structure Strategy • Established & dominant players in • Mezzanine Investments (~50%): each micro-market having good Downside protection with regular execution capability coupon along with equity kicker • Investment with a developer group not • Structured equity (up to 50%): to exceed 20% of Fund Size Enhanced returns by undertaking equity investments with reputed developers Key Terms Target Fund Size Rs. 1500 cr (incl. green-shoe option of Rs. 500 cr)
Hurdle Rate 10% IRR (pre-tax)
Target Return 22-24%
Minimum Commitment Rs. 1 cr
Sponsor & team Commitment 10% of aggregate Capital Commitments received by the Fund, subject to a minimum Capital Commitment of Rs. 50 cr and maximum of Rs. 100 cr Tenure 5 Y from the date of the final closing subject to two additional 1 year extensions
Commitment Period 2 Y from final closing (extendable by 1Y)
• Rs. 1 cr to 10 cr: 2.0% p.a. Management Fees • > Rs. 10 cr to 25 cr: 1.75% p.a. • > Rs. 25 cr: 1.50% p.a.
Carried interest (with catch up) • Rs. 1 cr to 10 cr: 15.0% p.a. • > Rs. 10 cr to 25 cr: 12.50% p.a. • > Rs. 25 cr: 10.0% p.a.
JULY 2019 | ISSUE 79 51 Alpha Strategist | “Sisyphus Challenge” Fund Insight
Large Cap Funds Positioning of Large Cap Funds NIFTY 50 ICICI Bluechip Birla Focused Equity Birla Frontline Equity SBI Bluechip MOSt 25 Mirae Asset Large Cap HDFC top 100 42.0 High P/E 40.0 Bubble size 3 yrs Average RoE 38.0 22.7 36.0
34.0
Low P/B 32.0 High P/B 15.2 30.0 18.5 16.0 3 yrs Average P/E Average 3 yrs 28.0 19.3 26.0 13.5 17.8 24.0 13.8
22.0 Low P/E 3 yrs Average P/B 20.0 2.5 3.5 4.5 5.5 6.5 7.5 8.5 9.5 Period: June 2016 to May 2019
Aditya Birla SL Focused Equity Fund (Fund Manager - Mahesh Patil) Top 10 Holdings Top 5 Sector Fund Stylometer Stocks Allocation 4.9 HDFC Bk 9.9 ICICI Bk 8.8 9.2 HDFC 5.3 5.1 SBI Mean Value Blended Growth Earnings Infosys 4.9 9.7 Reversion Momentum 4.9 41.8 L&T P/E P/B Div Particulars ROE ITC 4.7 Ratio Ratio Yield 4.1 RIL 10.0 Fund 21.2 2.7 12.9 1.3 NTPC 3.9 Kotak Bk 3.3 Financial Cons Goods Nifty 50 25.3 3.0 11.9 1.5 Others 45.2 Energy IT Construction Aditya Birla SL Frontline Eq Fund (Fund Manager - Mahesh Patil) Top 10 Holdings Top 5 Sector Fund Stylometer Stocks Allocation 4.5 HDFC Bk 10.0 9.0 ICICI Bk 8.3 Infosys 5.2 SBI 4.5 10.0 Mean Value Blended Growth Earnings ITC 4.3 41.3 Reversion Momentum HDFC 4.2 P/E P/B Div Particulars ROE RIL 3.8 Ratio Ratio Yield L&T 3.5 11.6 Fund 21.4 2.9 13.4 1.3 NTPC 2.5 Axis Bk 2.3 Financial Cons Goods Nifty 50 25.3 3.0 11.9 1.5 Others 51.4 Energy IT Auto
JULY 2019 | ISSUE 79 52 Alpha Strategist | “Sisyphus Challenge”
ICICI Pru Focused BlueChip Eq Fund (Fund Manager – Anish Pawakley, Rajat Chandak) Top 10 Holdings Top 5 Sector Fund Stylometer Stocks Allocation 6.7 HDFC Bk 9.5 ICICI Bk 6.7 8.9 Infosys 5.6
Bharti 4.0 32.6 Mean Value Blended Growth Earnings NTPC 4.0 Reversion Momentum HDFC 3.8 9.3 P/E P/B Div Particulars ROE Axis Bk 3.8 Ratio Ratio Yield L&T 3.7 Fund 20.5 2.6 12.6 1.5 ITC 3.6 12.7 SBI Life Insur 3.3 Financial Energy Nifty 50 25.3 3.0 11.9 1.5 Others 52.0 Cons Goods IT Auto
