MULTIPLE ‐STRATEGY TREND RATED AUTOMATIC TRADING SYSTEM Portfolio Management Services (PMS) Performance Update 31 January 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 g y 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.
Market Update – PerpectiveTheTh corrective phase of November and December continued into January albeit with greater f ti h fN b dD b ti di t J lb it ith t ferocity. Whil it WhileSensex & Nifty corrected by ~11% in January, (~13% from the peak), individual stocks corrected ~15-45%from the peakExcess global liquidity drove the markets in 2009 and 2010 that came into the Indian markets (via theFII’s), saw sharp withdrawals in January 2011. With FII’s as sellers across the board and very limitedbuying interest on the domestic investors (both Institutional and non-institutional), it was a sharp correctionThe accompanying table shows the correction of various indices in January as well as their correction fromthe peak in October-November 2010Index Fall from Peak Fall in January Index Fall from Peak Fall in JanuaryNifty -12.78% -10.25% Sensex -12.75% -10.64%Bank Nifty -19.80% -9.75% BSE Auto -14.61% -13.10%S&P 500 -14.86% 14 86% -10.45% 10 45% BSE Capital Goods -19.01% 19 01% -12.25% 12 25%CNX Mid Cap -18.50% -10.55% BSE FMCG -10.08% -8.63%CNX IT -20.49% -12.00% BSE Metals -8.69% -8.41%CNX Realty -44.68% -22.69% BSE Oil & Gas -15.21% -10.56%Although the sharp erosion in stock prices (individual stocks having corrected by 15-45%) makes it looklike a bear market, the fall so far is a correction and not the beginning of a bear market, not as yetLimiting the downside in the portfolio in such a scenario is always a huge challenge (unless one was totallyout of the market.) Nevertheless, we managed to limit the downside to a large extent ) , g g
Portfolio Update and Outlook (Cont’d)Dilemma during the corrective phase in the markets: Sell the portfolio and stay liquid. Attempt to re-enter at lower levels Stay put holding the portfolio and see a temporary erosion in valueWe did both selectively. During the month: We largely exited from the Banking sector, (Axis Bank, ICICI Bank & Power Finance Corporation). If we had continued to hold them, (was ~20% of December 2010-end), the portfolio would have ,( ), p declined much more since all of them are currently significantly lower than our selling price. Thus we have managed to limit the downside to that extent We stayed 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 at least for now, as we feel these would bounce back fast when markets stabiliseWe also reduced our Mid-cap exposure by booking profits. However, selectively mid-caps will continue tobe an attractive space as individual performances are likely to shine amidst range bound marketsMarkets in 2011 are more likely to test Conviction & Patience. Stock picking is likely to be the key ingenerating superior returnsHowever, Credo of Sticking to Quality will always remain and will never be compromised , g Q y y p
Absolute Performance – 31 January 2011 Since Weekly Monthly Quarterly Half Yearly Annual Inception pBRICS Growth -3.80% -9.47% -11.69% 3.25% 28.36% 36.70%NIFTY -4.13% -10.25% -8.50% 2.58% 12.78% 8.31%SENSEX -4.30% -10.64% -8.51% 2.57% 12.04% 6.96%S&P CNX 500 -4.41% -10.45% -11.03% -1.13% 6.46% 7.42%S&P CNX MIDCAP -4.36% 4 36% -10.55% 10 55% -15.36% 15 36% -5.86% 5 86% 10.01% 10 01% 18.28% 18 28%Inception Date: 1 October, 2009 Portfolio returns are audited and Actual Returns to Investors After deducting fees (including performance fees) & other expenses g ( gp ) p
Compared to Top 20 Mutual Funds as of 31 Jan. 2011 Ranked on 1 year returns Performance Rank Scheme Name 6 Months % 1 Year % 1 BRICS Growth 3.25 28.36 2 Canara Robeco FORCE Fund - IP - Growth 1.54 1 54 25.04 25 04 3 HDFC Equity Fund - Growth 4.18 23.65 4 Escorts High Yield Equity Plan - Growth 4.71 23.39 5 Templeton India Equity Income Fund - Growth 11.04 23.13 6 Reliance Equity Opportunities Fund - Growth 0.49 22.98 7 Tata Dividend Yield Fund - Growth 3.75 22.21 8 Quantum Long-Term Equity Fund - Growth 4.45 22.11 9 Religare Mid N Small Cap Fund - Growth -2.94 21.40 10 HDFC Mid-Cap Opportunities Fund - Growth -0.05 21.23 11 ICICI Prudential Focused Bluechip Equity Fund - IP I - Growth 5.16 21.08 12 Birla Sun Life Dividend Yield Plus - Growth -0.87 20.78 13 UTI Dividend Yield Fund - Growth 4.66 20.47 14 Reliance Quant Plus Fund - Ret - Growth 7.78 20.19 15 Kotak Lifestyle Fund - Growth -1.22 20.16 16 Canara R b C Robeco E Emerging E iti - G i Equities Growth th -1.75 1 75 20.14 20 14 17 Sahara Wealth Plus Fund - VP - Growth -0.10 20.13 18 ICICI Prudential Focused Bluechip Equity Fund - Ret - Growth 4.75 20.08 19 ING Dividend Yield Fund - Growth -0.04 20.00 20 HDFC Top 200 - Growth 3.31 19.68 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 profits 125 Opportunistically ride the momentum for a part of the portfolio (<15%) 120 Remain adequately liquid at all times 115 110 Adequate liquidity h l : Ad t li idit helps 105 Protect against volatility 100 Provides enough courage and conviction 95 to buy into panics 90 85 1‐Oct‐09 1‐Feb‐10 1‐Aug‐10 1‐Sep‐10 1‐Oct‐10 1‐Nov‐09 1‐Dec‐09 1‐Jan‐10 1‐Mar‐10 1‐Apr‐10 1‐May‐10 1‐Jun‐10 1‐Jul‐10 1‐Nov‐10 1‐Dec‐10 1‐Jan‐11 Current cash/liquid balances ~ 29.21% of the Portfolio as of January-end 2011 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 f ll in Th fall i NAV d i th corrective phase was i li with th I di during the ti h in line ith the Indices (i spite of having (in it f h i ~20% exposure to Banking & Financial Services and ~30% in mid & small caps) 1 October 2009 ─ 25 May 2010 ─ 5 November 2010 ─ Date 25 May 2010 5 November 2010 31 January 2011 Range bound Sharp rally across Market Scenario Fall from the Peak Market the board BRICS Growth 15.70% 36.73% -13.59% Nifty -5.44% 31.32% -12.78% Sensex -6.50% 31.10% -12.75% S&P 500 -2.84% 29.86% -14.86% CNX Mid-Cap 10.32% 31.54% -18.50% y Bank Nifty -0.10% 49.90% -19.80%
