(1) Avant Garde Wealth Management provides an update on market conditions and their portfolio positioning. (2) They have remained 36% invested with the rest in cash finding limited stocks that meet their valuation criteria. (3) Their portfolio has increased 1.8% while the market fell 19.6% since starting in June, though longer-term performance is needed to evaluate their ability.

1. Avant Garde Wealth Management Pvt. Ltd.
Dear investor,
It has been an interesting seven months since we started investing in June of this year. Economic
conditions both in India and globally have been challenging, which contributed to poor performance
in most equity markets globally, and the Indian markets have been no exception. At times like these
we like to remind ourselves that it is periods of uncertainty that throw up profitable investment
opportunities. We are grateful that our clients understand the importance of remaining invested
during market downturns, thus enabling us to actually take advantage of the emotional swings of
the market so that we can aspire to deliver superior returns over time.
The Macroeconomic context – Slow growth globally and policy issues in India
We are not experts on macroeconomic issues and choose to focus our efforts on researching
companies and industries. However, it is important to keep the macroeconomic context in mind,
especially if there is reason to believe that the future may not resemble the past as far as some key
trends are concerned. Both global and local developments are worth exploring.
A key trend driving economic growth globally from the mid 80s through till 2007 was increasing
consumption by consumers in developed markets (primarily in the US and Europe), which was to a
large extent driven by higher leverage. This was made possible by a few important factors (1) the US
Fed, led by Alan Greenspan, stepping in to aggressively ease monetary policy at the first sign of
recession, (2) favourable demographics, (3) the growth of financial derivatives, (4) an aggressively
growing China that was effectively exporting deflation, and (5) the formation of the EMU. The so-
called Greenspan put allowed investors and consumers alike to believe that the business cycle had
been tamed, and that any economic downturns would be short and shallow, thus giving consumers
confidence to take on more leverage and consume more in anticipation of better times and lack of
fear of bad times. Favourable demographics of young workers entering the work force helped
perpetuate this trend. This was also assisted to a large extent by the deflation exported from China,
which helped keep inflation low and allowed monetary policy to be easy. Derivatives were
increasingly used to transfer and obscure risk, again leading to the illusion that the world was a safer
place and encouraging leverage. While the ECB was not quite as accommodative, in an increasingly
global economy the actions of the Fed had similar effects across the Atlantic. The formation of the
EMU allowed peripheral European countries to borrow cheap, which led to rising consumption and
leverage at the cost of productivity and long-term economic competitiveness. Long story short, the
western world consumed a lot, financed by borrowing, and probably enjoyed a standard of living
which was “higher than it should have been”. Starting with the financial crisis in 2008 and now the
European crisis, many of these trends have gone into reverse, leading to deleveraging at households,
financial institutions, and countries, leading to lesser consumption. This trend will impact Indian
companies. Exporters may be impacted by lower demand from consumers in developed countries,
and potentially lower commodity prices will impact consumers and producers of commodities in
India. Companies may face more competition from MNCs and imports due to lower capacity
utilization globally. In addition, capital flows may slow down or reverse, which will impact financial
markets and the ability of companies to raise capital to fund growth.
Note: “Portfolio” refers to the weighted average of all client portfolios managed by us over the relevant time period. Any metrics such as
returns or portfolio weighting similarly refer to the weighted average of all portfolios. Individual clients portfolios may defer materially
from the blended “Portfolio” and clients should refer to their portfolio statements for details on their portfolios

