Portfolio Analysis - Shailesh

kb_snn · July 28, 2018, 8:16am

I have received multiple questions on my current portfolio in my earlier thread : BULL in BEAR Market - #20 by kb_snn

This thread is in response to that . For regulatory reasons kindly read the following

I AM NOT SEBI AUTHORISED FINANCIAL ADVISOR NOR I INTEND TO BE ONE .

NO ONE IS EXPERT IN MARKET AND MARKET TEACHES US NEW LESSON EVERY YEAR

PL DON"T IMITATE THIS PORTFOLIO IN PART OR FULL . THIS CAN BE DANGEROUS IF READER DOES NOT UNDERSTAND WHY I BOUGHT IT AND WHEN I WILL SELL IT IN PART OR FULL… PLUS MY RISK PROFILE MAY NOT BE SAME AS YOURS .

ANY PORTFOLIO OR STOCK DISCUSSION SHOULD BE USED AS CASE OF LEARNING AND NOT AS RECOMMENDATION

Watch This Video before I get into details on how I construct my portfolio

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STEP 1 : ASSET ALLOCATION FOR YEAR 2018

Primary Objective : Long term survival and compounding

Like every year this year too I have put across a guideline for my portfolio equity / debt asset allocation . My equity portfolio is primarily large cap so I am using NIFTY as benchmark of market mood / behaviour

Equity %	30%	50%	60%	65%	70%	75%	80%	85%	90%
NIFTY LEVEL	15030	14529	13527	12525	11022	10020	8993	8094	6745

What above table means if NIFTY is @ 15000 my equity % in overall portfolio will fall to 30% and if nifty is @ 6800 equity allocation will increase to 90% .

Currently since NIFTY is around 11000 -10000 , my equity allocation is 73% …

Now comes the question why this range … This range is based on past NIFTY behaviour over 25 years.

Can NIFTY go beyond this range in this year – Sure it can but the probabilities are low .

What will I do if NIFTY goes beyond this range ,

Say < 6800 – Under No circumstance pure fixed income will fall below 10% of my portfolio . This MOS in for any black swan period like 1929 - 1948 when market equity market remained undervalued for nearly 20 years … Since such period are often deflationary - I assume fixed income can cover my annual expenses even if companies discontinued dividends …

Similarly if Nifty > 16000 in 2018 - I will retain my equity position at 30% and not reduce it …

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STEP 2 : Portfolio Construct :

Primary AIM : Portfolio Gr > Inflation + 8% -10%

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Current Fixed Income Components

LONG TERM BONDs

Gilt Fund ( currently it is Kotak Gilt Fund )
Perpetual Bond ( Tata Power )
Tax saving bonds ( Multiple companies and with differing maturity profiles )

Since last year I have reduced Gilt fund % and moved into liquid funds . This year most of money is moving into Quasi bonds … More on that later , My Plan is in coming year I want to reduce Gilt funds to zero and shift to attractive Corporate Long term Bonds when available …

LIQUID FUNDS

HDFC Liquid Fund ( Feeder to Long term bonds depending upon interest rate )
ICICI Liquid Fund & Kotak Liquid Fund ( As alternative to cash for re-investment in Equity )

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sambandham82 · July 28, 2018, 3:41pm

I agree that at least 10% must be kept in fixed income due to black swan effect but when Nifty is at 16000 in the year-2018, at current EPS of 402, it will trade at 39 P/E. Even if we assume EPS grows by 20% to 482 by year end, Dec-2018 (5 months from now), it will trade at 33 P/E. At that point in time, even if we assign another 20% forward EPS growth for year-2019, forward EPS will be 578 and it will trade at 28 P/E of 1 year forward earnings in Dec-2018.

Don’t you think you will bring it down to 10% in NIFTY if not 0% ?

kb_snn · July 28, 2018, 5:21pm

P correct me if I am wrong . You are saying I should reduce my equity allocation to less than 30% if Nifty goes > 16000 in Year 2018 .

The answer for the same comes through my Equity construct

10% -15% is Quasi Bond stocks and 20% - 30% is Stable compounders - These will be last to leave or may not exit from my portfolio .

