The document discusses strategies for constructing investment portfolios that balance risk and returns, including defining core objectives, understanding basic concepts like the efficient frontier and beta/alpha returns, and using a core and satellite approach where the core portfolio focuses on meeting financial goals and the satellite portfolio takes on higher risk for potential higher returns. It also covers factors like vision, risk, consistency, taxes, and transferring wealth that are important considerations in developing an effective wealth strategy.

1. Wealth Strategy
Understanding basic portfolio
construction and risk
Sudhir Upadhyay – Managing Partner , Equal Partners Wealth Advisory
Phone: 9158041122
Email: sudhir@equalpartners.in
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2. Important constituents
 Vision & Horizon
 Returns
 Risk
 Consistency
 Tax
 Transfer of Wealth
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3. Vision
 Investing for a ‘month’, ‘year’ or ‘years’
 Defining core objectives
 Differentiating between wealth creation &
wealth management
 Formulating strategies for Wealth Creation as
well as Wealth Management
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4. Returns
Are explained by
 Beta- the exposure one has to the markets. Beta is
what investors get rewarded for being ‘in’ the market
 Alpha- the excess returns one generates over and
above the normal returns ‘obtained by just ‘being’ in
the markets
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5. Beta & Alpha - Why
Beta
 Why is it needed? – being invested in the market and going with the flow
ensures you only face as much risk as the market in general faces and get as
much return
 Passive strategy
 Needs less frequent monitoring
 Addresses core needs- you design meeting your longer term financial objectives
by relying on the ‘normal’ & ‘general’ forecasts for the markets. Thereby avoiding
undue risks to the portfolio. Beta returns in general are more forecast able than
alpha returns
Alpha
 Why is it needed?- Wealth creation largely depends on ‘Alpha’ generation.
 Disproportionate risk is rewarded by disproportionate returns
 Once core objectives are secured through financial planning, attempts can be
made to generate alpha by cordoning such investments in a way that the losses
from these do not affect the core objectives
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6. Investment Styles
Core & Satellite approach
 Core portfolio focuses on meeting the core financial objectives.
 Relies on asset allocation to generate sufficient returns in as
much risk averse manner as possible
 Case : A client focusing on building a retirement corpus. Has 10 years in hand and wants a steady
appreciation over his accumulated savings. The client can face shorter term volatility to participate in
assets which grow at double digit rates in future. However the client is not willing to lose principal or
face a negative return on the overall portfolio.
 Satellite investing is driven by aspiration rather than need
 Satellite portfolios will have higher investment expenses and
risks while compared to the core portfolios
 Case: A client wishing to invest in a portfolio has the capability to provide gains in excess of 100% in a
year, and understands that such investments can be highly volatile and can result in substantial capital
loss if the investing premise does not turn true. The investment is one single stock about with high
conviction
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7. Core Portfolio- driving logic
 Core Portfolio’s are constructed using modern portfolio theory as
a guiding principle
 Modern Portfolio theory derives heavy contributions from Dr
Harry M Markowitz , who won a Nobel Prize in 1990 for his
efforts.
 Core Portfolio’s tend to follow an ‘efficient frontier’
 Efficient Frontier- focuses on substituting an investment by
another ‘efficient’ investment if such investment generates a
higher return to previous investment but maintains the same risk
levels as the previous investment.
 Core portfolios run for longer periods of time where diverse
investments help cancel each others risk and produce more
steady returns over a period of time
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8. Efficient Frontier
Efficient Frontier: Balancing Risk and Return
 In 1990 Dr. Harry M. Markowitz won the Nobel Prize in Economics for his work in developing Modern
Portfolio Theory. Dr. Markowitz showed that the most effective portfolios are those that lie along the
Efficient Frontier—a series of points that models the range of possible portfolios, each representing the
combination of investments that has the maximum rate of return for every given level of risk, or the
minimum risk for every level of return.
 Therefore, the goal of a prudent, conservative investor is to develop a portfolio that lies as close as
possible to the efficient frontier. Portfolios that lie below the efficient frontier are getting too low a return
for the risk being taken, while portfolios that attempt to lie above the efficient frontier are generally
taking more risk than appropriate.
