The equi max approach sept 2012

The EquiMax Tool
Better returns by understanding
(A) When to enter/ exit equity
(B) Buying into equity through
appropriate MFs for market type

Sept. 2012 For Private Circulation Only. Please read the last slide for Disclaimer

Journey of Rs.10 Lacs invested in
BSE SENSEX
I wish I had put
Rs. 16.9 lacs in all my money Rs. 16.9 lacs
20000 a year back. Let
I should invest me do that now!
18000 more!

16000
Rs. 14 lacs

14000

What now?
12000
Rs. 10 lacs Put in more Wait? Exit?
money now?
10000 No way!
Rs. 6.6 lacs
8000

RETURN OF JUST 7.2% P.A. TILL 28 SEP 2012
Sept. 2012 For Private Circulation Only. Please read the last slide for Disclaimer 2

The result Ending up
investing
20000 here and
losing
18000
money
16000

14000

Ending up
12000
exiting or not
investing here,
10000
and losing out
8000
on big returns

WE ARE LEFT FEELING THAT WE CAN NEVER MAKE
MONEY FROM EQUITIES

The problem
• We don’t know when we should exit, especially
when the market keeps going up
 Belief that the party will continue- in media, in ‘expert’ views
• We don’t know if we should continue being invested,
or invest more, in the face of heavy losses
 Doom and gloom in the media and in expert columns

THE SOLUTION MOST ADVISORS OFFER:
STAY INVESTED-
‘TIME IN THE MARKET’ INSTEAD OF ‘TIMING THE MARKET’.
BUT DOES THIS WORK?


‘Time in the market’
• 10 Years is a good long-term period- plenty of ‘time
in the market’.
• Suppose you invest in the BSE SENSEX for 10
years
 Jan ‘93- Jan ‘03: 2.8% p.a.
 Apr ’02- Apr ‘12: 17.9% p.a.
• This is still a lot of uncertainty.
 What happens if we wait for 10 years, only to see the
market crash in the last year, and reduce our returns
dramatically?


A closer look at two 10-year periods
Nov '10-
Apr '12
10.32 lacs
(5% p.a.)

Apr '02- Jan '93-
Nov '10 Feb '00
41.56 lacs 23.36 lacs
(33% p.a.) (13% p.a.)

Feb '00-
Jan '03
Growth of Rs.10 Lacs invested in BSE -10.07 lacs
SENSEX (-18% p.a.)

BAD PERIODS CAN MAKE OVERALL RETURNS MUCH POORER-
AND THEY DON’T ALWAYS OCCUR IN THE SECOND HALF!

Conclusion
• Clearly, “just stay invested” is not the best response
to the problems of:
 Not getting in when markets have declined
 Trying to get out after markets have declined
• We need a convincing tool to tell us
 When we stand a good chance of making money by
entering
 When we should exit and avoid depletion of wealth

EQUIMAX, OUR ADVISORY TOOL IS AN ATTEMPT TO
PROVIDE THESE ANSWERS


The EquiMax Approach
• Categorizes markets into types 1-6, 1 being most favourable,
6 being least favourable
 Market types have been developed after researching the returns
one year forward, at given levels of variables like price-to-
earnings, earnings growth, interest rates etc.
 This has been done between Jan ‘92 and initially up to
Jun ’11, now updated up to Sep ‘12
 One-year returns across market types:
Mkt Type Average 1- Probability
Year of Negative Improve average by
Return Returns
Allocating
1 58% 2.6% more here
2 31% 13.0%
3 19% 31.8%
4 5% 36.3% Allocating
5 -2% 59.7% less here
6 -14% 78.8%


The Active Allocation Process
• Initial allocation
 EquiMax invests in markets 1-3, and
 Books profits and hold cash in markets 4-6
• The allocation is reviewed periodically, and changed
if the market type necessitates it.


The Mutual Fund Selector
• So far, we have discussed equity market returns as
represented by the BSE SENSEX
• However, ~84% of our diversified mutual funds universe has
done better than BSE SENSEX between Oct ‘06 and Sep ‘12
• The EquiMax study has also studied mutual fund behaviour by
market type, and selects funds based on current market type.
 Some findings:
 Funds that do well in market type 1 do not do well in market type
4.Choice of fund has to be made knowing the market type
 A Market Type 1 for large cap stocks (SENSEX), may not be the same
for mid and small cap stocks (NSE MIDCAP). The model may, at
times, advise buying one and selling the other.
 Performing industries (e.g.Auto, FMCG) change with market type, and
need to be rotated accordingly, by investing in sector funds.
LET US SEE HOW A MUTUAL FUND PORTFOLIO BUILT
AROUND THESE RULES HAS PERFORMED

Growth of Rs.10 Lacs- Oct ‘06- Sep ‘12
• EQUIMAX Diversified MF Portfolio, SENSEX and Best-
performing Diversified large/ multi-cap MF* over this period

* Note: As per ARKA classification of equity mutual funds, derived from stated benchmarks. Best
diversified MF out of the 250+ funds monitored was Birla Sun Life Dividend Yield Fund


• EQUIMAX Midcap MF Portfolio, NSE CNX Midcap and Best-
performing mid-cap MF* over this period
Only one fund better
than this portfolio over
this period

* Note: As per ARKA classification of equity mutual funds, derived from stated benchmarks. Best Mid-
cap MF out of the 250+ funds monitored was IDFC Premier Equity Fund

• EQUIMAX Sector MF Portfolio, and Best-performing
sector/thematic MF* over this period
Only 2 funds did better
than this portfolio

* Note: As per ARKA classification of equity mutual funds, derived from stated benchmarks. Best Sector
MF out of the 250+ funds monitored was Reliance Pharma Fund


What EquiMax cannot do…
• Avoid all losses
 EquiMax tries to improve the chances of making better returns
through active allocation, getting in closer to the bottom and
exiting closer to the peak
 However, markets can continue to go down after entering, even in
market types 1-3- we cannot get in at the absolute bottom.
 Markets may continue to go up in the short term, after we exit even
when the market type is 5-6.
• Cut down investment horizon
 Even in a ‘1’ type market, there is a 2.6% chance of making
negative returns in 1 year
 In such a case, you may have to wait for 1 or 2 years more before
making good the losses


Disclaimer
This document has been created by Arka Consulting & Advisory (ARKA) for
private circulation to its clients and prospective clients only. Neither this
document, nor any portion thereof may be reprinted, sold or distributed without the
express consent of ARKA. The information and statistical analyses contained in
this document have been obtained from sources we believe to be reliable. Such
information has not been independently verified, and we make no representation
or warranty as to its accuracy, completeness or correctness. Any opinion or
estimates contained in this document reflect ARKA’s judgment at the date of
release of this document, and are subject to change at any time without notice.
This document is not a solicitation or an offer to buy or sell. This document is for
informational purposes only and is not intended to provide professional,
investment or any other type of advice or recommendation and does not take into
account the investment needs of individual recipients. ARKA does not accept any
responsibility and cannot be held liable for any person’s use of or reliance on, the
information contained herein. No guarantees of returns are being made in this
document.

Sept. 2012 15

The equi max approach sept 2012

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