Most Focused 25 Fund* (Fund Manager – Siddharth Bothra, Abhiroop Mukherjee ) Top 10 Holdings Top 5 Sector Fund Stylometer Stocks Allocation 5.8 HDFC Bk 10.6 6.7 HDFC Insur 7.4 ICICI Bk 6.7 7.6 Kotak Bk 6.4 Mean Value Blended Growth Earnings L&T 5.8 Reversion Momentum
Axis Bk 5.6 P/E P/B Div 47.9 Particulars ROE ICICI Lombard 5.0 9.9 Ratio Ratio Yield ABB India 4.7 Fund 30.3 4.4 14.6 0.8 TCS 4.1 Infosys 4.1 Financial IT Nifty 50 25.3 3.0 11.9 1.5 Others 39.7 Pharma Auto Construction
SBI BlueChip Fund* (Fund Manager – Sohini Andani) Top 10 Holdings Top 5 Sector Fund Stylometer Stocks Allocation 6.2 HDFC Bk 9.7 6.8 L&T 5.5 ICICI Bk 5.1 ITC 4.6 Mean Value Blended Growth Earnings 8.1 HDFC 4.5 Reversion Momentum 38.7 SBI 4.3 P/E P/B Div Particulars ROE Nestle 3.2 Ratio Ratio Yield Infosys 3.2 8.4 Fund 22.9 3.1 13.7 1.2 Kotak Bk 3.0 Financial Cons Goods Axis Bk 2.9 Energy Auto Nifty 50 25.3 3.0 11.9 1.5 Others 54.0 Construction
Mirae Asset Largecap Fund* (Fund Manager - Neelesh Surana, Harshad Borawake) Top 10 Holdings Top 5 Sector Fund Stylometer Stocks Allocation 6.2 HDFC Bk 8.6 10.4 ICICI Bk 5.6 RIL 5.2
Axis Bk 4.7 35.0 Mean Value Blended Growth Earnings L&T 4.1 Reversion Momentum 10.5 SBI 4.0 P/E P/B Div Particulars ROE Infosys 3.9 Ratio Ratio Yield TCS 3.8 Fund 22.4 3.1 13.6 1.2 HDFC 3.1 11.4 Maruti 2.9 Financial Energy Nifty 50 25.3 3.0 11.9 1.5 Others 54.1 Cons Goods IT Pharma
JULY 2019 | ISSUE 79 53 Alpha Strategist | “Sisyphus Challenge”
HDFC Top 100 Fund* (Fund Manager: Prashant Jain; Amar Kalkundrikar) Top 10 Holdings Top 5 Sector Fund Stylometer Stocks Allocation 6.3 ICICI Bk 8.1 6.6 SBI 8.0 RIL 7.2 37.6 Infosys 6.6 13.0 Mean Value Blended Growth Earnings HDFC Bk 6.6 Reversion Momentum
L&T 6.3 P/E P/B Div Particulars ROE NTPC 4.4 Ratio Ratio Yield ITC 4.1 Fund 14.9 1.9 13.0 1.9 TCS 4.0 20.9 Axis Bk 3.8 Financial Energy Nifty 50 25.3 3.0 11.9 1.5 Others 41.0 IT Metals Construction
Multi Cap Funds
Positioning of Multi Cap Funds NIFTY 500 L&T Value Franklin Focused Equity ICICI Value Discovery Axis Focused 25 Kotak Standard Multicap Invesco India Contra ICICI Multicap MOSt Multicap 35 Franklin Equity Birla Equity HDFC Equity ICICI Pru India Opp
Bubble size 47.0 3 yrs Average RoE High P/E 45.0 43.0 19.8 41.0 39.0 37.0 15.8 Low P/B 35.0 10.2 21.7 33.0 13.4 31.0 19.9 29.0 10.9 3 yrs Average P/E Average 3 yrs 27.0 13.3 16.9 12.9 25.0 17.2 23.0 13.7 21.0 19.0 13.2 17.0 Low P/E 3 yrs Average P/B 15.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 11.0 Period: June 2016 to May 2019
Aditya Birla SL Equity Fund (Fund Manager - Anil Shah) Top 10 Holdings Top 5 Sector Fund Stylometer Stocks Allocation ICICI Bk 9.5 7.0 HDFC Bk 9.4 7.5 Dr. Reddys Lab 3.3
Tata Steel 3.2 Mean Value Blended Growth Earnings ITC 3.2 Reversion Momentum 7.9 36.9 Tata Chemicals 3.1 P/E P/B Div Particulars ROE Bajaj Finance 3.0 Ratio Ratio Yield Sun Pharma 2.9 Fund 20.8 2.6 12.5 1.2 SBI 2.8 10.8 Infosys 2.8 Financial Cons Goods Nifty 500 28.1 2.7 9.7 1.5 Others 56.7 Pharma IT Metals
