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 to read the original post, here is the plan in a nutshell…
You can check the previous reviews below
It is 2 years and time for our annual review!
- Did you invest every month?
- Did you increase the savings amount after every year?
- Do you have a long time horizon to even out the ups and downs?
- Does the overall performance fall within your 6 month return expectation range?
- Any change in fund manager?
- Did the fund manager stick to the stated investment style?
- Does the original investment rationale hold?
- Do they continue to communicate their strategy?
- Is the churn low?
- Is the expense ratio reasonable?
- Fund Performance
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, the performance is below the expectation of 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, the expectations were…
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 lakhs to Rs 13.1 lakhs. This would be considered as normal behavior from my portfolio.
Let us check the results as on 04-Aug-2020,
Great! The value is within our expected range. Equity asset class is 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 Nifty 500 TRI, Nifty 50 TRI and Nifty Next 50 TRI as seen above.
So both the asset class and fund selection are working out as expected.
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-Jul-2020):
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. As more outside investors like us invest in the fund their ownership comes down.
Focused & Simple to track
The current portfolio has around 26 stocks and is very easy to track.
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 was one new addition to the Portfolio – Indian Energy Exchange (IEX)
Low Churn: The churn is very low at 4% indicating that they are walking the talk of a buy and hold strategy.
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 ~27% (vs 31% six months back). They have replaced Nestle with Microsoft.
Their expense ratio during the review 1 year back had reduced from 1.4% to 1.3%. Then in last review it had further reduced to 1.15%. Now it is 1.07%. This is great. Lower the cost the better for us!
2 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.
A year back 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 corrected in February and March 2020, they have deployed the entire cash into equities. So this concern is sorted as of now!
Overall, my thesis remains intact and I will continue with my SIP in Parag Parikh Long Term Equity Fund
Fund no 2: ICICI Prudential India Opportunities Fund
The primary thesis (refer here) was based on the fund manager Naren. Here is a snapshot of why I like him
- 27 years of Market experience covering 3 cycles
- 13 years of fund management experience
- Robust long term performance track record
- Consistent Investment Style = Value investing + Contrarian + Evaluating Cycles + Top Down (using the big picture to arrive at stocks to invest in) + Bottom Up
- Macro overlay + takes advantage of cycles
- Knowledge of credit markets and credit cycles – its interplay with equities
- Ability to withstand and stick to investment process during occasional periods of short term under performance
- Widely read
- Investment Gurus – James Montier, Howard Marks, Michael Mauboussin
- Deploys checklists for investing – inspired from Atul Gawande’s Checklist Manifesto
- 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)
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 15 stocks accounting for 74% of the portfolio. Overall it has around 35 stocks.
AUM size at Rs 2,521 crs implies significant flexibility to manage the portfolio across market caps. Currently has around 37% in Mid and Small caps.
Investments are predominantly into sectors which are going through near term pain thereby providing attractive valuations
- Power – 20% – NTPC, Tata Power, Power Grid, CESC, etc
- Oil & Gas – 18% – ONGC, IOCL, GAIL, Oil India etc
- Metals – 17% – Coal India, Hindalco, Vedanta, Tata Steel, NMDC etc
- Corporate Oriented Lenders – 8% – Axis, ICICI, BOB etc
- Telecom – 9% – Bharti Airtel
- Positioned for PSUs, Dividend Yield plays
- 1/3rd of Portfolio Exposure to small and midcaps
Underweight: Retail Lenders, Mega caps, Quality theme
Price to Earnings Ratio: 7.5
Price to Book Ratio: 0.9
(source: value research)
PE ratio at 7.5 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.
The expense ratio is around 0.58% (increased from 0.39% six months back) which is still pretty low and good!
Portfolio Churn is neither to high nor too low at 56%. Given the part tactical nature of the portfolio I expect this to be around this range.
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 fainthearted 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.
Overall, my original thesis remains intact, that I would want to play the contrarian style via Sankaran Naren.
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. Now going forward for the third year, I will be making this Rs 50,000 equally split across both the above funds.
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 50,000 SIP, I expect my portfolio to be normally between Rs 2.5 to 4.0 lakhs after 6 months.
But I had already accumulated around ~Rs 9 lakhs as on 4-Aug-2020. (Just to make sure the six month review time lines are kept the same)
This Rs 9 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 50,000 normally will give me between Rs 2.5 to 4 lakhs , we also need to figure out the 6 month 95% probability range for my Rs 9 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 Rs 9 lakhs we get a 6 month outcome range of Rs 6.6 lakhs to Rs 13.7 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-Feb-2021,
I would expect my portfolio (actual investments of Rs 11.4 lakhs) to be between Rs 9.1 to Rs 17.7 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 whole idea is not to ask you to pick these 2 funds. That is irrelevant. The real intent is to encourage you to save and invest steadily across your working careers. 10-15 years down the line, irrespective of which fund you pick (as long as you don’t mess it up big time) you will end up with a great outcome.
The next review will be on Feb-2021.
See you folks. As always Happy investing!
If you have any feedback you can also mail me at firstname.lastname@example.org.
If you loved this post, share it with your friends and don’t forget to subscribe to the blog (1 article per week) or Twitter along with the 7000+ awesome people. Look out for some fresh, super interesting investment insights delivered straight to your inbox.
You can also check out my other articles here
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.
12 thoughts on “2 Years & This Is What Happened To My Investments…”
Well written blog
Thanks Vikas 🙂
Hi Arun, Are you coming up with your half yearly review soon ?
Next week 👍
Is the latest review available??
“The next review will be on Feb-2021”.
Dear Arun – This will be a good bump to the PF given the markets. Looking forward to reading this when you post….