2. Avant Garde Wealth Management Pvt. Ltd.
From 2003 to 2007 the Indian economy participated in the spectacular growth seen globally. The
high GDP growth during that period was driven by both higher investment and consumption. Since
the financial crisis in 2008, consumption growth has remained strong but investment has faltered.
While global economic conditions have contributed to this, local policies are probably more to
blame. Poor fiscal management with an emphasis on populist politics has led to lower productivity,
higher inflation, and higher interest rates. Combined with bureaucratic and policy hurdles to
investment, this has led to a significant slowdown in the capex cycle. It is now dawning on some that
India is not entitled to grow at 8% or more as had become a foregone conclusion. A big factor in
India’s favour is a young population, and the tailwind provided by this reality may be enough to put
some kind of floor to India’s growth rate for the foreseeable future, which should be well ahead of
the 3.5% Hindu rate of growth the country was mired in the past. However, the spread above that
floor will depend to a large extent on how conducive the business environment is.
Indian equities – Bull and bear markets and a valuation disconnect
What the economy will do is one thing, what equity markets will do can be quite another. Market
prices imply certain expectations about the future. If the expectations are too pessimistic, all that
you need for equity prices to appreciate is for the future to be better than the expectations,
although the future may still not turn out to be “good” in absolute terms. Of course, the inverse
reasoning holds as well. The graph below shows that there have been bull markets in India even
when earnings growth is low or negative, and bear markets with flattish or positive earnings growth.
The same has been true globally.
Bull markets Bear markets
(Index returns, Valuation, Earnings growth) P/E (Index returns, Valuation, Earnings growth) P/E
300% 60 300% 57.4 60
250% 50 250% 47.0 50
215%
200% 40 200% 40
28.5
150% 26.7 30 150% 25.5 30
24.0
106%
98%
100% 16.9 87% 20 100% 16.8 20
12.8 76%
11.0 11.0 52% 11.6 53%
50% 28% 10 50% 10
24% 20% 14% 7%
9% -7% -44% 3% -31% -5% -19% 0% -55% -4%
-20% -23%
0% 0 0% 0
Jan 91-Apr 92 Jul 93-Sep 94 Dec 96-Aug 97 Nov 98-Feb 00 May 03-Jan 08 Mar 09-Nov 10 Apr 92-Jul 93 Sep 94-Dec 96 Aug 97-Nov 98 Feb 00-May 03 Jan 08-Mar 09 Nov 10-Dec 11
-50% -10 -50% -10
-100% -20 -100% -20
Index CAGR EPS CAGR Beginning P/E (TTM) Index CAGR EPS CAGR Beginning P/E (TTM)
Note: CAGR is compound Annual Growth Rate; Index is Sensex; TTM is Trailing Twelve Months
Source: BSE web site
There is an odd anomaly in Indian markets at present. As a basket, consumption related stocks have
significantly outperformed stocks of companies related to infrastructure and capital investment. As
a result valuations of the former are at a very large premium to the later. The difference in
valuations is illustrated in the table below.
Note: “Portfolio” refers to the weighted average of all client portfolios managed by us over the relevant time period. Any metrics such as
returns or portfolio weighting similarly refer to the weighted average of all portfolios. Individual clients portfolios may defer materially
from the blended “Portfolio” and clients should refer to their portfolio statements for details on their portfolios

3. Avant Garde Wealth Management Pvt. Ltd.
TTM P/E TTM P/B
CNX FMCG Index 28.12 9.60
CNX Infrastructure Index 15.68 1.99
Note: As of Dec 30, 2011; TTM is Trailing Twelve Months
Source: NSE India
If the expectations embedded in the infra/capex stocks indeed come to pass, it would mean that the
rate of investment in the economy will be very poor in the coming years. Consumption growth is
unlikely to keep chugging along in such an environment, which means that consumer stocks will
disappoint. Conversely, if consumer stocks perform up to expectations, infra/capex stocks are likely
to perform much better than current expectations. These are generalizations and it is not to say that
there will be consumer stocks which will not perform well and infra/capex stocks that will not
continue to underperform.
Portfolio positioning – Not enough bargains
While we are finding some interesting opportunities, there aren’t enough stocks that meet our
investment criteria. As a result we are only 36% net long (44% long, 8% short), with 56% of the
portfolio in cash and equivalents (the short positions are via futures). While we continue to
incrementally invest as we find stocks that meet our criteria, we do not intend to dilute our criteria
in order to deploy cash. At the same time we are cognizant of the common tendency to turn more
negative on the outlook as prices fall, which prevents investors from recognizing and taking
advantage of bargains. In order to avoid falling into such traps we try to put appropriate decision
making processes in place.
It is important to emphasize that the high percentage of cash does not indicate that we expect the
market to decline in the near future. The position is merely based on the recognition that we have
not been able to find enough bargains for us to be more invested. It is entirely possible to envision a
scenario where stocks don’t get any cheaper and actually begin a bull market from these levels.
While that would not be a favourable outcome given the portfolio positioning, it is a possible
scenario.
We estimate that the intrinsic value of our long positions is about 50-80% above current market
prices. For most of our positions we do not see the intrinsic values falling below current prices even
under stress assumptions. For our two short positions it is the opposite. Even using optimistic
assumptions we don’t see intrinsic value much above current prices. As a base case we estimate
intrinsic value to be 30-40% below current prices.
As a basket the underlying drivers of the stocks we own are quite diverse. About 13% of long
positions are driven by consumer spending, which is partially offset by the 8% short position also
being driven by consumer spends. About 10% of the long position is driven by gold price. About 8%
of the long position is driven by capital expenditure trends. The remaining 12% long positions have
unique drivers which cannot be generalized.
Note: “Portfolio” refers to the weighted average of all client portfolios managed by us over the relevant time period. Any metrics such as
returns or portfolio weighting similarly refer to the weighted average of all portfolios. Individual clients portfolios may defer materially
from the blended “Portfolio” and clients should refer to their portfolio statements for details on their portfolios