JULY 2019 | ISSUE 79 54 Alpha Strategist | “Sisyphus Challenge”
Franklin India Equity Fund (Fund Manager - Anand Radhakrishnan) Top 10 Holdings Top 5 Sector Fund Stylometer Stocks Allocation 7.5 HDFC Bk 9.3 Infosys 6.2 8.0 Bharti 6.0 25.4 ICICI Bk 4.8 Mean Value Blended Growth Earnings L&T 3.8 Reversion Momentum M&M 3.3 P/E P/B Div Particulars ROE Kotak Bk 3.3 10.7 Ratio Ratio Yield Axis Bk 3.2 Fund 22.9 2.8 12.1 1.1 HCL Tec 2.8 11.9 Tata Motors 2.4 Financial IT Cons Goods Nifty 500 28.1 2.7 9.7 1.5 Others 54.9 Telecom Auto
Franklin India Focus Equity Fund (Fund Manager - Roshi Jain) Top 10 Holdings Top 5 Sector Fund Stylometer Stocks Allocation 7.5 ICICI Bk 9.1 SBI 8.8 7.5 Bharti 6.0 31.1 IOC 5.6 Mean Value Blended Growth Earnings HDFC Bk 5.4 9.5 Reversion Momentum Axis Bk 5.1 P/E P/B Div Particulars ROE NTPC 4.4 Ratio Ratio Yield Ultratech 4.3 Fund 21.6 2.6 12.0 1.4 Abbott India 4.1 16.1 Idea Cellular 3.5 Financial Energy Telecom Nifty 500 28.1 2.7 9.7 1.5 Others 43.7 Pharma Cement
ICICI Pru Value Discovery Fund (Fund Manager - Mrinal Singh) Top 10 Holdings Top 5 Sector Fund Stylometer Stocks Allocation 7.7 Infosys 7.6 15.3 Sun Pharma 7.2 SBI 7.0 9.3 NTPC 5.8 Mean Value Blended Growth Earnings HDFC Bk 4.5 Reversion Momentum IOC 4.0 P/E P/B Div Particulars ROE ITC 4.0 Ratio Ratio Yield Wipro 4.0 15.1 13.4 Fund 16.5 2.2 13.3 1.9 M&M 3.5 Bharti 3.1 IT Financial Energy Nifty 500 28.1 2.7 9.7 1.5 Others 49.3 Auto Pharma
ICICI Prudential Multicap Fund (Fund Manager - Sankaran Naren, Atul Patel) Top 10 Holdings Top 5 Sector Fund Stylometer Stocks Allocation 8.0 NTPC 5.7 SBI 5.4 19.5 Bharti 4.9 8.3 Infosys 4.6 Mean Value Blended Growth Earnings ICICI Bk 4.1 Reversion Momentum L&T 4.1 P/E P/B Div Particulars ROE ITC 3.2 Ratio Ratio Yield ONGC 11.7 3.1 15.1 Fund 17.0 2.1 12.1 2.2 Vedanta 2.8 Financial Energy IT Axis Bk Nifty 500 2.5 Cons Goods Construction 28.1 2.7 9.7 1.5 Others 59.5
JULY 2019 | ISSUE 79 55 Alpha Strategist | “Sisyphus Challenge”
ICICI Pru India Opp Fund (Fund Manager: Sankaran Naren,Roshan Chutkey) Top 10 Holdings Top 5 Sector Fund Stylometer Stocks Allocation 9.2 NTPC 8.5 18.4 Infosys 7.7 Hindalco 7.6 10.0 Bharti 7.0 Mean Value Blended Growth Earnings Vedanta 5.5 Reversion Momentum Sun Pharma 5.3 P/E P/B Div Particulars ROE ONGC 4.5 17.2 Ratio Ratio Yield Tata Chemicals 4.4 15.9 Fund 12.5 1.3 10.4 2.7 Tata Steel 4.0 Energy Metals SBI 3.3 Financial Telecom IT Nifty 500 28.1 2.7 9.7 1.5 Others 42.2
Invesco India Contra Fund* (Fund Manager - Taher Badshah, Amit Ganatra) Top 10 Holdings Top 5 Sector Fund Stylometer Stocks Allocation 6.8 HDFC Bk 8.9 7.0 ICICI Bk 8.5 L&T 5.2 Infosys 4.4 34.8 11.3 Mean Value Blended Growth Earnings Axis Bk 3.8 Reversion Momentum
SBI 3.5 P/E P/B Div Particulars ROE Equitas 2.9 Ratio Ratio Yield HPCL 2.4 12.0 Fund 18.8 2.7 14.1 1.5 Exide 2.4 Financial IT Sun Pharma 2.3 Energy Auto Nifty 500 28.1 2.7 9.7 1.5 Others 55.8 Construction