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9. Satellite Portfolio- driving logic
 Satellite Portfolio's tend to focus on gaining from market
inefficiency over shorter periods of time
 Market inefficiency over shorter periods of time can emerge from
lack of knowledge, execution skills, superior securities selection
etc.
 Satellite Portfolio managers are strongly convinced about their
ideas and investment logic and hence concentrate their holdings
to gain from the price movement in this short period
 Satellite Portfolios are often tactical plays
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10. Portfolio Returns Explained
 Asset Allocation primarily
determines how a portfolio will
behaves over the longer term.
 Core Portfolios follow this principle
 Security Selection and
MarketTiming can also add to the
returns of the portfolio, but it is
more difficult to achieve than
achieving returns consistently
through asset allocation
 Satellite Portfolios focus on
generating the ‘alpha’ by
considering the above two factors
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11. Risks- Systemic & Asystemic
 Systemic Risks- are those risks which affect all in the system the same
way.
 E.g., if the index moves from 20000 to 10000 all invested in the index
lose the same amount, and if the index moves from 10000 to 20000 all
invested gain back the lost amount.
 Asystemic Risk- are those risks which are specific to a particular
investment and needed not be faced by the market in general.
 For e.g., a company can be highly leveraged and face financial
problems in tightening liquidity.
 All investments can face systemic and some investments can face both
systemic & asystemic risk at the same time.
 While an investment can recoup the loss due to systemic risk soon as
the market bounces back, those facing asystemic risk may not react to
the market’s upward move.
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12. Risks in perspective of Core &
Satellite Portfolio
 Core Portfolios are constructed in a way so as to have minimum impact
from asystemic risks.
 Diversification helps in maintaining low asystemic risk
 Satellite Portfolios being concentrated in nature will highly be prone to
asystemic risks along with systemic risk like any other investment
 Satellite Portfolios will therefore look to seek rewards in greater
proportions for assuming both types of risk as compared to Core
Portfolios which primarily assume systemic risks
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13. How Core Portfolios work
 Oversimplifying - growth stocks do well during the early portion of the growth phase of the business cycle.
 Commodities then tend to outperform as the business cycle matures and commodity prices zoom up due to
inflation.
 Money market funds tend to outperform as a recession starts to kick in.
 Bonds do well as inflation evaporates and becomes disinflation or even a little deflation.
 This model is not guaranteed to work and every business cycle has its own quirky characteristics, but does help
to explain some of the investment and speculative behavior we see in the markets.
 Core Portfolios are intended to run for longer number of years and hence diversify to adequately capture
growth from all cycles through various asset classes & at the same time not allocate substantially in one asset
class to avoid excessive losses in an adverse cycle
 Satellite portfolios on the other hand thrive from their abilities to predict such cycles and therefore allocate
disproportionate assets in such asset classes which are deemed to be favorable
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14. Sector Rotation
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15. Few Learning's
THE rich don't stay rich for long.
 Only one in five of the wealthiest people is able to remain within the elite top 400 for two decades, said a
study by investment bank JP Morgan. The study was based on an analysis of the Forbes magazine rich list which
has ranked the world's wealthiest over the past 20 years.
 The downfall of the rich is caused by erratic stock markets, heavy taxes and the irresistible urge to 'shop
till you drop', reported The Times of London recently.
 More than 200 people have 'destroyed' their wealth through poor investment decisions. They include Yoko Ono
and Estee Lauder, who founded the successful cosmetics business. According to JP Morgan, all the original
super-rich would have remained in the top echelon had their investments or assets grown at the same
rate as the stock market - the benchmark for the study.
 But many mistakenly stuck to investments or assets that helped to make them their initial fortunes.
 'Diversifying assets is the key way to stay wealthy but it is the method most difficult to swallow as it can
be an emotionally difficult thing to do
 The bank has found that many fortunes do not survive beyond the third generation as the offspring of the wealthy
go on huge spending sprees. It cited Paris Hilton as an example. She is renowned for her large clothing bills
which are paid for from the Hilton hotel family's fortune.
 Only 50 people have maintained their position on the list.
 They include Warren Buffett, the legendary stock market investor who is the world's second richest man; William
Clay Ford, of the Ford cars family; Roy Disney of the cartoon and theme park family and Philip Knight, the founder
of sports shoes maker Nike.
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16. Thank You
Please email for further queries : sudhir@equalpartners.in
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