I have been running a live Equity SIP portfolio with my own money since Aug-18 with the intent of motivating you to start yours.
If you are new to SIPs and want a clear understanding of why and how this whole thing really works, check my earlier article here.
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
- Rs 60,000 per month since Aug-2021 till Jul-22
Starting from Aug-22, in line with the plan I have increased my SIP amount by Rs 10,000 (i.e from Rs 60,000 per month to Rs 70,000 per month).
If you are interested in how it all began, you can read the story here.
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
- 6 Month review: Link
- 1 Year review: Link
- 1 Year 6 months: Link
- 2 Years: Link
- 2 Years 6 months: Link
- 3 Years: Link
- 3 Years 6 months: Link
It’s been 4 years now and time for our 8th half-yearly review!
- Did you invest every month?
- Did you increase the savings amount after every year?
Yup! This August (2022), I have again increased my SIP amount by Rs 10,000 (from Rs 60,000 to Rs 70,000) exactly as per plan.
- 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 expected return 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 worry that “Hey! Maybe this is not working. So let me stop my SIP”.
Historically, when I studied the past Equity SIP journeys for the last 20+ years from different starting points, I found that all SIP investors have to go through three tough phases at regular intervals.
- Disappointment Phase a.k.a “I Expected Far More” Phase: There are intermittent periods of time where your SIP returns are between 7-10%. While this is not a bad outcome and is better than FD returns, as an equity investor you definitely expected a lot more from your equity SIP. This phase is characterized by the typical “I expected far more” rant.
- Frustration Phase a.k.a “My FD Would Have Done Better” Phase: There are intermittent periods of time where your SIP returns are between 0-7%. This is much lower than what you would have got in your FDs. This phase is characterized by the typical “My FDs would have done far better” rant.
- Panic Phase a.k.a “My Portfolio Value is Lower Than What I Invested” Phase: Whenever there is a large temporary market fall, which is pretty normal for equity markets (Using history as a guide, a 10-20% fall happens almost every year and a 30-60% fall can be expected once every 7-10 years), your SIP returns may even turn negative for a short period of time. As you see your hard-earned money eroding every day, eventually panic takes over and you decide to stop and redeem your entire SIP money. This phase is characterized by “My Portfolio value is even lower than what I invested” rant.
Here comes the hard reality – All the above phases are actually a feature and not a bug.
Whenever equity returns were low i.e when it hits one of the three failure points in the initial 3-5 years, as blasphemous and counterintuitive as it sounds, patiently continuing your SIP for another 1-3 years led to a dramatic recovery in performance!
If you find this a little difficult to believe, you can read about why this happens here.
In fact, you can see that even in my Equity SIP journey the same thing has played out:
- 1 Year Returns: -2.2%
- 1 Year & 6 Month Returns: 12.1%
- 2 Year Returns: 8.2%
- 2 Year & 6 Month Returns: 30.1%
- 3 Year Returns: 36.6%
- 3 Year & 6 Month Returns: 33.5%
- 4 Year Returns: 25.6%
The reality is that the 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.
So, I had created a simple framework, to make sure short term expectations were set right, and 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-2022,
I would expect my portfolio (actual investments of Rs 21.6 lakhs) to be between Rs 25 lakhs to Rs 45 lakhs. This would be considered normal behavior for my portfolio.
Let us check the results as of 04-Aug-2022,
Great! The value Rs 33.3 lakhs is within our expected range and has a 25.6% XIRR returns. Equity asset class is behaving normally as per my expectation and as we continue investing over longer time frames, the returns will be decent.
Overall the performance was far 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. The key is not to get too carried away by the higher than expected current returns and let us continue to focus on the process and keep things simple.
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 original rationale here
Latest Factsheet (as on 31-Aug-2022):
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 reviews, 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 the regulation doesn’t allow global exposure for ELSS category). One more fund has been added in the Conservative Hybrid category but this is more of a debt oriented solution.
Skin in the game
Original Rationale: Their own employees own around 10% of the scheme
Current 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 to do the right thing as their money is also invested.
As of 31-Dec-2021, 156 crs (i.e ~0.6%) 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 28 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.
Current 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.
4 New Additions to the Portfolio: HDFC Ltd (anyway HDFC Bank and HDFC are getting merged), Coal India (4%), Negligible exposures in NMDC & Maharashtra Scooters
1 Exit from the portfolio: HDFC Bank
The churn is very low at 17% 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 global diversification via 1/3rd exposure to global stocks. The global equity exposure has come down to 20% levels due to the recent industry wide restrictions on investing in foreign stocks. This will eventually go back to 30% levels once these restrictions are removed. So this is not something to worry.
Their expense ratio has consistently been coming down.
Their expense ratio when I started was around 1.4%. It has been consistently coming down. During the previous review, it was 0.87%. Now it has further reduced to 0.77%. This is great. The lower the cost the better for us!
Here is how the fund has performed in the past
As seen above, the 5Y & Since Inception (9+ years) performance indicates significant outperformance against the benchmark. 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 had deployed the entire cash into equities.
Right now the cash allocation is around 10% which is higher than my comfort levels. But I guess I will have to live with this as of now.
Growing Fund Size needs to be monitored
As the fund has done really well, a lot of investors have started to notice this and the inflows have been pretty strong. The fund’s size is now ~26,000 crs which is reasonably large.