Kotak Standard Multicap Fund (Fund Manager - Harsha Upadhyaya) Top 10 Holdings Top 5 Sector Fund Stylometer Stocks Allocation 6.9 HDFC Bk 6.9 7.1 RIL 6.8 ICICI Bk 6.4 Axis Bk 5.7 7.5 Mean Value Blended Growth Earnings L&T 5.2 38.1 Reversion Momentum Infosys 4.0 P/E P/B Div Particulars ROE TCS 3.5 Ratio Ratio Yield SBI 3.0 Fund 26.3 3.5 13.5 0.9 Ultratech 2.7 14.9 RBL Bk 2.7 Financial Energy Nifty 500 28.1 2.7 9.7 1.5 Others 53.1 IT Cement Cons Goods
L&T India Value Fund* (Fund Manager - Venugopal M.; Karan Desai) Top 10 Holdings Top 5 Sector Fund Stylometer Stocks Allocation 6.8 ICICI Bk 6.7 RIL 6.5 10.5 Infosys 5.1 30.1 SBI 4.5 Mean Value Blended Growth Earnings Axis Bk 4.3 Reversion Momentum L&T 4.1 P/E P/B Div Particulars ROE HDFC 3.7 10.6 Ratio Ratio Yield HDFC Bk 3.4 Fund 20.6 2.6 12.7 1.2 ITC 2.5 10.7 Divis Lab 2.3 Financial Construction Nifty 500 28.1 2.7 9.7 1.5 Others 57.0 IT Energy Cement
JULY 2019 | ISSUE 79 56 Alpha Strategist | “Sisyphus Challenge”
MOSt Focused Multicap 35 Fund* (Fund Manager - Akash Singhania; Abhiroop Mukherjee) Top 10 Holdings Top 5 Sector Fund Stylometer Stocks Allocation 8.3 HDFC Bk 10.2 Axis Bk 7.4 8.9 HDFC 7.2 6.3 L&T Mean Value Blended Growth Earnings Infosys 6.1 9.4 45.9 Reversion Momentum 4.6 Bajaj Finance P/E P/B Div Particulars ROE Maruti 4.5 Ratio Ratio Yield 4.4 RBL Bk 12.2 Fund 25.2 4.4 17.3 1.2 HDFC Insur 4.4 TCS 4.3 Financial IT Nifty 500 28.1 2.7 9.7 1.5 Others 40.5 Energy Cons Goods Auto
Axis Focused 25 Fund (Fund Manager - Jinesh Gopani) Top 10 Holdings Top 5 Sector Fund Stylometer Stocks Allocation 7.5 HDFC Bk 8.8 7.9 Kotak Bk 8.8 Bajaj Finance 7.9 7.1 TCS 11.1 Mean Value Blended Growth Earnings Bajaj Finserv 6.7 47.9 Reversion Momentum HDFC 6.4 P/E P/B Div Particulars ROE Pidilite 5.7 Ratio Ratio Yield
Maruti 4.7 11.3 Fund 38.2 5.7 15.0 0.5 Supreme 4.6 Financial IT Avenue Supermarts 4.5 Nifty 500 28.1 2.7 9.7 1.5 Cons Goods Cap Goods Others 34.9 Auto
Sundaram Rural & Consumption Fund* (Fund Manager: S. Krishnakumar) Top 10 Holdings Top 5 Sector Fund Stylometer Stocks Allocation 7.7 ITC 4.7 7.9 HUL 4.6 M&M 4.0 3.8 UPL 8.3 Mean Value Blended Growth Earnings SBI 3.5 42.9 Reversion Momentum 2.8 City Union Bk P/E P/B Div Particulars ROE Crompton Greaves 2.5 Ratio Ratio Yield Tata Beverages 2.5 16.7 Fund 25.3 3.3 13.1 1.0 Ramco Cements 2.4 Asian Paints 2.4 Cons Goods Financial Nifty 500 28.1 2.7 9.7 1.5 Others 66.7 Fertilisers Cement Auto
HDFC Equity Fund (Fund Manager: Prashant Jain, Amar Kalkundrikar) Top 10 Holdings Top 5 Sector Fund Stylometer Stocks Allocation 6.0 SBI 9.8 8.9 ICICI Bk 9.8 L&T 8.5 Infosys 8.2 39.4 Mean Value Blended Growth Earnings RIL 4.9 13.2 Reversion Momentum NTPC 4.6 P/E P/B Div Particulars ROE HDFC Bk 4.3 Ratio Ratio Yield ITC 3.3 Fund 14.9 1.9 12.8 2.0 TCS 3.1 18.8 PFC 3.0 Financial Energy Nifty 500 28.1 2.7 9.7 1.5 Others 40.5 IT Construction Metals
JULY 2019 | ISSUE 79 57 Alpha Strategist | “Sisyphus Challenge”
Midcap Fund
Positioning of Midcap Funds NIFTY FREE FLOAT MIDCAP 100 HDFC Mid-Cap Opportunities Franklin Prima Sundaram Select Midcap Kotak Emerging Equity MOSt Midcap 30 Bubble size : 3 yrs Average RoE 46.0 High P/E 44.0
