How does one deal with these kind of extra-ordinary period of super normal returns and abnormal returns?
One of the better methods to overcome these anxieties of extremes in portfolio performance during these turbulent times is to stick to goal based approach to investing. An interesting report to improve wealth management for individual investors was proposed by
Dan Nevins , where in he takes into account the various factors that impact the investment decisions for investors. Terms like ‘loss aversion’, ‘mental accounting’, ‘over confidence’, ‘hind sight bias’, ‘over reaction’, ‘belief perseverance’, regret avoidance’ from behavioral finance builds the case for ‘Goal Based Investing’ approach. More importantly, it specifies the need to look at risk from portfolio level as well as goals level and accordingly deploy assets to for specific time frames to achieve those goals .Though the report was written in 2003, it is all the more valid and increasingly being applied in the wealth management space. The report has also laid out some strategies to manage investments over different time periods and life style goal needs.

To conclude, it is important to understand that managing wealth involves marrying the traditional finance with modern finance.
Goal based investing is the way to go.

1. The U.S. will continue to do ‘quantitative easing’ to ease the credit crunch..Unfortunately, it has not yielded meaningful results till date. According to Meredith Whitney,the Small and Medium Enterprsises in U.S. [ which contribute to over one-third of the GDP] till date have been increasingly denied access to credit.The SMEs are the prime engines of innovation and employment revivals[represents 50% of the nation's workforce]. Lack of credit leads to lay offs and closure of businesses.

2. The U.S. Government’s intent to stimulate the economy through more consumption[ like cash for clunkers program, etc] would not work, since the consumers are paying off their debt and saving more. The notion that over 70% of GDP contribution would still come through consumption seems to be history.

3. Dollar[due to zero interest rate policy] has now replaced the yen as the ‘carry trade’ for investors, fuelling asset bubbles across emerging markets.

4. Recent data put out by IMF indicates that Fiscal Stimulus doesn’t work in reviving the economy, when the fiscal deficit is beyond 60% of GDP. The U.S. has already reached that level.

5. When all mechanisms to revive the economy fails, drastic depreciation of the currency would be the only option for U.S. to revive its economy. This would temporarily bring down the soaring un-employment rates and push consumer prices upwards[deflation to inflation].

Recent Report published by David Rosenberg on The case for commodities captures the above premise very well and also suggests how investors now should re-align their portfolios.

It clearly raises a strong case for commodities. As history shows, during high inflation its the commodities and precious metals which not only acts a hedge to our portfolios but performs better.

What does all this mean to the Indian Investor? Our country and other nations across the world has very high correlation to U.S. and hence what happens there does impact us. For eg. 16% of world GDP consumption is still driven by U.S. investors.

To sum up, it would be prudent to trim equity portfolios , add commodities & precious metals [with a 20-25% exposure] and increase fixed income allocation in your portfolio.

After all, Portfolio Diversification and Dynamic Asset Allocation is the way to preserving and managing our wealth in these uncertain times.

Most corporations in the developed world offer the EAP benefits to their employees which helps improve productivity and reduce attrition levels.

In India specifically, the time has come to introduce financial planning and advice under employee assistance programs for the following reasons;
1. Aspirational levels have lead to leverage among individuals, which has gone up thrice from 5% of GDP in 2003 to almost 15% of GDP
2. Global slowdown has brought in job losses across sectors and fear of job loss specifically in certain sectors which are export dependent..
3. In metros and tier 1/ tier 2 cities, the young urban population have bet on their future cash flows and leveraged far more than they could afford.
4. The bull run that started from 2004 and ended in early 2008 brought in its wake easy money and in the process destroyed the wealth creation opportunities that could have been achieved in a sustained and consistent manner.
5. The nuclear family concept has come of its age which has changed the social fabric in the country and emotional support systems [for the migrant white collar workforce]are either nil or marginal.
6. Due to financial stress, health and family issues takes center stage thereby reducing productivity levels of employees and higher attrition levels,specifically in sectors like I.T. and ITES.

It is time that Indian corporations take a pro-active approach to assist employees in the most crucial sphere of their personal lives. Like the statistics and studies bear out, its a win-win situation for both employers and employees!.

We believe there is a way out. Personal Financial Planning is it.

Yes! Focusing on ‘goals’ rather than ‘returns’ could help us avoid asset bubbles.
This in turn detaches the investors from the ‘greed and fear’ experiences in the market.

An interesting study done by Dr Conrad S Ciccotello of University of Atlanta, Georgia bears some very interesting observations:

1. Returns estimation expected by clients varied from overly optimistic during bull runs and overly pessimistic during bear phases.
2. How could one avoid the herd mentality?
3. Goal setting as part of the financial planning process holds the key to avoiding asset bubbles.

Most importantly, the study showed that people would always want to achieve their goals.

The project had twin objectives :
1. Will stocks deliver positive returns in the long run?
2. Will Portfolio Diversification along with Portfolio Re-balancing or Dynamic Asset Allocation deliver consistent returns as well as minimize the downside risks to the Portfolio.

