Some concerns have been raised post publication of ValuePickr Scorecard 5. Thanks a lot for bringing these on - Life has been too easy for ValuePickrs:-). Better wake up to some real risks.
My thoughts below on the common concerns identified so far. Views are invited so we can all refine our thought process - and be more prepared - for maybe some uncharted waters in coming times.
Disc: My investments are majorly in VP Portfolio. My views are biased.
#1. Too much of Pharma. What about sectoral risks -should something go wrong? @Ashwini Damani
Depends a lot on one's temperament. One can adopt a broad 10% allocation across the spectrum of 10 VP stocks - that will leave one with 30% allocation (Ajanta/Shilpa/Alembic) to Pharma - Don't think this should attract much criticism as being too aggressive a call.
Those looking to make a tactical call on Pharma sector tailwinds and our own (daresay solid :-)) homework on the individual business prospects might seek higher concentration.
There is that stricter USFDA headwind - but does that affect everyone of our businesses equally? Have we done that due diligence. Alembic does carry that risk - but do read the Management Q&A - about how much stress is on ensuring compliance. Personally I am invested. Those not comfortable on this count may skip Alembic altogether or reduce allocations, drastically if they like.
#2. Mostly Exports focused Portfolio. What if there's a 10-15% currency reversal? Is there any thought process on that?
@ Ravikumar Bhoopal
This is a very valid observation. Though I can assure everyone the Forex-kicker x-factor in selections was deliberate only from late 2012 or so. We stand by our tactical call on exports-focused business tailwinds supporting superior earnings growth. At the same time we have 3 mostly domestic-focused businesses (if any they have a reverse impact) - Astral Poly, Kaveri Seeds, Atul Auto.
So yes, we are happy to have that decisive tilt in the Portfolio - which does not take anything away from the robustness/medium-term durability of competitive advantage of these businesses. A 10-15% currency reversal might slow down the earnings momentum a bit - but all still good for 20-25% CAGR earnings growth over next 2-3 years.
#3. Have downsides been considered for a Portfolio stacked only with small caps? What impact will be there on such a portfolio in the event of an economic downturn of the scale of 2008?
@ Anant Jain
This is again a very pertinent observation. What happens when there is a secular fall for months on an end. Will our (quality) small caps be spared the hammering? I have often thought about this. Some counter-observations from my side
a) We have seen this Market fall to 15000-16000-17000 levels too in the not too distant past since the 21000 high of Diwali 2010. At the same time our quality businesses that continued to demonstrate superior earnings growth - continued to be rewarded by Mr Market - the stocks have moved into stronger hands - ensuring higher highs - almost defying the (then) bear market
b) Since then the Portfolio has also matured. None of the businesses are in undiscovered territory - except may be an Avanti Feeds to an extent - but that's also going to be 1000+Cr Sales business this year.
c) In tune with market uncertainty, there may be a 20-30% volatility expected depending on poll outcome/fed tapering/other unforeseen events. That is something anyone focused on building capital over next 2-3-5 years should easily take in his stride. I certainly do. I also keep 20% CASH handy to take advantage to accumulate my favourite toys.
d) For a big secular fall to happen over months - first the market has to reach a frenzy - before that kind of a crash takes place that crushes everything in sight. Small caps seemed to be reaching that kind of frenzy just about a month back - but not the overall market. I am in favour of staying more or less fully invested till the fist signs of that big frenzy. We have models for detecting that)- and for staging calibrated exits - built post my inability to get out in 2008!
Yes, we must be exiting our small-cap businesses almost completely - once that stage of a bull market is reached. But we are far from that happy situation right now perhaps?
#4. What about measuring Portfolio Risks? The drops from the peaks? What about measuring Risk-Adjusted Returns?
Valid Points. Except for an Indag Rubber I do not recall any of our stocks dropping decisively below peaks. Most stocks have continued to consolidate past earlier peaks in last 3 years. That itself is an indication perhaps of low risks for VP Portfolio.
But not for nothing we have our resident number/portfolio cruncher Rudra Shankar Chowdhury :-). Think he may like to take this up in a formal way to measure and document Portfolio Risk (Standard deviation, and the like) and Portfolio Risk-Adjusted Returns (Sharpe Ratio, and the like) that can attempt to measure excess return(or risk premium) per deviation or unit of measured risk.