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 27-Jan-2010 -159.65 -3.19% -490.64 -2.92% -2.29% Protecting capital is often more 03-Nov-2009 -147.80 -3.14% -491.34 -3.09% -0.36% important during periods of volatility 19-May-2010 -146.55 -2.89% -467.27 -2.77% -0.84% Downside protection equally contributes to superior returns over a p 25-May-2010 -137.20 -137 20 -2.78% -2 78% -447.07 -447 07 -2.71% -2 71% -1.62% -1 62% period of time 05-Feb-2010 -126.70 -2.61% -434.02 -2.68% -0.47% We have managed to fall less than the indices during each of the sharp 27-Oct-2009 -124.20 -2.50% -387.10 -2.31% -0.65% falls / panics since our inception 21-Jan-2010 21 J 2010 -127.55 127 55 -2.44% 2 44% -423.35 423 35 -2.42% 2 42% -1.32% 1 32% Large liquidity during periods of volatility & a low beta portfolio helped. 10-Jan-2011 -141.75 -2.40% -467.69 -2.38% -1.92% 7-Jan-2011 -143.65 -2.38% -492.93 -2.44% -1.48% CNX Against Nifty Sensex 09-Dec-2010 -137.2 -2.32% -454.18 -2.31% -2.18% Midcap Beta * 0.4985 0.4992 0.5001 01-Jun-2010 -116.10 -2.28% -372.60 -2.20% -1.24% 16-Nov-2010 -132.90 -2.17% -444.55 -2.19% -1.44% *Beta measures the volatility of the y portfolio relative to the index
Portfolio Breakup Market Cap Breakup Sectoral Allocation Automobiles Oil & Gas 6% 11% Banking & Cash Finance 6% 29.21% Infrastructure Branded & Capital Garments & Goods 13% Large Cap Retail 12% 47.78% Information Technology 13%Small Cap 15.75% Cash 29% FMCG 10% Mid Cap 7.26% 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 of liquid balances by 1.00 buying on declines 0.90 0 90 Increased Turnover increased as the Cash 0.80 we partly booked levels profits at higher levels 0.70 0.60 0 60times 0.50 0.40 0.30 0 30 0.20 0.10 0.00 0 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 Portfolio Turnover
Market OutlookGlobalGl b l macro economic risks, I fl ti and hi h commodity prices will continue t weigh on th markets. i i k Inflation d higher dit i ill ti to i h the k tWill definitely have repercussions on IndiaConcerns on macro economic front, (Inflation, fiscal deficits, higher commodity prices etc.) necessitatestightening liquidity and higher interest rate cycle going forward. We feel that there is a long way to go on theinterest rate cycle. This could threaten to slowdown the “India Growth Story.”Excess global liquidity was the primary reason for the sharp rallies across all emerging markets in 2009 and2010. However, we are already seeing the impact of marginal withdrawal of liquidity as foreign fund flowsreversed in January 2011Although Valuations have corrected significantly in the last three months, they are reasonable but still notcheap when seen in light of growth outlook going forward. Earnings estimates for FY12 are likely to berevised down post the current results season We had anticipated ( (and mentioned in our previous updates) about sharp declines in stock prices if ) f corporate earnings disappoint. Several large and prominent corporates actually disappointed on earnings or growth outlook going forward Where the earnings were in line, the earnings growth going forward raises concerns on back of : Increasing interest rates and tight liquidity, making capital raising both difficult and expensive Higher commodity prices across the board, (cost pressures are already beginning to be felt) Little flexibility in increasing the end product prices thus putting pressure on margins prices,
Market Outlook (cont’d)Key Investment Theme in 2011Focus 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 pricing power to pass on higher costs as a result of higher commodity prices, and thus protect marginsValuations v/s growth favour bottom up stock picking across the spectrum (large and mid-cap), rather thantop-down approach. I di id l performances could ht d h Individual f ld have a wide variance among th peer group id i theStocks/Sectors to avoid are those where growth is dependent on fresh issue of capital (both debt andequity) as tight liquidity would make fund raising both difficult and expensive. This will have seriousimplications on growthPockets of opportunities are still available in stocks/sectors where growth is steady, are adequately fundedand valuations leave room for upsideIt is quite possible, that in 2011 will see indices in a broad range but individual stocks could give excellentreturns. St k picking will be the key t Stock i ki ill b th kIt is a good time to build a high quality long term portfolio by Buying on DeclinesHowever, Markets in 2011 are likely to Test Conviction & Patience
Our Strategy “Time” in the “Ti ” i th markets i more i k t is important th “Ti i ” th markets t t than “Timing” the k t 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 FMCG, Paints, Branded Garments, etc.