Accretus Solutions

Asset Allocation owes its origins to the Nobel Award Winning Professor Harry Markowitz’s Modern Portfolio Theory or ‘ Mean Variance Analysis’.

Data Collected by his team over long periods of time on markets and specifically on equities, bonds and cash indicated that the proportion of these 3 major categories played a vital role in the portfolio performance. In fact, the asset allocation contributed 91.5% towards the portfolio’s performance vis a vis ‘market timing’ that contributed just 1.8%.

Also ’security selection’ contributed 4.6% to the portfolio performance. Few other factors like ‘re-balancing’etc contributed 2.1% towards the portfolio performance.

As you can see..clearly the winner is ‘asset allocation’.

Well… so much for market timing and security selection!!

Asset Allocation is the way to go!

Amen to market timing!

Indian markets continued the bull run for the fourth straight year with 46% returns in 2006.

FII flows in the Indian equity markets for the year 2006 stood at $ 8 billion compared to $ 10 billion in 2005.

Domestic mutual funds contributed $ 3.5 billion. It is 17% higher than last year.

This is a healthy sign which indicates that more retail investors are entering the equity market through mutual funds.

Tough to time correction in the markets, especially for the first few months.

Data and Analysis points to India in the over valuation zone.

According to Morgan Stanley estimates markets could have a downside of 18% and an upside of 21%.

Various external and internal factors could contribute to the downside.

The key ones are possible U.S. slowdown in 2007, interest rate sensitivity, geopolitical risks, liquidity squeeze, oil factor etc..

But the broad consensus[estimates by brokerage houses] is that the corporate earnings growth will be in the region of 30% for FY2007.

Data and analysis points to aligning one’s portfolio predominantly to large caps and select mid caps stocks/funds.

Overall.. the long term equity story for India is intact and one could get reasonable returns [with a time horizon of 2-3 years] by holding investments predominantly in large caps and in select mid /small cap stocks/funds.

On the flip side.. will we[Indian Stock Markets] show the money in 2007!?

Time will tell..