My SIP Portfolio – 1 year Review

I have been running a live SIP portfolio of Rs 30,000 per month since Aug-2018 with the intent of motivating you to start yours. You can find the details here.

Now if you don’t have the time, here is the plan in a nutshell

You can check the previous 6 month review here.

It is more than a year and time for our annual review.

Checklist

1. Did you invest every month?
2. Did you increase the savings amount after every year?
3. Do you have a long time horizon to even out the ups and downs?
4. Does the overall performance fall within your 6 month return expectation range?
5. Any change in fund manager?
6. Did the fund manager stick to the stated investment style?
7. Does the original investment rationale hold?
8. Do they continue to communicate their strategy?
9. Is the churn low?
10. Is the expense ratio reasonable?
11. Fund Performance
12. Risk

Performance Check

One of the biggest issues when it comes to performance evaluation, is that we are sold equities with the wrong expectations. Mostly the pitch is 12-15% returns over the long run.

So anytime, my performance is below the expectation say 12%, we get a doubt that “Hey! Maybe this is not working”

The reality is that long term, is simply made up of several short terms where the returns have a wide range of outcomes. As several short term periods accumulate, the wide range of ups and downs even out to provide reasonable returns.

We needed a framework, to make sure short term expectations were set right so that we can hang on for the long run.

Now in the last review, based on the 6 month expectations framework that I discussed in that post, we had decided that

In the next six months, that is on 05-Aug-19, 

I would expect my portfolio (actual investments of Rs 3.6 lakhs) to be between Rs 2.8 to Rs 5 lakhs. This would be considered as normal behavior from my portfolio. 

Let us check the results,

Great! The value is within our expected range. The equity asset class is behaving normally as per expectation and as we continue investing over longer time frames, the returns will start picking up.

Now with that out of the way, let us dive into the two funds..

Fund 1: Parag Parikh Long Term Equity Fund 

You can refer to the earlier rationale here

Latest Factsheet (as on 31-Aug-2019): Link

High Conviction

Original Rationale: The entire fund house just has one single equity fund – and this single fund runs a concentrated portfolio of around 20-25 stocks. So all the resources will be focused on this single fund and shows their conviction and belief. This is a welcome change from the majority of AMCs where they have several funds running different strategies so that at all points in time there will be one fund or the other performing.

Current View: Logic pretty much continues to hold true. As explained in previous review, they have launched an ELSS fund. But this will be very similar to the Parag Parikh Long Term Equity Fund except for the global exposure (which again is because regulation doesn’t allow global exposure for ELSS category)

Skin in the game

Original Rationale: Their own employees own around 10% of the scheme

View: While this has no prediction capabilities on the future performance, this is a sign that we are partnering with people of integrity.

Currently 5.96% of the fund is owned by company employees amounting to ~Rs 120 crs. Six months back it was at 7%. Before you worry that it is reducing, this is purely optical as the AUM has also grown (Rs 2,004 cr in 31-Jul-2019 vs Rs 1,618 cr as on 28-Feb-19) and the actual amount was more or less the same.

Focused & Simple to track

The current portfolio has around 25 stocks (similar 25 stocks 6 months back) and is very easy to track.

Clear communication

Original Rationale: These guys are way ahead of the industry and have phenomenal transparency in communicating their views and process. They have a good youtube channel (link) where the fund managers regularly communicate their views and also their annual investor meeting is available where they talk about the investment thesis behind their stocks.

View: They continue with their frequent communication via their youtube channel. Their recent video called the “Return of the Boy who called wolf” makes for an interesting watch. Check it out here.

Investment Process & Style:

CIOs letter: Link
You can find them discussing details on their investment philosophy and portfolio construction here

The portfolio remains more or less the same and the earlier discussed thesis continues.

Low Churn: The churn is very low at 4% indicating that they are walking the talk of a buy and hold strategy. They have exited IBM and added CDSL.

Fund Managers:

The fund managers Rajeev Thakkar and Raunak Onkar continue to manage the fund which was my original thesis. So no worries!

Exposure to global stocks

The fund provides diversification via 1/3rd exposure to global stocks

View: The global equity exposure remains around the same levels at ~30%. IBM stock has been exited recently and all other stocks remain the same

Rationale for selling IBM: The cloud and AI businesses have been witnessing rapid growth for the industry but IBM has not meaningfully delivered over the past few years. Also shifting goal posts in financial reporting by IBM have made evaluation difficult. We see better opportunities elsewhere and have exited the position

Expense Ratio:

Their expense ratio has reduced from 1.4% to 1.3%. Lower the cost the better for us!