In terms of their portfolio construct, I am noticing two effects of this large inflows
- Higher Cash Allocation as deployment may be taking time
- Mid & Small cap allocation which used to be 20-30% of the portfolio in the past has dropped to 12% of the portfolio.
Early signs of larger size, leading to slight modification of the strategy are starting to emerge. But the concentration of the portfolio remains intact (at 25-30 stocks). The low churn historically and global exposure at 30% provides some buffer to handle size.
Right now, its early days but I will continue to have a close watch on this.
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
- 31+ years of Market experience covering 3 cycles
- 15+ 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 54% of the portfolio and 15 stocks accounting for ~68% of the portfolio. Overall it has around 42 stocks.
Reasonable AUM size at Rs 5,772 crs implies significant flexibility to manage the portfolio across market caps.
Currently, the portfolio has around 35% in Mid and Small caps vs 28% exposure 6 months back.
Investments were predominantly into sectors which were going through near term pain thereby providing attractive valuations. Some of the positions have already started to play out. The portfolio is positioned for cyclicals and can do extremely well if the economic recovery continues.
Overweight: Pharma, Power, Telecom, Auto, Corporate Lenders, NBFCs
Underweight: Retail Lenders, Consumption, Quality theme, IT
Price to Earnings Ratio: 11.3 (vs 12.6 in previous review)
Price to Book Ratio: 1.6 (vs 1.6 in previous review)
(source: value research)
Valuations are reasonable indicating the value tilt of the portfolio. PE ratio at 11.3 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.
Skin in the Game
As per the data shared by Manoj Nagpal in his linked post here, the AMC board has around Rs 54 crs and Naren has around 52 crs invested in this fund. This is the highest exposure by the ICICI Prudential AMC board and fund manager compared to all other ICICI Prudential Equity Funds.
This provides me with further comfort as even the AMC and the fund manager are betting on this fund. As always, more than what they say, the real clues are always hidden in what they do.
The expense ratio is low at around 0.77% ( 0.62% in Aug-21). While this is slowly creeping up, it is still pretty low and good!
Portfolio Churn is neither too high nor too low at 69%. Given the part tactical nature of the portfolio, I expect this to be around this range.
The fund was launched on 15-Jan-19. So its still a reasonably short time frame to measure the performance.
What was my view before 2 years…
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 review back then:
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 2 years
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. Due to the strong returns since Oct-20, now the fund has started to outperform both in the 3Y time frame and Since inception (15-Jan-2019). This is yet another reminder of why patience is a must when you take part in contrarian funds.
Overall, while the initial few years tested our patience as value style was out of favor, post Oct-20 the fund saw significant turnaround in performance and comfortably outperforms the benchmark by 3% annually since inception (20% for the fund vs 17% for benchmark).
That being said, this fund is not for the fainthearted and will have a significant performance differential with indices in the short term (negative and positive) given the divergent (84% of the portfolio is different from the benchmark – also called by a fancy name “active share”) and concentrated portfolio of beaten-down stocks.
Overall, my original thesis remains intact, and 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 and invest 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, Rs 40,000 every month for the 2nd year, Rs 50,000 every month for the 3rd year and Rs 60,000 every year for the 4th year. Now I intend to do the same over the next year by investing Rs 70,000 a month.
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. Since it involved too many numbers and is slightly complex, I have decided to simplify it going forward. This will make it easy for you do a rough mental math and set the right expectations from your SIP portfolio.
The rough math goes like this,
For my Rs 70,000 SIP, in the next six months, I will add Rs 4.2 lakhs (Rs 70,000 x 6 months) to my current SIP portfolio. But I have already accumulated around ~Rs 33.3 lakhs as on 4-Aug-2022 (Just to make sure the six month review time lines are kept the same). Put together, I will have a portfolio of Rs 37.5 lakhs after next 6 months.
This Rs 37.5 lakhs is like a lumpsum amount going forward as the entire amount is exposed to equity market ups and downs.
Based on historical data, the 6 month 90% probability return range for equities has been anywhere between -20% to +40%. So, you basically, multiply your portfolio value by 0.8x and 1.4x to get the 6 month future expected value range. As simple as that!
Applying this to Rs 37.5 lakhs we get a 6 month outcome range of Rs 30 lakhs to Rs 52 lakhs.
Summing it up,
In the next six months, that is on 04-Feb-2023,
I would expect my portfolio (actual investments of Rs 21.6 lakhs) to be between Rs 30 lakhs to Rs 52 lakhs. Any value within this range would be considered as normal behavior from my portfolio.
That being said, if there is a large market crash (which I obviously can’t predict), then my portfolio can fall much more than this. It is reasonable to expect one or two major crisis events every ten years. (covid crash of 2020 is a good reminder of this)
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 consistently 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.
In fact, over the next 4-5 years, this simple Equity SIP portfolio has a high chance of reaching Rs 1 crore (if we get 12% returns from here).
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 in your lives.
Ok, sentiments aside – the next review will be on Feb-2023.
See you, folks. As always Happy investing!
If you have any feedback (good or bad) you can mail me at email@example.com.
You can also check my articles in FundsIndia blog where I write more regularly – https://www.fundsindia.com/blog/category/mf-research
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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.