Subscriber Update - Nov '21
Welcome to the second issue of Equity Midas Capital’s Subscriber Update.
Q2-IY2021-22 (IY = Investment Year, June to May) was a very critical quarter for Indian companies. After a string of quarters impacted by Covid-19, this was the first quarter where neither the production nor the consumption was hit by the pandemic. The operations and results of the companies were not impacted by lock-downs or supply-chain issues or non-availability of labour. The results declared are a direct reflection of company performance without any external impact.
The last few months were also very eventful for the markets, more so in the Primary Markets. Investment in IPOs seemed to be the quickest way to get rich and then came Paytm, to spoil the party. A lot of money moved from secondary markets to the newly listed IPOs. This can been seen from the FII trade data. Retail participation has been strong in both the primary and secondary markets.
It has also been a quarter where political focus has shifted back to elections and pandemic induced optimism (yes, optimism) has gone through some tempering.
The news about a new Covid variant has caused quick correction in the markets. Nifty 50 has fallen from 18600 to 17000 and according to many experts, this is a warranted healthy correction. Market sentiments have turned sour and so has our recommendations performance.
Sometimes the headline indices do not show the true picture of the market. Large/Mega cap companies have too high a weightage in the indices to show the correct impact on the broader markets. The correction in the broader market (small and mid cap stocks) is deeper than what the index suggests.
This quarter was also very significant for Equity Midas Capital. We launched our third product (Strength of Nifty50, SoN50) for subscription to existing subscribers only. We are also on-track to launch the same portfolio on SmallCase in Jan 2022. More about this portfolio in the “Current Affairs” section below.
Note: We publish these letters every 3 months, in the first week of September, December, March and June. This also allows us to collate & analyse the results published for the previous quarter and include the same here.
Aggregated Performance
Focus continues to perform better than Nifty 200 by over 5.5% while Feast returns are inline with Nifty 500 though down by 1.5%.
Overall, this quarter the benchmark indices (Nifty 200 and Nifty 500) have out-performed the EVM portfolios (Focus & Feast).
Unrealised Returns, As On Nov 30 2021 (before fees & taxes, including dividends)
| PORTFOLIO | NUMBER OF STOCKS | TOTAL RETURNS (%) | BENCHMARK | BENCHMARK RETURNS (%) | AVG HOLDING PERIOD |
|---|---|---|---|---|---|
| FOCUS (LARGE & MID CAP) | 9 | 16.20 | NIFTY 200 | 10.69 | 6 MONTHS |
| FEAST (ALL CAP) | 34 | 9.70 | NIFTY 500 | 11.24 | 6 MONTHS |
The graphs below show the daily performance of Focus and Feast in comparison with their respecting benchmarks, till Nov-30.
Key Observations
- Feast has a larger composition of industrials, cements, metals & chemical companies. Unfortunately these sectors have underperformed this quarter impacting the portfolio performance.
- Large and mid cap stocks continue to out-perform small caps.
- Post results some stocks corrected despite the results being positive. Their performance should improve in this quarter.
- Most of the underperformance can be attributed to companies not meeting expected operational performance.
- June tranche stock have underperformed the portfolio by a huge margin, something surely that we will look in to:
- April Tranche – 23.8%
- May Tranche – 17.95%
- June Tranche – (10.72%)
- Overall the model portfolio performance trend is in-line with the market performance.
Operating Performance Analysis - EVM View
We analyse operating performance against the expectations derived by EVM. In a typical year by Q2, anything above 40% of expected performance is good performance. This year though, with Q1 numbers impacted due to Covid, judging this number is a bit difficult. Different companies were impacted differently.
So to review the performance of the companies we created four quadrants.
Quadrant 1 – Poor Performance (< 30% of expected performance achieved by Q2)
Quadrant 2 – Adequate Performance (30% to 40% of expected performance achieved by Q2)
Quadrant 3 – Good Performance (40%-50% of expected performance achieved by Q2)
Quadrant 4 – Excellent Performance (>50% of expected performance achieved by Q2)
Based on this grouping here is how we see the results:Investor Queries
Q1. Why have the recommendations underperformed the benchmark indices this quarter?