Performance:

1 year is still too short a period to evaluate. At least 3-5 years is needed to evaluate performance metrics. But nevertheless, just to get a sense of what has happened..

Worry Points:

6 months back around 20% was in Cash positions (arbitrage and cash). This has come down to 14%. They have also given an indication that they will deploy the cash allocations as they find new opportunities given the recent selloff.

“Investors will see some reduction in the allocation in cash and arbitrage positions. We have seen some sell off in the broader markets and selectively we can see some companies trading at attractive valuations. We continue to look at individual investments on their own merits and will not hesitate to invest if an opportunity looks attractive “

While they have clearly communicated that they will be taking cash calls, personally I don’t prefer fund managers taking cash calls. However, given their overall positives and the fact that they have started to deploy the cash, this is an issue that I will live with.

View

Overall, my thesis remains intact and I will continue with my SIP in Parag Parikh Long Term Equity Fund

Fund no 2: ICICI Prudential Large and Midcap Fund

The primary thesis (refer here) was based on the fund manager Naren. Here is a snapshot of why I like him

1. 27 years of Market experience covering 3 cycles
2. 13 years of fund management experience
3. Robust long term performance track record
   
4. Consistent Investment Style  = Value investing + Contrarian + Evaluating Cycles + Top Down (using the big picture to arrive at stocks to invest in) + Bottom Up
5. Macro overlay + takes advantage of cycles
6. Knowledge of credit markets and credit cycles – its interplay with equities
7. Ability to withstand and stick to investment process during occasional periods of short term under performance
8. Widely read
9. Investment Gurus – James Montier, Howard Marks, Michael Mauboussin
10. Deploys checklists for investing – inspired from Atul Gawande’s Checklist Manifesto
11. Communicates strategies and thought process regularly on public forums (making our lives a lot more easier)

To play the contrarian style, you need to be willing to look wrong often in the short term, before the mean reversion takes place. This means you need the support and trust from both the AMC and investors. Naren’s experience and stature allows him the rare luxury to take near term pain and stay patient till the contrarian call plays out (which a lot of new fund managers will never have as the short sighted industry won’t let him/her survive)

Current Positioning:

This was the commentary 6 months back

” Our earlier large-cap bias helped us because the recent correction was largely in mid- and small-caps. As a result, the worry about overvaluation in mid- and smallcaps has also come down. Across market cap segments, on an average, valuations remain slightly above average. Just like the large-cap space, we see opportunity in the mid- and small-cap spaces now as there are pockets that are cheap while some continue to remain expensive. In other words, we have shifted from a large-cap bias to a multicap bias.

In line with this, they have gradually started to increase their small cap exposure (but nothing drastic)

6 months back – Feb-19

Current Positioning

Sector Views:

View six months back..

“We are of the view the NPA cycle has bottomed out. We have more of corporate facing banks in our portfolios now. Regarding the losses, lot of it is because of NPA provisioning recognised earlier. The operating profits of corporate banks are steadily improving. ” – Naren interview

Source: Link

This view is getting reflected in the portfolio. Except for HDFC Bank, all the other banks in the portfolio are predominantly corporate oriented lenders.

The fund is underweight the financials ~25% vs category average of ~32%. This underweight is primarily in retail lenders.

The view is that

“When people look at rate sensitives what happens is that at the end of the day, you had a situation where most of the retail financiers have done very well over the last 10 years and there has been no retail credit cycle for the last 10 years. Our worry comes from the fact that every other category connected to consumption slowdown but retail credit, has not slowed down. We believe in cycle so we think that retail credit should slow down at least in terms of growth. So we are waiting for that growth slow down at some point of time to buy a structurally good sector.”

Mega Cap Stocks and Quality Stocks overvalued

“Today if you look at mega caps, quality stocks are not cheap but no one will want to recognise that cycles will play in every asset class and every type of equity. The mega caps are extremely overvalued.  When I look at mega caps at this point of time, I see valuations being clearly above one standard deviation from normal and you have huge flows into that category. “

In line with this view, the fund is underweight the megacaps (Reliance Industries, Kotak Mahindra Bank, Infosys, TCS, HDFC) and quality names (FMCG etc)

Positive on Utilities, Dividend Yield Plays

“We think in a period where the economy is not growing very fast, utilities and dividend yield stocks are two very interesting areas.  Markets are cheap is clearly in credit, in small caps, then midcaps, the value stocks including PSUs and those are the areas where sentiment is extremely negative and valuations are extremely attractive for long-term investors.“

This is getting reflected in the portfolio. For eg the top holding NTPC is a part of utilities exposure and has around 5% in dividend yield.