42.0 19.5 40.0 6.3 13.9 38.0
36.0 High P/B 34.0 14.6 16.2
32.0 Low P/B
3 yrs Average P/E Average 3 yrs 30.0 15.5
28.0
26.0
24.0 Low P/E 22.0 1.5 2.5 3.5 4.5 5.5 6.5 7.5 8.5 9.5 3 yrs Average P/B Period: June 2016 to May 2019
Franklin India Prima Fund* (Fund Manager: R. Janakiraman; Hari Shyamsunder) Top 10 Holdings Top 5 Sector Fund Stylometer Stocks Allocation 6.4 HDFC Bk 3.6 Ramco Cements 3.0 8.6 20.1 City Union Bk 2.9
Kotak Bk 2.8 Mean Value Blended Growth Earnings Kansai Paints 2.6 Reversion Momentum
Info Edge 2.6 P/E P/B Div Particulars ROE Finolex Cables 2.5 Ratio Ratio Yield 10.3 Voltas 2.5 Fund 22.0 2.9 13.4 1.0 Oberoi Realty 2.3 12.9 Nifty Free Float Tata Chemicals 2.3 30.6 2.1 8.0 1.6 Financial Cap Goods Mid Cap 100 Others 72.8 Cons Goods Energy Auto
HDFC Mid-Cap Opportunities Fund (Fund Manager: Chirag Setalvad) Top 10 Holdings Top 5 Sector Fund Stylometer Stocks Allocation 8.9 Chola Invest 4.1 Aarti 3.7 22.7 Sundram Fasteners 3.4 9.2 City Union Bk 3.1 Mean Value Blended Growth Earnings Voltas 3.0 Reversion Momentum RBL Bk 2.8 P/E P/B Div Particulars ROE Balkrishna 2.8 Ratio Ratio Yield Indian Hotels 2.7 11.6 Fund 20.6 2.8 13.5 1.0 Trent 2.4 12.5 Nifty Free Float 2.3 Financial 30.6 2.1 8.0 1.6 Torrent Pharma Cons Goods Mid Cap 100 Others 69.6 Auto Chemicals Cap Goods
JULY 2019 | ISSUE 79 58 Alpha Strategist | “Sisyphus Challenge”
Kotak Emerging Equity Fund* (Fund Manager: Pankaj Tibrewal) Top 10 Holdings Top 5 Sector Fund Stylometer Stocks Allocation 6.2 PI 3.7 Ramco Cements 3.6 6.3 19.4 Atul 3.4
AU Small Bk 3.3 Mean Value Blended Growth Earnings Supreme 3.2 Reversion Momentum
Schaeffler India 3.1 9.6 P/E P/B Div Particulars ROE RBL Bk 2.8 Ratio Ratio Yield Thermax 2.8 Fund 26.3 3.8 14.6 0.7 SRF 2.7 16.4 Nifty Free Float 30.6 2.1 8.0 1.6 Solar (India) 2.6 Financial Cap Goods Mid Cap 100 Others 68.9 Cons Goods Pharma Fertilisers
Motilal Oswal Midcap 30 Fund* (Fund Manager: Akash Singhania; Niket Shah) Top 10 Holdings Top 5 Sector Fund Stylometer Stocks Allocation 5.0 7.0 Bajaj Finance 9.6 RBL Bk 8.6 AU Small Bk 6.3 City Union Bk 5.9 13.9 38.1 Mean Value Blended Growth Earnings Voltas 4.8 Reversion Momentum Page 4.8 P/E P/B Div Particulars ROE Chola Invest 4.3 Ratio Ratio Yield Exide 4.0 Fund 34.4 5.6 16.3 0.5 Havells India 3.6 15.4 Nifty Free Float 30.6 2.1 8.0 1.6 Sundram Fasteners 3.4 Financial Auto Mid Cap 100 Others 44.6 Cons Goods Construction Pharma
Sundaram Midcap Fund* (Fund Manager: S. Krishnakumar) Top 10 Holdings Top 5 Sector Fund Stylometer Stocks Allocation 4.8 6.3 Ramco Cements 4.7 21.4 Trent 3.4 Honeywell Auto 3.1
Sundaram-Clayton 2.9 Mean Value Blended Growth Earnings Reversion Momentum AB Fashion& Retail 2.6 15.7 Federal Bk 2.6 P/E P/B Div Particulars ROE Schaeffler India 2.5 Ratio Ratio Yield Apollo Hospitals 2.4 Fund 26.0 3.4 13.0 0.7 Indraprastha Gas 2.4 21.1 RBL Bk Nifty Free Float 2.4 Cons Goods Financial Mid Cap 100 30.6 2.1 8.0 1.6 Others 71.1 Cap Goods Auto Services