Finally in every bull market there is a small relative bear market -

For example in 2000s when technology stocks were at peak traditional cyclic and some great compounders were in bear market . Similarly in last year bull market - many large caps were in bear market . This gives one always a chance to allocate some amount to Cyclic stocks depending upon sector which is in bear grip .

So I think there is always an opportunity to put atleast 30% of one’s PF in equity .

sambandham82 · July 29, 2018, 2:10am

Thats fine as long as one look at valuation of individual stocks and pick them.

kb_snn · July 29, 2018, 4:06am

You are absolutely right . But it happens all the time —>

In 2005/ 2006 Bull market HUL was at Rs 100 @ historical low PE …
In 2015/ 2016 Bull market many large cap IT stocks were at available at less than 15 PE .
Currently when Nifty is making new highs there are many Mid caps / small caps making 3/5 year lows … without significant damage to their earning profile …

It is all about looking at bear market within bull market …

gagandeep · September 15, 2018, 9:15am

Thank you @kb_snn for generously sharing your PF construct, this is really helpful.

I am trying to construct a Fixed income PF for myself, currently, My PF is 55% equity & 45 Debt%, but in debt, all 45% in liquid funds, so i was looking for better construct.
Hence questions are regarding same, you have mentioned:

Can you please clarify whether the Move from Gilt Bonds towards Quasi Bonds & Corporate Long-term bond is permanent or temporary? How do you decide which one to go for? appreciate if you could elaborate on this.
Can you please elaborate on Quasi Bond stocks with few examples?
What kind of corporate long-term bonds you look for…? for ex: recently Indiabulls(9.2% yield) & TATA CAPITAL FINANCIAL SERVICES NCD (9.1% yield) & Aadhar Housing Finance(9.75% yield)
now how shall one invest in such corporate bonds, I guess it would be the combination of Rating + Yield + secured/unsecured + maturity you look for.

but instead of relying on rating(As Rating could be rigged or bought) do you also cross-check underlying business, for example, recently AA rated IL&FS NCD bonds defaulted.
Could you please share what are the checks one should do before investing in Corporate Bonds.
also, do you favor diversification in corporate bonds or better to concentrate on AAA bonds only?

PS: I have applied for Tata capital finance NCD, simply based on Tata’s trust & decent yield.

kb_snn · September 15, 2018, 12:23pm

As I see you are conservative investor and have 45% in liquid funds . In this context pl check portfolio of your liquid funds . I invest in liquid funds which has > 95% invested in Govt securities … so that I don’t have to take default risk . For example recent ILFS default has hit some liquid funds

Now coming to your questions

Nothing is permanent in this world . One needs to monitor market and adapt investment accordingly . Corporate bonds are tax inefficient and also prone to credit defaults . But tax free bonds issued by PSU can be bought as and when you get opportunity . but limit your investment in tax free bonds to less than 10% of PF ( converting to cash when in needs is not easy and is not tax inefficient )
Quasi bonds stocks - ( < 12 PE )

Regulated utilities with PPA signed and RBI is also part of this … Here you need to focus on utilities with better receivables record . NTPC , Power Grid .

Stocks of mature industries with low growth , high cash generation , zero debt and high dividend - IT services ( like infosys )

On long term corporate bonds I have explained earlier – unless you get them in market at deep discount or your spouse is in low tax bracket it does not make sense

Investor_No_1 · September 17, 2018, 8:18am

Very interesting points and thought process indeed.
Can you pls let me know in your debt part of portfolio what average post tax CAGR you expect (i.e u would be happy to achieve) and what you have got since you started investing in debt parts…thanks

kb_snn · September 17, 2018, 11:56am

The purpose of Fixed income portfolio is to provide dry powder for equity portfolio

Hence here one needs to be focus on credit risk and not return . So I don’t target any return from debt portfolio . I target return @ overall portfolio level.