Ans: Yes, this quarter has been a tough one for the recommendations. Aggregate performance of a hypothetical equal-weighted portfolio of Focus recommendations continues to do better than the benchmark though the margin has come down while Feast performance is inline with the benchmarks but lower by about 1.5%. Since Feast started this quarter with over 3% of out-performance, it has lost about 4.5% as compared to the benchmark.
Till mid-October or before the results started coming in, the portfolios were doing very well. Once the results started coming in, companies that did not perform as per the expectations, showed a drop in their market value. Metals make up almost 30% of our portfolio, and these companies are not doing good currently as their prices in the international markets are falling. These cycles can reserve very fast as we have seen earlier.
Let see how the portfolio has performed if we split it by market cap. As you can see in the table below, large & mid caps have delivered 16.2% returns while small caps have only managed 7.4% returns in the first 6 months. If you look at the PE ratios of small caps, the average PE ratio is 12.6. This is much lower as compared to the average PE of large caps, which is very high at 36.
Large caps will need to perform very well to justify this high PE while the expectations from small caps are manageable. If Small caps perform per expectations in the next two quarters, the returns should improve fast.
Q2. Some companies in the portfolio have not generated positive returns since we bought them. Can’t we not sell them?
Ans: EVM is based on the concept of a portfolio and not individual stocks. It has also been tested as a portfolio. The test conditions need to be replicated in real life to expect similar results. Taking a loss mid-way of the holding period or booking profit are not a part of the test conditions. We will hence not recommend selling stocks that have not performed yet. This does not mean that we are confident that these stocks will deliver better returns in the future. It just means that we do not know how they will perform and hence we stick to the model test conditions.
Another aspect of selling a position is the availability of opportunity to invest. We do not have any alternatives to suggest until the model is run next year.
Current Affairs
We continue to work on new portfolio offerings. The concept of EVM (performance against expectations drives the returns) can be applied on various stock groups or on alternative timelines (like quarterly instead of yearly) or even more markets. The flexibility of EVM will help us build more products, but the key lies in testing. We will never launch a product unless we have thoroughly tested it. Remember, “Responsibility First”.
This quarter we have launched one new portfolio for subscription, Strength of Nifty50 (SON50) portfolio. This is a quarterly rebalanced portfolio that includes stock only from the Nifty50 index constituents. Those stocks from the index constituents which have preformed better than the expectations are filtered in the portfolio. The back tests have shown good performance, over 6.5% returns per quarter on average. This portfolio can be considered as an alternative for index investing.
We plan to publish SON50 on SmallCase from Jan 2022. The only problem is that SmallCase will entail an additional burden of almost 24% on the fees. That is because SmallCase charges 20% + GST on the advisor fees. Hence the question/dilemma; is it worth paying 24% extra just to avoid the hassle of buying stocks 1 by 1 thru your broker manually.
Ranking of Stocks
Ranking is turning out to be much more complicated that our initial assessment. The key reason being that the results data availability is spread over one and a half month and that is a long time for the stocks to move. This impacts the returns of the portfolio. We will continue to work since this is one feature almost all subscribers have asked for. Limiting the number of stocks to a certain fixed number helps in easier capital allocation.
Chef's Corner - Are you investing in the markets or companies?
Equity is misunderstood to be the tool to make big money, quickly. This stems from the fact that equities are traded on the markets and markets offer multiple lucrative ways to make money viz. short term bets (position and swing trading), derivatives, high liquidity, easy hop in, hop off, almost zero transaction costs, ability to invest anywhere in the world and many more. The incentive to hold on to your investments for a long term was further lost when long term capital gains tax rate was brought very close to the short term capital gains tax rate.
Equity investments is hence being replaced by market investments or trading. People are trying to make money from markets rather than ownership of companies, which is what equity investments should be.
Equity investments should make money when the underlying company makes more money. This cannot happen in a jiffy. Even the fastest growing companies need years to establish themselves, be profitable and generate wealth for their owners (share holders).
Have said this, to build an strong equity portfolio is critical to generate wealth. I have written a detailed blog on this topic and I suggest all those who want to build wealth using equity should go thru it. Here is the link. Do let me know your thoughts in the comments.
Ashish Arole
Equity Midas Capital
equitymidas.com