JULY 2019 | ISSUE 79 59 Alpha Strategist | “Sisyphus Challenge”
Small Cap Fund
Positioning of Small cap Funds NIFTY FREE FLOAT MIDCAP 100 HDFC Small Cap Franklin Smaller Cos. DSP Small Cap
42.0 High P/E
40.0 6.3 38.0
36.0
34.0 Low P/B High P/B 32.0 14.1 30.0
28.0
3 yrs Average P/E Average 3 yrs Bubble size : 3 yrs Average RoE 16.4 26.0
24.0 15.5 22.0
20.0 Low P/E 18.0 1.5 2.5 3.5 4.5 5.5 6.5 3 yrs Average P/B Period: June 2016 to May 2019
DSPBR Small Cap Fund*(Fund Manager: Vinit Sambre) Top 10 Holdings Top 5 Sector Fund Stylometer Stocks Allocation 7.6 Ipca Lab 4.4 12.4 Atul 4.1 DCB Bk 4.0
SRF 3.6 9.4 Mean Value Blended Growth Earnings Aarti 3.2 Reversion Momentum
APL Apollo Tubes 3.1 P/E P/B Div Particulars ROE Finolex Cables 2.8 Ratio Ratio Yield 11.6 KPR Mill 2.6 Fund 18.7 2.8 14.7 0.8 Welspun India 2.2 11.2 Nifty Small Navin Fluorine 2.2 Textiles Chemicals Cap 55.1 1.7 2.3 1.3 Others 67.9 Cap Goods Financial Pharma
Franklin India Smaller Cos Fund* (Fund Manager: R. Janakiraman) Top 10 Holdings Top 5 Sector Fund Stylometer Stocks Allocation 6.5 HDFC Bk 4.6 Vardhman Textiles 2.4 6.8 20.5 Finolex Cables 2.4
Cyient 2.3 Mean Value Blended Growth Earnings Sobha 2.3 Reversion Momentum
Deepak Nitrite 2.3 P/E P/B Div Particulars ROE Brigade Enter 2.2 10.7 Ratio Ratio Yield Voltas 2.2 Fund 17.7 2.4 13.7 1.1 HPCL 2.2 14.2 Nesco Nifty Small 2.2 Financial Construction Cap 55.1 1.7 2.3 1.3 Others 75.0 Cap Goods Chemicals Cons Goods
JULY 2019 | ISSUE 79 60 Alpha Strategist | “Sisyphus Challenge”
HDFC Small Cap Fund* (Fund Manager: Chirag Setalvad; Rakesh Vyas) Top 10 Holdings Top 5 Sector Fund Stylometer Stocks Allocation 5.7 NIIT Tec 3.1 14.0 DCB Bk 3.0 Sonata Software 3.0 6.2 Chambal Fertilisers 2.8 Mean Value Blended Growth Earnings BOB 2.5 Reversion Momentum Federal Bk 2.5 P/E P/B Div Particulars ROE Balkrishna 2.4 Ratio Ratio Yield Aurobindo 2.4 9.6 Fund 16.5 2.1 12.5 0.9 Indian Bk 2.3 11.2 Nifty Small Indian Hotels 2.2 Financial Cap Goods Cap 55.1 1.7 2.3 1.3 Others 73.7 IT Chemicals Auto
Balanced Fund
Positioning of Balanced Funds NIFTY 50 HDFC Hybrid Equity ICICI Equity & Debt Birla Equity Hybrid '95 Franklin Equity Hybrid
40.0 High P/E
38.0 Bubble size 3 yrs Average RoE 36.0
34.0 15.1 32.0 Low P/B High P/B 30.0 17.6 28.0 12.9 26.0 14.1 24.0 13.5
3 yrs Average P/E Average 3 yrs 22.0
20.0 Low P/E 18.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 3 yrs Average P/B Period: June 2016 to May 2019
Aditya Birla SL Hybrid Equity '95 Fund (Fund Manager - Mahesh Patil, Dhaval Shah) Top 10 Holdings Top 5 Sector Fund Stylometer Stocks Allocation 4.7 HDFC Bk 8.3 ICICI Bk 6.5 6.3 Infosys 3.7 SBI 2.9 27.7 Mean Value Blended Growth Earnings L&T 2.3 6.4 Reversion Momentum 2.2 ITC P/E P/B Div Particulars ROE RIL 2.1 Ratio Ratio Yield Whirlpool 1.6 12.3 Fund 22.2 3.0 13.6 1.1 Marico 1.6 Financial Cons Goods IT Kotak Bk 1.5 Nifty 50 25.3 3.0 11.9 1.5 Others 67.3 Energy Pharma
JULY 2019 | ISSUE 79 61 Alpha Strategist | “Sisyphus Challenge”
