Archive for May, 2013

Circle of Competence in Investing

In the world of investments, one is constantly barraged by data, analyses, news, etc., As we saw some issues back most of it is noise, and only few signal. Indeed, the investment world is the most famous one after entertainment with dedicated news channels, newspapers etc.

The management thinker Stephen Covey said that the only way to take on big tasks is to first start within your circle of competence and slowly expand your competence, Most of the time we end up doing the opposite in investing. A civil engineer buys stocks of IT companies without much knowledge of IT companies working, whereas the guy in IT co may be buying the stock of the engineering co because some talking head on TV said it was a good ‘buy’. So the first thing is to look for investment opportunities within your circle of competence, So first gain knowledge of the companies you work for, suppliers , competitors, customers etc.

In the last 4-5 years compared to any other industry FMCG Co’s have given stellar returns, this would have been obvious to any FMCG employee, supplier, stockist etc.; I’m not sure how many used this information. Obviously I’m not asking the FMCG employee to bet his house but buy the co’s share because he is the first one to see the growth that I would be the last one to see.

Normally as they say grass is green on the other side, hence many do not invest in their own co’s but that of others!

The above is the first level of competence, second level is where we as consumers come across great products that we use daily. Let us see some of the products:

Toothpaste and Brush : Colgate, Hindustan Uniliver, P&G

Water Purifiers: Tata, HLL

Kitchenware: Hawkins, Prestige

Appliances: Bajaj Electricals, Whirlpool,

Breakfast: HLL from cookies to bread,

Watches and Jewelry: Titan

Footwear: Bata

School Books, Note Books, Stationery: NAvneet, ITC,

 

This is just before 9 AM!!

We can go through this the entire day Transportation, Food, Medicines, even Holidays!!

The above does not obviously mean that all these are great companies to invest in but they are the starting point for further study, into the company & the environment it operates on.

So there is wealth out there, for many of us though this may be too much work to research and buy, o buy only in your circle of competence and leave the rest to professionals like Mutual Fund managers who scour the market for good investments every day. Some of them have compounded wealth so well that as I wrote previously, if you don’t want to go through this work, it is as easy as fill it shut it forget it to invest and reap rewards from long term investing via equity mutual funds.

Of course you need to comply with your co’s rules on insider trading. We need to distinguish between genuine research and insider trading, Calling your friend and telling him that your co’s board has approved a rescue plan before anyone in markets know it is insider trading, which is what Rajat Gupta is alleged to have done, but doing your homework in analyzing a co whether it is where you work or its product is liked by you or your friends is not insider trading.

 

Comments

Franklin Templeton India PE Ratio Fund

 

“Bull markets are born on pessimism, grown on scepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.” Sir John Marks Templeton

 

The biggest complain that one hears from investors seems to be the past returns have been poor (in the last 5 years) hence prefer the safe FD (never mind that adding inflation and taxes the real return could be negative). Second complaint is that the equity markets are too volatile and risky. Buy low sell high is all ok but how low is low and how high is high?  Not all of us are experts and we have seen that even experts can go wrong ( or usually go wrong 🙂  ) To address these need to buy equity as the valuations go lower and sell as valuation gets higher and keep the rest in bonds is a good way to do this. Let us see one such unique Mutual Fund.

FT India PE Ratio Fund of Fund

What is the idea sirji? Simple enough, markets keep swinging like a pendulum from one end of pessimism and the other end of euphoria, the fund values the market based on Price to earnings ratio (a simple formula to measure how cheap or expensive overall market indices are) and keeps selling equity and buying bonds as markets become costlier and sells bonds and buys equity as they become cheaper. So this first means comparatively lesser risk since at higher prices, stocks are sold and lower prices they are bought. Meanwhile the money in bonds also gets interest income.

The key thing is buying low and selling high, idea professed by all great investors be it Warren Buffett or Sir John Templeton ( this fund is from Franklin Templeton India incidentally) but hard to practice.

How does it work? This is a fund of fund structure i.e. the fund invests in its own Franklin Bluechip Fund (profiled last month in our column) and Templeton India Income Fund (a bond fund). As market keeps becoming costly, equity fund is sold and money moved to bonds, when equity is going down bond fund is sold and equity fund is bought. The allocation between equity and bond fund is given below.

Recognizing that market works in cycles and there is no way to say how high is high or how low is low, the fund lowers or increases exposure but is never fully into equity or into debt.

Why Invest

This fund was started way back in 2003 and would complete 10 years in Oct 2013. Its latest price is 46.29 implying an 18% return over last 9 years, in the same time period BSE SENSEX has delivered 16.35% returns. So an investor has got better returns with comparatively lower risk.  Even in the volatile past of last 5 years the fund has given 7.67% vs. NSE Nifty returns of (–) 0.62%

Costs & Taxation

This is a fund of fund and hence taxed as a non equity fund. So short term gains will be taxed at the marginal rates of the investor and long term gains will be either 10% without indexation or 20% with indexation whichever is lower. Ideally this fund is meant for 5 years + holding time but I would recommend for even longer periods. It makes a good entry point for investors who have not invested in equity or are afraid of the volatility of the markets.  Cost (expense ratio) is a bit high since it is a fund of fund approximately 2.71% per annum however my take is that the advantage of buying low and selling high automatically makes it attractive for me even with the cost.

Risks: Though there is a disclaimer at the bottom, there is no harm in repeating that Mutual funds do not and can not guarantee returns and there is no assurance for either principal or returns, not only that past performance may or may not be repeated in future. However, investing wisely in equity markets remains the corner stone of capitalism, and the only known way to beat inflation. I think it will remain that way.

 

Weighted average PE Ratio of Nifty is Then allocation will be
In this band… Equity% Debt%
Up to 12 90-100 0-10
Above 12 – 16 70-90 10-30′
Above 16 – 20 50-70 30-50
Above 20 -24 30-50 50-70
Above 24 – 28 10-30′ 70-90
Above 28 0-10 90-100

 

Min Investment Amount : Rs 5000. Min Investment Period : 1% Exit load applicable if investment is sold before 1 year, nil after 1 year.

Source:  Scheme Factsheet, Morningstar.in, Valueresearchonline.com

Disclaimer : Mutual Fund investments are subject to market risks, please read scheme related documents carefully.

Author is a Certified Financial Planner based in Chennai.

Comments