4. Avant Garde Wealth Management Pvt. Ltd.
Stocks in the portfolio
The largest bets in the portfolio are Piramal Healthcare, Blue Star and Gold.
Piramal is a special situation where the company is sitting on a lot of cash from selling off its
domestic drug business to Abbott Pharmaceuticals last year. At current price the market is putting a
50-60% discount on the cash holdings. There is a lot of uncertainty about how these funds may be
deployed and management has not given much clarity on this front. The Chairman Ajay Piramal has
historically shown his ability to succeed at M&A by buying low and selling high so it is not entirely
unreasonable to assume that he will at least not destroy value. And that is frankly all we need him to
do to make money on this investment since the market is already building in significant value
destruction. If he can actually create value, which is reasonably likely, then that would add to the
upside potential. A lot of things do not need to go right to make money here. We just require that
not too many things go wrong. These are the sort of investments we like best.
Blue Star has been our worst performing position till date. The industry environment for electro-
mechanical projects is lacklustre due to poor capital expenditure and the company is suffering the ill
effects of some orders it took on which turned out to have bad economics. However, the industry is
a stable oligopoly, which has allowed the company to earn very good returns over business cycles.
Investors don’t know when the capex cycle will pick-up and don’t like what they see in near future.
We see the same problems but also see an opportunity to buy a good franchise at very cheap
valuations. It could be a long wait but we are willing to be patient. This is also currently the only
investment in the portfolio linked to capex spend in the economy.
We see our long gold position as a way of shorting the fiscal and monetary actions of policy makers
globally and in India. In order to fight the deleveraging trend in developed markets their
governments and central banks are likely to continue to debase currencies and attempt to create
inflation so that the real value of debts can be reduced. Real interest rates are negative almost
across the globe, indicating the extent of monetary distortion. This is a key driver of higher gold
prices as gold does not offer any yield and there is a cost associated with holding gold. Additionally,
given increasingly poor fiscal management in India, the current account deficit and high inflation, the
rupee is likely to have a depreciating bias over time. Putting all this together it makes sense to own
gold in rupee terms. Our bet is currently equally split between a direct position in a gold ETF and an
indirect position through a gold jeweller.
Portfolio performance – Holding up in a down market
Since we started investing in June the portfolio is up 1.8% while the BSE500 index (which we
benchmark ourselves against) is down 19.6%. We do not consider 1.8% to be a satisfactory rate of
return but the performance has been reasonable given the tough market conditions. If we are able
to protect capital during market downturns, it allows us to benefit that much more when markets
rebound. It is important to emphasize that this period is too short to be a meaningful measure of our
Note: “Portfolio” refers to the weighted average of all client portfolios managed by us over the relevant time period. Any metrics such as
returns or portfolio weighting similarly refer to the weighted average of all portfolios. Individual clients portfolios may defer materially
from the blended “Portfolio” and clients should refer to their portfolio statements for details on their portfolios

5. Avant Garde Wealth Management Pvt. Ltd.
investment capability. At a minimum investment performance needs to be evaluated over three
years and ideally over a period of 5 years or more.
Cumulative Returns
5%
0%
-5%
-10%
-15%
-20%
-25%
NAV (pre-fee) BSE500 Index
Best wishes for a successful 2012!
Gaurav Jalan
January 3, 2012
Note: “Portfolio” refers to the weighted average of all client portfolios managed by us over the relevant time period. Any metrics such as
returns or portfolio weighting similarly refer to the weighted average of all portfolios. Individual clients portfolios may defer materially
from the blended “Portfolio” and clients should refer to their portfolio statements for details on their portfolios