Franklin India Equity Hybrid Fund (Fund Manager - Lakshmikanth Reddy, Sachin Padwal-Desai) Top 10 Holdings Top 5 Sector Fund Stylometer Stocks Allocation 4.5 Axis Bk 8.4 HDFC Bk 6.3 5.5 Kotak Bk 3.5
ICICI Bk 3.4 24.1 Mean Value Blended Growth Earnings Hindalco 3.3 6.8 Reversion Momentum Infosys 2.9 P/E P/B Div Particulars ROE Grasim 2.8 Ratio Ratio Yield M&M 2.8 Fund 17.8 2.2 12.5 1.4 Power Grid 2.7 11.9 Bharti 2.3 Financial Energy Nifty 50 25.3 3.0 11.9 1.5 Others 61.7 Cons Goods Auto IT
HDFC Hybrid Equity Fund (Fund Manager - Chirag Setalvad, Rakesh Vyas) Top 10 Holdings Top 5 Sector Fund Stylometer Stocks Allocation 4.6 HDFC Bk 8.2 ICICI Bk 5.4 6.2 Infosys 4.7 HDFC 4.5 Mean Value Blended Growth Earnings L&T 3.6 26.9 Reversion Momentum 3.1 6.8 ITC P/E P/B Div Particulars ROE Axis Bk 2.7 Ratio Ratio Yield SBI 2.5 Fund 20.1 2.7 13.3 1.3 RIL 2.2 7.2 Aurobindo 2.0 Financial IT Energy Nifty 50 25.3 3.0 11.9 1.5 Others 61.0 Construction Cons Goods
ICICI Pru Equity & Debt Fund (Fund Manager - Sankaran Naren, Atul Patel) Top 10 Holdings Top 5 Sector Fund Stylometer Stocks Allocation 6.0 ICICI Bk 7.4 NTPC 6.1 15.7 Bharti 5.6 6.8 Infosys 4.6 Mean Value Blended Growth Earnings SBI 4.3 Reversion Momentum 3.9 ONGC P/E P/B Div Particulars ROE Vedanta 3.7 7.0 Ratio Ratio Yield ITC 3.6 15.4 Fund 14.8 1.8 11.9 2.7 Hindalco 3.0 IOC 2.9 Financial Energy Nifty 50 25.3 3.0 11.9 1.5 Others 54.9 Metals IT Telecom
The Portfolio data and Fundamental attributes As on June 30, 2019 *The Portfolio data and Fundamental attributes As on April 30, 2019
JULY 2019 | ISSUE 79 62 Alpha Strategist | “Sisyphus Challenge”
Portfolio Details AA & Scheme Name Large Cap Midcap Small cap Sov & AAA equivalent Cash Others Large Cap Funds Aditya Birla SL Focused Equity Fund 79.1 15.0 — 0.0 — 5.9 — Aditya Birla SL Frontline Equity Fund 82.6 11.3 1.7 0.0 — 4.6 -0.2 ICICI Pru Bluechip Fund 87.0 3.2 0.2 4.7 — 1.9 3.0 Mirae Asset Large Cap Fund 82.1 11.4 3.0 — — 2.4 1.1 HDFC Top 100 Fund 90.2 7.2 — — — 2.5 0.0 Motilal Oswal Focused 25 Fund 83.6 9.1 5.9 — — 1.3 — SBI BlueChip Fund-Reg 82.2 9.8 0.7 — — 7.3 — Multi Cap Funds Aditya Birla SL Equity Fund 69.3 20.0 6.6 — — 4.0 — Axis Focused 25 Fund 78.5 20.7 — — — 0.8 — Franklin India Equity Fund 71.5 15.5 6.7 — — 6.3 — Franklin India Focused Equity Fund 62.0 10.1 17.8 — — 10.0 — HDFC Equity Fund 85.3 8.1 5.1 — — 1.6 0.0 ICICI Pru India Opp Fund 68.0 14.9 6.1 — — 11.1 — ICICI Pru Multicap Fund 69.9 12.5 9.4 — — 8.3 — ICICI Pru Value Discovery Fund 68.7 12.6 3.3 0.3 — 10.0 5.1 Invesco India Contra Fund 63.0 22.1 10.2 — — 4.6 — Kotak Standard Multicap Fund 72.1 20.9 2.0 — — 5.0 0.0 L&T India Value Fund 63.6 24.5 9.8 — — 2.1 0.0 Motilal Oswal Multicap 35 Fund 81.5 10.2 5.1 — — 3.2 — Sundaram Rural & Consumption Fund 45.1 29.7 20.4 — — 4.7 — Mid Cap Funds Franklin India Prima Fund 13.1 70.2 8.9 — — 7.9 — HDFC Mid-Cap Opportunities Fund 6.7 66.6 18.3 — — 8.5 0.0 Kotak Emerging Equity Scheme 5.0 77.2 14.8 — 0.0 3.0 — Motilal Oswal Midcap 30 Fund 21.2 66.9 7.6 — — 4.3 — Sundaram Mid Cap Fund 1.5 72.7 24.6 — — 1.2 — Small Cap Funds DSP Small Cap Fund — 18.4 75.7 — — 5.9 — Franklin India Smaller Cos Fund 15.1 17.0 62.6 — — 5.4 — HDFC Small Cap Fund 4.9 20.0 62.1 — — 13.0 — Balanced Funds Aditya Birla SL Equity Hybrid ’95 Fund 46.9 21.7 6.9 11.3 9.0 3.1 1.0 Franklin India Equity Hybrid Fund 60.8 8.4 1.5 4.7 22.2 2.5 — HDFC Hybrid Equity Fund 49.5 12.6 8.6 24.1 3.3 1.3 0.7 ICICI Pru Equity & Debt Fund 60.9 5.4 5.4 10.8 13.2 4.2 0.1
