Just as a balanced diet, well-suited to your age and your specific health circumstance, is important for a healthy and happy life, maintaining a balanced financial portfolio is critical for a secure and contented financial future.
To draw upon this metaphor of a balanced diet, various food items provide us with different nutrients, each of which is important to meet a particular and unique requirement – for instance, carbohydrates provides the energy to perform the body’s most basic functions such as physical activity, brain function, operation of organs, while fats (lipids) operate as store-houses of energy for a ‘rainy day’, maintaining our body temperature amongst other things and Proteins play a vital role in regulation of metabolism, provide structure and strength to cells and tissues and stimulate growth. Similarly, various financial instruments play different roles in a financial portfolio – while bank accounts provide immediate liquidity, equities offer wealth creation, debt funds offer wealth preservation, market linked debentures offer non-linear returns uncorrelated to conventional markets – each product serves an unique purpose and just as in the case of food, excesses and deficits can throw a perfectly well-meaning financial plan completely off gear.
A suitable financial portfolio – just like a balanced diet – will change depending upon the age, financial circumstances (net-worth, cash flow requirements, changing goals) and market environment and hence, a portfolio suited for a young, professional seeking to set up his own business in the years to come would vary significantly from that of a middle-aged established businessman seeking to build a legacy for his future generations.
In building a financial portfolio, arriving at a suitable asset allocation is the basic building block followed by the overlay of product selection – this assumes additional significance in the context of the vast universe of products available and the significant contrast in performance of products even within the same product category.
While most models/ methodologies currently in vogue hinge significantly on past performance, such history-based quantitative models lack predictive power and hence, are hardly efficient tools for fund selection. Our experience in the mutual funds product class suggests that qualitative factors offer deeper insights into a product’s suitability for a particular market cycle vis-à-vis hindsighting.
The investor of today does not profit from yesterday’s growth. If past history was all there was to the game, the richest people would be librarians – Warren Buffet
Specifically, amongst several factors that we track, a stable fund positioning, disciplined investment style & strategy and extent of translation of the fund manager’s conviction into the portfolio are most critical factors to be monitored. Given the dependence on qualitative factors, our due diligence process involves multiple conversations with the fund management team. This is a continuous process and forms a key input for on-going fund review and ongoing suitability assessments.
We do not have a bias for any strategy – rather, our endeavor is to match strategies with the environment. In our selection process, quantitative factors also find a place – although these are not simply periodic return-oriented, we prefer tracking a diverse set of parameters including return performance across cycles, relative volatility, stability of corpus, turnover, expenses etc.
On non-conventional products, we focus on the sharpness of the product positioning, relevance of the theme to the environment, the governance structure in terms of the advisory board, the investment team, relevant track record of the fund management team and the fund’s terms (tenure, fees, drawdowns, investment period etc.). For products with past track record, attribution of returns to the stated / indicated strategy and other tactical strategies as well as the suitability of a particular model to the evolving environment are some key factors that are assessed. Issuer credit ratings, liquidity, tenors, structure profile and profile of the underlying reference asset are parameters assessed for alternative fixed income products.
Performance Track Record
• Over a ‘rough’ 4-year period, we have been mostly able to spot the ‘cherries’ and avoid the ‘lemons’ • Market-linked debentures have delivered returns of 14 – 22% CAGR across 1 – 3 yrs. • Tax-free bonds – holding period IRR of 10-11% post-tax over a 2- 3 years • Early identification of equity ideas ( several mid-small and microcap as well as large-midcap funds, select PMS ) • Consciously avoided opaque products, with weak investment and regulatory support despite their apparently high return potential in the near term and wide appeal with the investor community. • Sharply positioned AIFs in themes ahead of the larger investor and product community ( for instance IT-enabled services / market place software companies in late 2012) • Real estate NCD oriented PMS in 2012-13 that has returned substantial capital back to the investors (IRR of ~22%)
Source : Fund performance – Accor ACE MF software, Exchanges, Product provider.
Benchmark – BSE 200 & Crisil Compbex equiweighted.
Excluding PE/RE performance