Also In case of market provides opportunities one needs to break debt funds before 3 years ( even though it may be tax inefficient to do so )

This said last 5 years CAGR post tax for debt is slightly higher than 8% ( pulled up by Gilt funds and pulled down by liquid funds )

shyamutty · October 5, 2018, 3:30am

awaiting your picks in this market

kb_snn · October 5, 2018, 4:41am

This is the time when one adds more to existing portfolio ( as and when the price hits in your comfort zone ) . New ideas are risker to pursue unless you have studied / bought those stocks in past .

One sector where I have very low allocation in financials ( 2% ) - that is what I am trying to study and add more in this cycle .

kb_snn · March 25, 2019, 9:00am

Quasi Bond Portfolio - As I had highlighted last year I started moving my money from debt funds to quasi bond … ( to 10% of Equity PF )

What are Quasi bonds …

Regulated Return Equities like utilities and very high stable cash flow generators with low growth

Why are they good option vis a vis debt funds …

When market are mis pricing these stocks , they often quote at single digit PE ie near 10% earning yield + this yield is growing @ 1% to 12% every year … This is far superior to debt returns which are flat at 6% -7% with zero growth

Lets take some of regulated utilities

NTPC - > 4 layer moat

Sales Moat : Assured PPA from Discoms unlike private players who are not sure if power take off will happen or not
RM Moat - Captive Mines + Coal India relative preference in allocation create RM moat for most operation
Financial Cost Moat - Access to cheaper finance - Public tax saving bonds ( < 8% interest rate ) and normal bonds too get better rates vis a vis other power generation companies who may have significantly higher rate ( e.g tata power perpetual bonds were at near 11% interest rate )
Scale Moat in capex - Most renewable firms have quoted very low capex rates/ final power cost per MW for NTPC projects … which will in turn help NTPC retain lowest cost producer tag for long time to come …

Now CERC has allowed NTPC to have regulated ROE of 15.5% till 2024 ++ lot of projects are getting capitalized in next few years assuring growth in revenues and profits …

NTPC hence qualifies for good debt substitution - It hence has been included in my Fixed income pf .

With near similar logic and with higher Mks is Power Grid . That too was added to my Quasi bond pf …

I will track this portion vis a vis debt fund performance over next 3 years …

In Equity Portion

Core Position : Limited / zero sales over next 3-5 years period - Reset for next 5 years is complete …

I have created 5 Core sector position – FMCG , IT , Consumer facing Energy , Pharma , Financial services ( pure services non lending companies) – each with 10% -15% allocation - Overall Equity pf allocation of 65%

Overall CORE sector position has PE of 21 , ROCE > 24% , Sales Gr of 13.5% , Near zero debt , Dividend Yield 2.1%

Opportunities Pf in progress - 26% of Equity PF

Opportunities Large cap : Telecom , Auto

Opportunities small cap : Consumer discretionaries esp in travel entertainment & hospitality , Real estate, Shipping companies

Opportunities Pf is value oriented PF … Focus is for < 5 years and may exit if valuation reaches target level.

Current Opportunities PF ratios : P/B < 1.4 , P/S < 1.4 , PE < 18 , Sales Gr > 12% , ROCE > 15% , Debt equity < 1 Price == > near 3 year/ 5 year low

Overall Asset Allocation 2019
Pure Debt funds + liquid funds > 18% of overall PF
Equity Allocation : 77% ( incl quasi bond )
Real estate & others < 5%

sahilverman · July 23, 2019, 1:39pm

Hi sir,

Can you please tell us a bit more about how you derive the different nifty levels for each decile of equity allocation?

kb_snn · July 24, 2019, 9:20am

This is based on historical data - I use my own valuation algo to compute what should be right allocation every year .

But this is relevant only if you invest majorly in large caps - like in my case 75% of equity is in large cap

Simplified version of same in available in public domain . though I don’t know the author of the same . You can use this as guide …

You can use this as guide

kb_snn · June 8, 2020, 7:30am

March to May 2020 has been good time to realign Portfolio …

But sudden movement in May to June 2020 has upset my asset allocation - Need to sell equity to take debt/ fixed income allocation up …

Interesting days ahead … Hope to see bumpy but rewarding July - Oct 2020 period too

nikhildoshi · May 27, 2021, 11:37am

Hi,

Can you provide your latest PF update?