The Portfolio data and Fundamental attributes As on June 30, 2019 *The Portfolio data and Fundamental attributes As on April 30, 2019
JULY 2019 | ISSUE 79 63 Alpha Strategist | “Sisyphus Challenge” Notes
JULY 2019 | ISSUE 79 64 Alpha Strategist | “Sisyphus Challenge” Investment Charter Template
General Information & Client Profile Particulars Details Portfolio Characteristics Investment Horizon Liquidity Requirements Cash Flow Requirements
Restricted Investments Performance Benchmarking Portfolio Review
Review of Guidelines Investment Charter – Asset Allocation Guidelines Mandate Criteria Portfolio Compliance Equity (Mutual Funds, Direct Equity, AIFs) – Fixed Income (Mutual Funds, Structures, AIFs, Direct Debt) – Alternatives (Real Estate, Private Equity, Long Short Funds) – Asset Allocation Liquid Assets (Liquid, Ultra Short-Term, and Arbitrage Funds) –
Return Expectations1 Investment Time Horizon2 1Return expectations for portfolio since inception for active and closed holdings. There is no guarantee that the performance will be achieved. 2Average age of portfolio holding – Including Closed Holdings Investment Charter – Exposure Guidelines Mandate Criteria Portfolio Compliance Large Cap (Top 100 Companies) – Market Cap Limits Mid Cap (101 to 250th Company) – Small Cap (251st Company Onwards) – Interest Rate Risk Modified Duration – AAA and Above – Credit Quality AA & Above – A & Below – Closed Ended Maximum allocation to closed ended investments – Investments Single AMC – Mutual Funds & Single Scheme – Managed Accounts
Single Issuer - Other Instruments Single Instrument- Own AMC/ Self-Managed Funds/ Structures/ Debt - Proprietary Products
JULY 2019 | ISSUE 79 65 Intentionally left blank Alpha Strategist | “Sisyphus Challenge”
Motilal Oswal Wealth Management Limited CIN: U67110MH2002PLC135075 Registered Office Address: Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai 400 025 Tel No.: 022 7193 4200/63; Website: www.motilaloswalpwm.com Registration details: SEBI PMS Regn No: INP000004409; AMFI Regn No: ARN87554 Please read disclosure document as issued by company from time to time.
Ashish Shanker Nitin Shanbhag Head- Investments Sr. Vice President - Investment Products [email protected] [email protected] +91 22 7198 5549 +91 22 7199 2328
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JULY 2019 | ISSUE 79 67 MotilalOswalPWM | Motilal Oswal Private Wealth Management
Motilal Oswal Tower, 6th Floor, Junction of Gokhale & Sayani Road, Prabhadevi, Mumbai - 400 025. Ahmedabad | Bangalore | Chennai | Hyderabad | Kolkata | Mumbai | New Delhi | Pune Email: [email protected]