India Market Chronicle chart [based on back testing data of 26 years] threw up some surprising and interesting results.

Two clear conclusions emerged out of the project :

1. In the long run, equities could still deliver negative real returns.
2. Portfolio Diversification and Dynamic Asset Allocation could indeed minimize downside risks and provide consistent returns.

1. Just like Sep and Oct 07, we are seeing huge inflows into the equity market.

2. Fundamentally nothing much has changed, except of course the positive sentiment on election results. That we would have a stable government for the next 5 years and some reforms would happen.

3. Global economy and markets have still not come out of the woods and we do not know how long it will take for the U.S. economy to recover.

4. Risk appetite has gone up substantially, all asset classes are up, thanks to quantitative easing by the central governments?

5. We learnt from the last crash, that dependency on capital flows is very high in emerging markets and this could set us up to a downside again, if any major global crisis were to happen in the near future.

A prudent approach now would be to review one’s portfolio and do profit booking/cut losses and get ready to buy into dips.

Archives – Oct 2007 – The P-Notes and the Capital Dilemma!

Over the last one week the ‘hot topic’ was the ‘P-Notes’ aross the length and the breadth of the country.
While there has been heated debates on the merits and de-merits of SEBI draft guidelines[which would become a directive with possibly few minor changes by tomorrow] on the regulation of P-Notes into the country, most of us have failed to see the bigger picture.

One of the first reports on the impact of unabated capital inflows into emerging markets[ post fed rate cut] was filed by Andy Mukherjee of Bloomberg, where he talks about how central bankers in emerging markets are grappling with the sudden rush of money, while the currency traders are raking it all..
Another follow up report on the topic by the author on the Hedge Fund’s love for India takes it further. He has taken a balanced view on the issue.

Interestingly, according to the latest IMF report on emerging market data , one third of the net surge of capital inflows into country leads to sudden stop or a currency crisis.
Some more interesting observations could be seen on Niranjan Rajadhyaksha’s column. More so in the context of a country like ours which has current account deficits and relies a lot on portfolio flows versus the FDI. Of course, the skew towards capital flows have reduced over a period of years with the increase in FDI investments.

With the rupee appreciating to double digits, its a cause for concern not just for exports but for the overall economy. The surge of capital inflows increases the prices across all asset classes. The impact would sooner or later put pressure on decreasing interest rates in the country , while the inflationary pressure would not allow it to do so.
Consumer Price Inflation Index for Urban Non Manual is hovering around 6.8%.
The RBI has been issuing Market Stabilisation Bonds to ease the situation but that does not help either.
Because the Government has to pay 7.5% interest on these bonds, whereas the forex reserves parked by the RBI hardly earns around 4%.
This again adds up to the fiscal deficit.While the revenue deficit gap has been to some extent addressed with increasing growth in tax collections, the increasing expenditure on various programs initiated by the current regime could widen the gap further. The latest is the recommendations by the pay commission to increase the salaries for government workers which is going to burn a hole in the state government exchequer.
If sudden reversal of capital flows happens in the near to medium term, that could lead to dampening the economy’s growth.

While all this may sound a little alarming, there is plenty of positives to cheer up that markets to be bullish..
1.Domestic institutions would soon be stepping in to shore up the market.
After all, they have been waiting on the sidelines since the surge of capital flows that have rushed in since the last month and pushed the valuations of a number of stocks to stratospheric levels..
To recap from the earlier post, the Life Insurers in India had invested $35 billion for the period April 2006-March 2007 whereas the FIIs had invested $ 8 billion at the end of the calendar year 2006!
2.According to a latest United Nations agency, there has been huge growth of inward remittances by millions of unknown Indians. The guys who sweat it out there in the Middle East and Africa, London and of course the techie workers from Sillicon Valley.The faceless Indians have sent back $25.5 billion in 2006!!
Making India the biggest market for inward remittances.
I am sure at the end of the year this group will better, if not equal the inflows of all the FIIs put together..
We will know the figures soon..
3.Finally, Globally trends in U.S. and Europe indicates that they are still reeling under the impact of sub prime crisis with major banks results coming out with their huge write downs/losses for the quarter. They expect it to continue for few more quarters till the clean up is complete.
Some more economic indicators [in the coming week] on the housing starts in the U.S., consumer spend patterns, increasing oil prices and profit warnings/missing the consensus estimates results by some large firms are leading us to believe that the FED would cut rates by another 25 to 50 basis points [on October 31,2007]to ward off the possible downturn in the economy.

Well..all this portends to more capital inflows into our country!
Its raining wealth..raining wealth..again??!!

Kiran..before I answer to your question on whether to invest in this fund or not, would like to give a little background about the fund..

Background :
Tiger in short for The Infrastructure , Growth and Economic Reforms Fund was launched with much fan fare in June 2004, by DSP Merrill Lynch just ahead of the General Elections of 2004, when the markets were shining and NDA launched the India Shining Campaign.
The fund bets and believes on the growth oriented infrastructure and economic reforms story.
Even though the NPA government was defeated and UPA came to power, it believed the reforms are here to stay.

