My Equity SIP Portfolio – 18 Months Review

I have been running a live SIP portfolio with the intent of motivating you to start yours. I started with Rs 30,000 per month since Aug-2018 till Jul-19 post which I increased this to Rs 40,000 per month. 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 and the 1 year review here

It is more than a 18 months and time for our bi 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 04-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. 

Let us check the results s on 04-Feb-2020,

Source: ValueResearch

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

Overall the performance was better than the benchmark index fund BSE 500 – I made Rs 6.53 lakhs vs Rs 6.35 lakhs in BSE 500.

And little did I know in the next 3 months, the story will completely change 🙂

Let us now see the current performance,

My SIP portfolio as on 01-May-2020, stands at Rs 6.6 lakhs vs 6.3 lakhs in BSE 500. However the original amount invested was around 7.2 lakhs and hence the portfolio is in loss – this is expected given the current markets and nothing to worry.

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-Mar-2020):

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 4% of the fund is owned by company employees amounting to ~Rs 100 crs. As more people invest in the fund their ownership comes down.

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.

Investment Process & Style:

You can find them discussing details on their investment philosophy and thought process here

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

There were three new additions to the Portfolio viz. ITC, MCX and Oracle Financial Services Software. They have exited Indraprastha Gas and Maharashtra Scooters.

Low Churn: The churn is very low at 6% indicating that they are walking the talk of a buy and hold strategy.

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 ~31%. They exited ‘3M Co’ in Jan-20 and increased allocation in ‘AMAZON.COM INC’ .

Expense Ratio:

Their expense ratio during the last review had reduced from 1.4% to 1.3%. Now it has further reduced to 1.15%. This is great. Lower the cost the better for us!

Performance:

1.5 years 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..

As seen above, the 1Y, 3Y performance indicates significant out performance against the benchmark and peer group. The fund is doing good and I shall continue with the fund

Cash Allocation

In the last review they had cash allocation of around 14%. I personally don’t prefer fund managers taking cash calls and hence had mentioned this as a concern. But as the markets have corrected, they have deployed the entire cash into equities. So this concern is sorted!

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)

In my last review, I had raised a few worry points

Worry points

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.

Current View:

In all communications from the AMC, I started noticing that this fund was never mentioned. Also even in their new product launches like the Freedom SIP this was fund was not mentioned.

So I was getting a sense that this portfolio is maybe not a true reflection of my original thesis of playing contrarian strategy by Naren.

When I looked at the current portfolio, it seemed a little confusing as it has exposure to stocks like Avenue Supermart Ltd, Jubilant Foodworks etc – which is slightly contradictory to other contrarian portfolios which Naren manages – ICICI Prudential Multicap and ICICI prudential India Opportunities Fund(both of which are recommended aggressively in all AMC communication)

This is an issue with large AMCs as they have too many products and very little communication on the funds (unless something goes wrong like what you are seeing on the debt side). I honestly don’t understand the strategy which means whenever the fund underperforms it is very difficult for me to stick with the fund.

This was my evaluation mistake.

Change in Fund

Now that I have far better access to AMCs, I realized that ICICI Prudential India Opportunities is a pure play on Naren’s contrarian strategy.

So I have decided to shift my current allocation in ICICI Prudential Large and Midcap Fund to ICICI Prudential India Opportunities Fund

The current allocation was shifted 2 weeks back around 20th of April and my future SIP of Rs 20,000 will go into this fund. Apologies that I couldn’t write a post immediately.

Why did I miss this fund the first time?

It was a relatively new fund (launched in Jan-19) and I had no idea that this would be a pure play on Naren’s contrarian strategy. Since the AMC used to launch several products, I was a little apprehensive of the new one.

But now looking at the portfolios, it is clear that this remains the purest play on Naren’s strategy!

Portfolio Positioning of ICICI Prudential India Opportunities Fund

It is a top heavy concentrated fund with top 10 stocks accounting for 61% of the portfolio and 20 stocks accounting for 80% of the portfolio. Overall it has around 52 stocks. Bottom 24 stocks have individual exposure less than 1% – and contribute to <8% of the entire portfolio.

AUM size at < Rs 2000 crs implies significant flexibility to manage the portfolio across market caps. Currently has around 37% in Mid and Small caps.

Sector Views

Investments are predominantly into sectors which are going through near term pain thereby providing attractive valuations

Overweight:

• Power – 18% – NTPC, Tata Power, CESC, Power Grid etc
• Oil & Gas – 17% – ONGC, IOCL, GAIL, Oil India etc
• Metals – 17% – Coal India, Hindalco, Vedanta, Tata Steel, NMDC etc
• Corporate Oriented Lenders – 9% – Axis, ICICI, BOB etc
• Telecom – 9% – Bharti Airtel
• Positioned for PSUs, Dividend Yield plays
• 37% Exposure to small and midcaps

Underweight: Retail Lenders, Mega caps, Quality

Valuations

Price to Earnings Ratio: 8.6
Price to Book Ratio: 1.4
Dividend Yield: 4.7%

The dividend yield is extremely attractive and in fact more than the RBI expected inflation of 4%. This would be close to liquid and overnight fund returns.

PE ratio at 8.6 times is also extremely cheap – providing significant valuation re-rating potential.

This is something I will monitor to get a sense of the value orientation of the portfolio.

Expense Ratio

The expense ratio is around 0.39%. Yup you read it right. Must be one of the cheapest active funds available.

Portfolio Churn

Portfolio Churn is neither to high nor too low at 54%. Given the part tactical nature of the portfolio I expect this to be around this range.

Performance

The fund was launched on 15-Jan-19 and hence has a short performance track record. The performance at the current juncture is nothing to write home about.

This is in line with all value oriented fund managers under performing. If you notice all the celebrated value oriented fund managers before 2013 – Prashant Jain, Anoop Bhaskar, Quantum Mutual Fund, Sankaran Naren, Anand Radhakrishnan etc are underperforming big time. The new breed of Quality oriented fund managers have been strong performers in the last 7 years. I expect mean reversion to play out sometime similar to what happened to value oriented fund managers previously and the quality oriented managers to go through their lean patch.

This fund is not for the faint hearted and will have significant performance differential with indices in the short term (negative and positive) given the divergent and concentrated portfolio of beaten down stocks. Personally, I would give it 3-5 years to see some strong outperformance.

View

Overall, my original thesis remains intact, that I would want to play the contrarian style via Sankaran Naren. The change in fund is in line with the above thought process.

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 volatility and I can ride it out.

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 first 1 year and Rs 40,000 post that.

While I have no control over the markets, I continue to focus on the above two – Time and Discipline and hopefully in 10-15 years should have a good enough outcome 🙂

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 had already accumulated around ~Rs 6.5 lakhs as on -5-Feb-2020. (Just to make sure the six month review time lines are kept the same)

This Rs 6.5 lakhs 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 6.5 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 6.5 lakhs we get a 6 month outcome range of Rs 4.8 lakhs to Rs 9.9 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 04-Aug-2020, 

I would expect my portfolio (actual investments of Rs 8.4 lakhs) to be between Rs 6.8 to Rs 13.1 lakhs. This would be considered as normal behavior from my portfolio. 

That being said, if the current COVID-19 crisis prolongs, 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!

Summing it up

The current update got a little late due to some professional commitments. The next review will be on August-2020.

See you folks. Happy investing!

If you have any feedback 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.