Source: Link

Summing it up:

Underweight: Retail Lenders, Megacaps, Quality

Overweight: Utilities, Corporate Lenders, PSUs, Dividend Yield plays, Metals. Gradually might increase exposure to small and midcaps.

Naren continues with his contrarian, respect-the-market-cycle approach and there is no style drift.

Expense Ratio

The expense ratio is around 1.23%. This has actually increased from 1.13% six months back. While not too expensive, I would want this to come to less than 1%.

Portfolio Churn

Portfolio Churn remains on the higher side at 80%. I guess the re-categorisation and increase in mid and small cap exposure due to transition from a pure large cap to “large & mid cap” category may be the reason. This is something we need to keep a watch.

Performance

As mentioned earlier 1 year is too short a period. But anyways just for our reference. The fund was earlier a pure large cap fund (called ICICI Prudential Top 100) and got changed into its new avatar of Large & mid cap fund only post the Mutual fund recategorisation ( 28-May-2018). So all performances above 1 year won’t be relevant for us.

Worry point

Recently there have been few fund manager exits from ICICI Prudential Mutual Fund. Now a lot of funds have Naren’s name attached to it as a fund manager. This is completely opposite to PPFAS where the entire team has just one fund to manage. Bandwidth can become an issue and there is always a concern on whether enough attention would be paid to our selected fund.

While there is an additional fund manager added – Prakash Goel to manage the mid and small caps (35-40% of the portfolio), Naren still has a lot of funds mapped under him. Further, I have no clue on the new fund manager and I am in the “watch closely” mode.

View

As of now, I will continue with the fund and I don’t see any deviation from the stated style of contrarian value investing. Naren’s bandwidth issues and the new fund manager in charge of mid and small cap portion will be something which will be nagging at the back of my mind.

Things under my control – Time & Discipline

Now while I have no control on the markets, the biggest determinant of my future portfolio thankfully is still under my control – Time + Discipline

Time – I have easily 10-15 years time frame. This would take care of most of the near term ups and downs.

Discipline – To save consistently, come what may. Call it the pressure of social accountability, I have managed to invest Rs 30,000 every month for the last 1 year.

Now comes the most important part. My salary has increased and so should my investments.

I will be increasing my SIP amount to Rs 40,000 starting this month!

Next 6 month return expectation

I had discussed a new framework to set expectations for equities as an asset class here. 

The rough math goes like this, 
For a 6 month SIP of Rs 10,000 (i.e an investment of Rs 60,000 in total) – the portfolio value usually (read as 95% of the times) has ended up in the range between Rs 50,000 to Rs 80,000.  

The worst ever value has been at Rs 40,000.  

The above value has been calculated using Nifty (from 1990) 

So for my Rs 40,000 SIP, I expect my portfolio to be normally between Rs 2 to 3.2 lakhs after 6 months.

But I have already accumulated around ~Rs 3,56,000 till date.

This Rs 3,56,000 is like a lumpsum amount going forward as the entire amount is exposed to equity market ups and downs. So, while the next six month SIP of Rs 40,000 normally will give me between Rs 2 to 3.2 lakhs , we also need to figure out the 6 month 95% probability range for my Rs 3.56 lakhs which has already been accumulated. 

Based on historical data, the 6 month 95% probability return range for equities has been anywhere between -26% to +52%. Applying this to 3.56 lakhs we get a 6 month outcome range of Rs 2.6 lakhs to Rs 5.4 lakhs

So adding both we can get our normal range of expected outcome for the next 6 months.

In the next six months, that is on 05-Feb-2020, 

I would expect my portfolio (actual investments of Rs 6 lakhs) to be between Rs 4.6 to Rs 8.6 lakhs. This would be considered as normal behavior from my portfolio. 

That being said, if there is a major crisis event, then my portfolio can fall even more than this. It is reasonable to expect one or two major crisis event every ten years. 

I have a 10-15 year time frame for my SIP. This means I have 20 to 30 six month periods to stay invested. Even if I lose out on a few periods, going by history of equities, majority of six month periods will be in my favor and hence I get to experience better returns over the long run.

In a similar manner, you can start building reasonable volatility expectations over the next 6 month period for your SIP portfolio. 

The key idea is to stay for long term returns, one six month period at a time!

See you folks. Happy investing!

Do share your feedback and let me know if it works for you. If you need any help regarding your investments you can also mail me at rarun86@gmail.com.

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Disclaimer: All blog posts are my personal views and do not reflect the views of my organization. I do not provide any investment advisory service via this blog. No content on this blog should be construed to be investment advice. You should consult a qualified financial advisor prior to making any actual investment or trading decisions. All information is a point of view, and is for educational and informational use only. The author accepts no liability for any interpretation of articles or comments on this blog being used for actual investments.