How do you handle this hugh jump in market post Covid?

How do you judge impact of 2nd covid wave / lockdown going forward?

Do you believe market will see relative contractions or we can expect jump similar to last year?

kb_snn · May 28, 2021, 3:42am

Equity allocation ( > 83% ) - not because of new addition from debt to equity , but because of sudden rise in equity valuation

One shift which I did in last few months is move money from over valued sectors to NV 20 ETF

This is both in direction

To simplify my portfolio for others to manage ( esp COVID has increased life uncertainty) , plus
On account. of taxation change esp tax on dividends

Moderate Inflation is good for asset heavy business

kb_snn · March 6, 2022, 7:50am

As stated in past Equity allocation accounts for >80% of my portfolio - now it is around 85% ( including Quasi Bond stocks stated in my earlier posts )

It has been ten years since I have followed SCODE APP scoring for my buy , sell and stock position limit

A small evaluation of the same as follows - What went right and what went wrong …

First Overall Result …

While it seems impressive it hides the fact that I have been made many mistakes , while most mistakes happened when I overrode the Software advise because of my gut feel , and some were also because of software logic , which I have since corrected post 2018 …

Any way lets look where I have been wrong first on commission ie taking wrong position which has pulled down my performance

Financial Sector : Never go for Cheap stocks esp in lending : Corporation bank was Mega failure . I had negative alpha of 25% in this stock over index after holding it for 5 years . Even if you take position in cheap lending stock … pl trade in and out and profit on volatility . Here I realised my software was not right for financial ( esp lending ) stocks , I had to alter my logic a bit
FMCG : ITC - I had been sentimental on this as I had made my first big money on this stock and so even my software told me to exit 100% in 2014 , I still kept 25% of initial holding - this contributed to decent underperformance ( 12% negative alpha ) over 10 years to my portfolio.
HealthCare : Lupin - Though I entered this stock in 2017/18 after its two major correction - I underestimated problems they were in … Here again software advised to me exit multiple times … but I kept delaying the inevitable … This has been drag ( -17% alpha over last 5 years )
Telecom sector - Bharati + Idea - I entered these stocks in 2014 and exited in 2018 with losses - the negative alpha was 50% over 5 years ) -
Shipping : GE shipping : I had entered at right valuation , but triggers that I had expected to unravel has taken time - last 5 years negative 13 % )
Mid cap stocks because of overconfidence in stocks post interacting with Management at AGMs ( One reason I have stopped attending AGMs now ) - BYKE , UFO movies , Tawalkar - mega losses > 70% negative alpha over 3/5 years of holding before exiting them … )

There are multiple errors on Omission - but then I will skip them as I have no way to accurately value opportunity cost . But I have brought lot of changes in my software logic post 2018 to minimise the same …

But for readers I will like highlight a few

Never exit stock because stock has gone by 5X if you see structural shifts in industry / business and if you are not sure of these shifts are structural shifts read competitors commentary …
If you decide to exit , don’t exit 100% when a major event has or is going to happen like CEO change , Regulatory shifts . Legal verdict etc … The good company definitely plans for adversity …
Narrative and numbers should match .: If they don’t investigate more before any action BUY or SELL

Mudit.Kushalvardhan · May 3, 2022, 5:26pm

This guy is not J. collin. its a look alike acting in a movie.
Its surprising to see his reference of J.L Collins in your post, as you must be aware, JL Collins is absolutely against stock picking and follows John Bogle completely. what is your take on Index Investing vis a vis Stock picking? I am aware about the standard answers about how much time you have for portfolio monitoring and studying businesses etc…But disregarding these factors and considering the very long term period with Mean reversion at play as well as Randomness at play, how much worthwhile is that activity as per you?

kb_snn · May 4, 2022, 6:08am

Pl be polite when asking anyone for their views …

Index investing

I have good exposure to Index ETF ( NV 20 and Midcap 150 ) and Tata Investment in my PF . The reason why they are present in my portfolio

Arbitrage between two same Index ETF offered by two houses because of liquidity …
High discount to NAV esp in Tata Investment
Low expense Ratio in all three