I have been running a live Equity SIP portfolio with the intent of motivating you to start yours.
Here is how it was done:
- Rs 30,000 per month since Aug-2018 till Jul-19
- Rs 40,000 per month since Aug-2019 till Jul-20
- Rs 50,000 per month since Aug-2020 till Jul-21
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 two and half years and time for our half-yearly 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?
Yup. 10-15 years easily.
- 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
Let us address the questions from 4-12
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-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.
Let us check the results as on 04-Feb-2021,
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 be decent.
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 Flexicap Fund
You can refer to the earlier rationale here
Latest Factsheet (as on 29-Feb-2021):
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 and the intention will be right.
Currently 156 crs (i.e ~2%) of the fund is owned by company employees. While it optically looks like the ownership is coming down, this is because the fund size has also grown. As more outside investors like us invest in the fund their ownership comes down.
Focused & Simple to track
The current portfolio has around 27 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.
2 new additions to the Portfolio – HCL Tech and CAMS
1 exit from the portfolio – Mahindra Holidays & Resorts
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. The global equity exposure remains around the same levels at ~29% (vs 27% six months back).
Their expense ratio has consistently been coming down.
Their expense ratio when I started was around 1.4%. It has been consistently coming down. Now it is 0.96%. This is great. Lower the cost the better for us!
Here is how the fund has performed in the past
As seen above, the 5Y & 7Y performance indicates significant out performance against the benchmark and peer group. The fund is doing good as per my expectation.
In 2019 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 Flexicap 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 60% of the portfolio and 15 stocks accounting for 73% of the portfolio. Overall it has around 40 stocks.
AUM size at Rs 3,220 crs implies significant flexibility to manage the portfolio across market caps.
Currently the portfolio has around 38% in Mid and Small caps which is similar to the positioning 6 months back.
Investments are predominantly into sectors which are going through near term pain thereby providing attractive valuations. The portfolio is positioned for cyclicals and can do extremely well if economic recovery is strong.
- Power – 22% – NTPC, Tata Power, Power Grid, CESC, Kalpataru Power Transmission etc
- Oil & Gas – 15% – ONGC, GAIL, IOCL, HPCL
- Metals – 16% – Coal India, Hindalco, Vedanta, Tata Steel etc
- Corporate Oriented Lenders – 8% – Axis, ICICI, BOB etc
- Telecom – 9% – Bharti Airtel
- Positioned for Cyclical recovery + PSUs + Dividend Yield plays
- 1/3rd of Portfolio Exposure to small and midcaps
Underweight: Retail Lenders, Mega Caps, Quality theme
Price to Earnings Ratio: 15.7
Price to Book Ratio: 1.3
(source: value research)
PE ratio at 15.7 times is also reasonable – 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 0.64% ( 0.58% in Aug-20 and 0.39% in Feb-20) which is still pretty low and good!
Portfolio Churn is neither to high nor too low at 45%. 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.
What was my view before 6 months…
The performance at that point in time was nothing to write home about. To be honest it was really bad.
This is what I wrote in my previous review:
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.
What happened in the last 6 months
Post that there was a significant pick up in returns (not that I knew about the timing) and thankfully the thesis has started to play out.
That being said, 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 for the 2nd year. Now for the current third year, I have been investing Rs 50,000 equally split across both the above funds.
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 15.8 lakhs as on 4-Feb-2021. (Just to make sure the six month review time lines are kept the same)
This Rs 15.8 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 15.8 lakhs we get a 6 month outcome range of Rs 11.7 lakhs to Rs 24 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-2021,
I would expect my portfolio (actual investments of Rs 14.4 lakhs) to be between Rs 14.2 lakhs to Rs 28 lakhs. This would be considered as normal behavior from my portfolio.
That being said, if there is a large market crash (whose reason we will know only in retrospect), then my portfolio can fall much 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!
Summing it up
The whole idea is not to ask you to pick these 2 funds. That is irrelevant. The actual 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.
Recently one of my readers had messaged me thanking that he had completed his 2 years in SIP and he was inspired by my SIP journey. While obviously my part is a very small one, still it does make you feel very happy.
I honestly think if we plan our money well, then it can make a huge difference to our lives and the people around us. The idea behind this blog is that in a small way, if I can help you make good money decisions today, maybe I can someday create a big difference to your lives.
Ok, sentiments aside – the next review will be on Aug-2021.
See you folks. As always Happy investing!
If you have any feedback you can also mail me at firstname.lastname@example.org.
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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.