Tiger Fund pre-dominantly focuses on infrastructure related stories where it has the maximum exposure..
It continues to believe that the potential for growth is enormous in that sector in the coming years..
Tiger Fund is one of the best performing funds in the equity diversified fund category with CPR1 ratings by CRISIL. Value Research Online has voted it as a 5 star fund category. The fund is well diversified and has a portfolio of 64 stocks and 2 derivative positions.
One of the interesting fact is that it has almost 12.5% in cash and cash equivalents which would come in handy during market downturns to capitalize on buying opportunities. This is the portfolio update as on 31 Aug 2007. The AUM of the fund stands at on Aug 31 2007 is Rs.2241 crores.

The fund has consistently out- performed the benchmark category of BSE 100 by more than 10% year on year.
Infact, it has exceptionally done well in the last one year where its returns are 52% and the BSE 100 gave returns of 32.42%..

Observations : As you might know, mutual funds are long term wealth creators. It is advisable to stay put in these funds for atleast 3 years if not 5 years.
With India story intact, foreign and domestic fund flows rushing in, thanks to the FED funds rate cut and the rupee appreciation, the market trends are extremely bullish.
In the short to medium term, the volatility in the markets will be very ferocious.. Factors like high oil prices, political crisis could play spoil sport in the short to medium term..

While at the same time, the global trends do point to an impending financial crisis, we seem to be fairly protected from the US recessionary trends/slowdown due to our domestic consumption story and demographic dividend which plays to our advantage. Of course, we have to address two key bigger issues like infrastructure and employability issues , but the process of reforms/development is irreversible…

We still need to wait and watch as to whether Asia, specifically India will de-couple from U.S. It does look like it will happen sooner or later..

Factoring all these, my recommendation for Kiran would be to invest in the fund, provided he has a clear time horizon of minimum 3-5 years and opts to go for systematic investment plan, which would ensure that the rupee cost averaging and power of compounding would generate extra kicker to his returns.

Indian markets are going to witness a never before fund flows from multiple segments..
In the last two days, FII inflows into the equity market stood at $608 million. Till date the FII inflows for this calendar year have already crossed $ 10 billion..
Raining wealth?!

Let me try and list out broadly the segments who could possibly contribute to the stratospheric highs of Sensex reaching 20k :
1. The existing ‘waiting on the side lines’ money from FIIs, Domestic Institutions and Retail/HNI segments.
2. The first time retail house hold investors who would enter the market through direct/Mutual Funds/ULIPS. The retail participation by house holds for FY 06-07 was a mere 6% of their savings into equity markets. This pie could significantly go up at the cost of the most dominant savings mode – Bank Fixed Deposits which is currently at 47%.
2. More and more hedge funds will enter the ‘arbitrage game play’ due to the return of the yen carry trade in a bigger manner [since BOJ went on the 'hold' mode with respect to interest rates]..
3. Newer Private Equity funds will find its way into the domestic markets..
4. The latest animal to the party, ‘Sovereign Wealth Funds’ would also try to wriggle its way into the market.
5. New Retail Investors from U.S. and other the developed world will join the bandwagon via India focused oversees Mutual Funds .
6. Last but not the least.. the NRIs pre-dominantly from the Middle East and other parts of the world will rush in as well..

In retrospect, at the start of the year 2007, I came across a very interesting column by a Neo Wave Technical Analyst who goes by the name Milind Karandikar whose column appeared on January 8, 2007 in the Business Standard’s ‘Smart Investor’ section.

According to Karandikar, “We are in the 5th wave as per the New Wave Theory.Wave 5 usually covers 100 % to 161.8% of the price action of Waves 1 and 3 combined. On a logarithmic scale this calculation sets a target of 20,000 plus for the Sensex. And that could happen in the year 2007 itself. Those who cannot over come the general feeling of nervousness would miss a life time investment opportunity, that the year 2007 presents. My advice to small investors is to over come this fear of heights and invest. They should take this opportunity; else the other wise men will take it away”.

Well.. there definitely seems to be a case for the build-up for the Sensex to hit 20,000 soon..

Hey..Should you and I join this party at all?
I am thinking..
Wait till I re-visit this subject[in the next few days] with more data and research and pen down my thoughts again ..
Meanwhile.. If you can’t wait to call your broker now, remember Jim Rogers latest quote ” Every time the Fed turns around to save its Wall Street friends it makes the situation worse. The dollar’s going to collapse, the bond market’s going to collapse, there will be a lot of problems in the U.S.”

This sure is a tipping point for our Indian Markets and reversal of roles as to who supersedes the equity market flows in the Country.
Of course, one needs to watch whether this is sustainable, because if and when our markets do get bearish[due to global factors and political factors] in the near term, our retail investors again could develop cold feet to equity investing.
The last time around we saw huge participation of domestic house holds investing in capital markets, was when Harshad Mehta moved the market in 1990s!
And the rest is history…

We hope this time around its different..
May we raise a toast to the coming of age of the Indian Investor!