MULTIPLE -STRATEGY TREND RATED AUTOMATIC TRADING SYSTEM Portfolio Management Services (PMS) Performance Update 28 February 2011Vivek Mavani – Vice President and Senior Portfolio Manager
BRICS Growth Synopsis BRICS Growth is a Long only Diversified Equity Product aimed at generating Absolute Returns The Objective is : To generate Steady & Consistent returns over medium to long term Maintain Low Volatility Margin of Safety The Focus is therefore on Stock Picking with a Buy and Hold philosophy Invest in high quality and high growth companies at reasonable valuations and hold them over a period of time. (Not trade in & out frequently) Our conservative approach to managing investments, (especially during periods of volatility) is reflected in our superior performance.
Portfolio Update and Outlook The corrective phase of November-December 2010 continued into January and February 2011. If the fall in January was ferocious, February was exceptionally volatile. While Sensex & Nifty lost ~13% during January-February 2011, individual stocks lost anywhere between 20-50% Excess global liquidity drove the markets in 2009 and 2010 that came into the Indian markets (via the FII’s), saw sharp withdrawals. FII’s were significant sellers across the board. On the other hand, the buying interest on the domestic investors side (both Institutional and non-institutional) was very limited, thus driving a sharp correction Although the sharp erosion in stock prices makes it look like a bear market, the fall so far is a correction and not the beginning of a bear market, not as yet The accompanying table shows the correction of various indices YTD 2011, as well as their correction from the peak levels achieved in November 2010 Index Fall from Peak Fall YTD 2011 Index Fall from Peak Fall YTD 2011 Nifty -15.51% -13.06% Sensex -15.15% -13.31% Bank Nifty -21.35% -11.50% BSE Auto -20.77% -19.37% S&P 500 -18.30% -14.04% BSE Capital Goods -25.76% -19.56% CNX Mid Cap -24.66% -16.79% BSE FMCG -9.51% -6.83% CNX IT -11.66% -11.01% BSE Metals -14.54% -12.77% CNX Realty -50.54% -30.81% BSE Oil & Gas -15.41% -10.77% Limiting the downside in the portfolio in such a scenario is always a huge challenge. We have managed to limit the downside to a very large extent
Portfolio Update and Outlook (Cont’d) Dilemma during the corrective phase in the markets: Sell the portfolio and stay liquid and attempt to re-enter at lower levels Stay put holding the portfolio and see a temporary erosion in value We did both selectively During the month: Starting the month with ~30% cash levels, we selectively started deploying the funds in February 2011, on declines. The significant cash balances helped us limit the large downsides as well as helped us to bottom fishing at lower levels We continue to stay put in stocks/sectors where we continue to have a high degree of conviction, namely Technology sector (Infosys & TCS), Auto (Bajaj Auto) and Capital Goods Sectors (BHEL). Although they have also corrected sharply, we would stay invested Selectively mid-caps continue to be an attractive space as individual performances are likely to shine in the medium-long term. We added marginally to our mid-cap holdings where risk return scenario from the medium terms is favourable Markets in 2011 are more likely to test Conviction & Patience. Stock picking is likely to be the key in generating superior returns However, Credo of Sticking to Quality will always remain and will never be compromised
Compared to Top 20 Mutual Funds as of 28 Feb. 2011 Ranked on 1 year returns Performance Rank Scheme Name 6 Months % 1 Year % 1 BRICS Growth -6.73 24.04 2 Canara Robeco FORCE Fund - Ret - Growth -7.65 21.23 3 Escorts High Yield Equity Plan - Growth -4.51 20.71 4 Quantum Long-Term Equity Fund - Growth -2.94 17.25 5 HDFC Equity Fund - Growth -4.74 16.87 6 ICICI Prudential Focused Bluechip Equity Fund - IP I - Growth 0.32 16.83 7 Canara Robeco Emerging Equities - Growth -10.25 16.33 8 Fidelity Equity Fund - Growth -3.42 16.20 9 ICICI Prudential Focused Bluechip Equity Fund - Ret - Growth -0.13 15.93 10 HDFC Growth Fund - Growth -5.48 15.79 11 Fidelity India Growth Fund - Growth -2.55 15.42 12 Kotak Lifestyle Fund - Growth -9.78 15.24 13 Reliance Equity Opportunities Fund - Growth -8.86 15.14 14 Reliance Quant Plus Fund - Ret - Growth 1.58 15.13 15 Templeton India Equity Income Fund - Growth 2.37 15.01 16 SBI Magnum Sector Umbrella - Emerging Businesses - Growth -9.84 14.94 17 Canara Robeco Multicap Fund - Growth -6.21 14.82 18 ING Dividend Yield Fund - Growth -8.02 14.75 19 HDFC Capital Builder Fund - Growth -4.72 14.49 20 Tata Dividend Yield Fund - Growth -4.83 14.44 The comparison includes 250 Diversified Equity Funds across all Fund Houses
BRICS Growth NAV Trend Performance has been a result of our: BRICS Growth NAV v/s Indices (normalised) Stock Picking 160 Low churn in the portfolio, and 155 Conservative attitude (not taking 150 excessive risks) 145 140 Our Strategy has been to : 135 Buy during panics/declines 130 Use sharp rallies to partially book 125 profits Opportunistically ride the momentum 120 for a part of the portfolio (<15%) 115 Remain adequately liquid at all times 110 105 Adequate liquidity helps : 100 Protect against volatility 95 Provides enough courage and 90 conviction to buy into panics 85 1-Oct-09 1-Oct-10 1-Jan-10 1-Mar-10 1-Jun-10 1-Jan-11 1-May-10 1-Apr-10 1-Aug-10 1-Nov-09 1-Feb-10 1-Jul-10 1-Sep-10 1-Nov-10 1-Feb-11 1-Dec-09 1-Dec-10 Current cash/liquid balances ~ at 19.12% of the Portfolio BRICS Growth Nifty Sensex S&P 500 CNX Midcap
BRICS Growth Outperformance Trend BRICS Growth has delivered absolute & consistent returns across different market phases Significant out-performance in a range bound volatile market, (Stock Picking was the Key) Kept pace even during the sharp rally (Buy and Hold, Profit booking at higher levels) The fall in NAV during the corrective phase was in line with the Indices (in spite of having several high beta stocks in the portfolio, banking, mid-caps etc.), large cash balances helped limit the downside) 1 October 2009 ─ 25 May 2010 ─ 5 November 2010 ─ Date 25 May 2010 5 November 2010 28 February 2011 Range bound Sharp rally across Market Scenario Fall from the Peak Market the board BRICS Growth 15.70% 36.73% -15.87% Nifty -5.44% 31.32% -15.51% Sensex -6.50% 31.10% -15.15% S&P 500 -2.84% 29.86% -18.28% CNX Mid-Cap 10.32% 31.54% -24.18% Bank Nifty -0.10% 49.90% -21.35%
How did we do during periods of Volatility – 12 Biggest Falls between Oct.-’09 – Jan.-’11 How much a portfolio falls during a Points Points % Fall - correction / sharp downturn is as % Fall - % Fall - Date Fall - Fall - BRICS important as how much it gains in a Nifty Sensex Nifty Sensex Growth bull market 24-Feb-2011 -174.65 -3.21% -545.92 -3.00% -2.01% Protecting capital is often more 27-Jan-2010 -159.65 -3.19% -490.64 -2.92% -2.29% important during periods of volatility 03-Nov-2009 -147.80 -3.14% -491.34 -3.09% -0.36% Downside protection equally contributes to superior returns over a 19-May-2010 -146.55 -2.89% -467.27 -2.77% -0.84% period of time 25-May-2010 -137.20 -2.78% -447.07 -2.71% -1.62% We have managed to fall less than the indices during each of the sharp 05-Feb-2010 -126.70 -2.61% -434.02 -2.68% -0.47% falls / panics since our inception 27-Oct-2009 -124.20 -2.50% -387.10 -2.31% -0.65% Large liquidity during periods of volatility & a low beta portfolio helped. 21-Jan-2010 -127.55 -2.44% -423.35 -2.42% -1.32% 10-Jan-2011 -141.75 -2.40% -467.69 -2.38% -1.92% CNX Against Nifty Sensex 07-Jan-2011 -143.65 -2.38% -492.93 -2.44% -1.48% Midcap Beta * 0.5150 0.5158 0.5147 04-Feb-2011 -131.00 -2.37% -441.16 -2.39% -1.18% 09-Dec-2010 -137.20 -2.32% -454.12 -2.31% -2.18% *Beta measures the volatility of the portfolio relative to the index
Portfolio Breakup Market Cap Breakup Sectoral Allocation Oil & Gas Cash 11.39% Automobiles 19.12% 6.15% Infrastructure & Capital Banking & Goods Finance 17.27% 6.70% Large Cap 49.40% Branded Garments &Small Cap Information Retail 21.61% Technology 13.82% 12.54% FMCG Cash 19.12% Mid Cap 13.01% 9.87% Large Cap. More than Rs 5,000 crores Mid-Cap. Rs 1,000 - 5,000 crores Small Cap. Less than Rs 1,000 crores
Low Portfolio Turnover (Buy & Hold at work) Portfolio Turnover Re-deployed part of1.00 liquid balances by buying on declines0.90 Turnover increased as0.80 we partly booked profits at higher levels0.700.600.500.400.300.200.100.00 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Portfolio Turnover
Market Outlook Global macro economic risks and higher commodity prices will continue to weigh on the markets. Will definitely have repercussions on India Concerns on macro economic front, (Inflation on back of high commodity prices) threaten to slowdown the “India Growth Story.” The Union Budget of 2011-12 seeks to address some of the growth concerns Persistent high Inflation necessitates tightening liquidity and higher interest rate cycle. We feel that there is still some way to go before the interest rate cycle peaks out this year Excess global liquidity was the primary reason for the sharp rallies across all emerging markets in 2009 and 2010. However, we are already seeing the impact of marginal withdrawal of liquidity as FII’s turned sellers in January-February 2011 Although Valuations have corrected significantly in the last four months, they are now beginning to look reasonable and cheap when seen in light of growth outlook going forward As long as earnings don’t disappoint going forward, its going to be a market of buying opportunities on declines. However, one would have to be careful about earnings slowing down due to: Increasing interest rates and tight liquidity, making capital raising both difficult and expensive Higher commodity prices across the board, pressure already beginning to be felt Little flexibility increases the end product prices, thus putting pressure on margins If any the above three factors play out, earnings estimates for FY12 could be revised down especially for sectors/stocks that are sensitive to interest rates and commodities cycle
Market Outlook (cont’d) The key Investment Theme in 2011 Focus on stocks/sectors where growth in sales and earnings is not sensitive to: Interest rates (both for themselves as well as their end customers) They have reasonable the pricing power to pass on higher costs as a result of higher commodity prices, and thus protect margins Valuations v/s growth favour bottom up stock picking across the spectrum (large and mid-cap), rather than top-down approach as individual performances could have a wide variance among the peer group. Stocks/Sectors to avoid are those where growth is dependent on fresh issue of capital (both debt and equity) as tight liquidity would make raising capital both difficult and expensive having serious implications on growth Pockets of opportunities are where growth is steady, are adequately funded and valuations leave room for upside It is quite possible, that in 2011 will see indices in a broad range but individual stocks could give excellent returns. Stock picking will be the key It is a good time to build a high quality long term portfolio by Buying on Declines However, Markets in 2011 are likely to Test Conviction & Patience as returns may not come fast and easy
Our Strategy “Time” in the markets is more important than “Timing” the markets Superior long-term sustainable returns are not made by timing the markets in terms of selling at the peaks. They are a result of purchase prices that are attractive in terms of valuations with adequate Margin of Safety Our strategy going ahead would continue to be, bottom up stock picking and be extremely selective: Buy on declines Use sharp rallies to partially book profits Opportunistically ride the momentum for only a small part of the portfolio Remain adequately liquid at all times The sectors that we are bullish and continue to be over weight are: Technology (Software Services), Capital Goods and Infrastructure Construction Oil and Gas including Gas Transportation & Distribution, Domestic Consumption themes like Consumer Goods, Paints, Branded Garments, etc.