Portfolio Management 1:01
Presentation at IIM, Calicut
ENAM Securities
13 August 2004
1
Some Key Concepts
 Approaches to Portfolio Construction
 Top Down v/s Bottom Up
 Value v/s Growth
 Think of Cycles… nothing is linear
 Client Requirements
 Match Needs, Requirements and Abilities
 Risk
 Use Math & Computing as tools
 Make Bets Explicit
 Why are you diversifying?
 Your OWN Portfolio?
ENAM Securities
August 2004
2
Elements of Portfolio Construction
Top Down
Growth
Value
Momentum
Bottom Up
ENAM Securities
August 2004
3
Decomposing Approaches
Top Down
Asset Class
•
•
•
•
•
Equities
Bonds
Currencies
Property
Commodities
– Oil
– Precious metals
– Natural Resources
Country
•
•
•
Developed Markets
Emerging Markets
Regional markets
ENAM Securities
Sector
•
•
•
•
•
•
FMCG
Pharma
Services
TMT
Manufacturing
Cyclicals
August 2004
4
Decomposing Approaches
Bottom Up
•
•
•
•
Value
•
•
•
Dividend Yield
Price/BV
Replacement Cost
Volume
Price
Efficiency:
– Costs
– Assets
Restructuring
GARP
•
•
•
•
Payback
EV/EBIDTA
P/E
DCF
ENAM Securities
Momentum
•
•
•
•
Technical Charts
Reflexivity
PE/G
Option Value
August 2004
5
Some Lessons from History
 Japan V/s UK in 1944
 Korea V/s India in 1950
 Singapore!
 Hero Honda V/s Kinetic Honda
 Bharti V/s IDEA
 Infosys V/s HCL
 HDFC Bank V/s SBI
There is NO trade-off between Top- Down and Bottom up
ENAM Securities
August 2004
6
Think of Cycles!
Nature is cyclical, not linear!
 Life Cycles
 Business Cycles / Boom-Bust
 Seasonality
 Innovation / Schumpeter
 Market Cycles
ENAM Securities
August 2004
7
Valuation Approaches
Value
Growth
Momentum
•
Illiquid
•
Institutional Favorites
•
Max Volume
•
Misunderstood
•
UVG Stories
•
News Flow
•
Hated/Uncovered
•
Imagine it!
•
Volatile
•
Appraised value
•
DCF or Option value
•
Technicals
In Reality, there is no distinction. Growth and Momentum are
LongTerm/Short Term Value catalysts
ENAM Securities
August 2004
8
OUR VALUATION “SCREEN”
COMPANY
Agrevo India
Cyanamid Agro
Mons anto
Novartis
As ahi India
Dens o India
Engine Valves
I P Rings
India Nippon
Kalyani Brakes
M ICO
Munjal Showa
Pricol
S undram Fas teners
Bajaj Auto
Hero Honda
Punjab Tractors
TELCO
TVS Suzuki
Archies
Baus h & Lomb
Birla 3M
Cadbury
Castrol
Colgate-Palmolive
Dabur
Hind Lever
Indian Shaving
International Bes tfoods
ITC
Kodak
Marico
Nestle
Proctor & Gamble
Reckitt & Colman
SKB ConsHCare
Britannia
ABB
Atlas Copco
Carrier Aircon
Chicago Pneumatic
Cummins
Elgi Equipment
Esab
Grindwell Norton
Hindus tan Powerplus
Honda S iel Power
Ingersoll-Rand
Kvaerner Cons truction
OTIS Elevator
Revathi- C P
S andvik As ia
Siemens
Swaraj Engines
Wartsila NSD
Widia
Colour Chem
Goodlas s Nerolac
ICI India
India Gyps um
M adras Cements
MRF
Albright W ils on
Asian Paints
BASF India
Centak Chemicals
MKTVAL
751
210
265
ROCE
38%
44%
52%
RONW
35%
32%
35%
CALC S ales /
RONW CapEmp
36%
2.6
28%
2.4
34%
3.2
S ALE/
BLOCK
4.0
21.2
9.0
WCAP/ S ALE/E
OPM
PAT+D
Q
% 94
1.8
24
#####
1.4
20
17%
0.9
40
12%
OPM OPM% OPM% OPM% OPM%
% 95
96
97
98
99
15%
13%
15%
16%
0%
20%
19%
18%
18%
0%
19%
15%
14%
17%
0%
OPR
MOM
95/94
#DIV/0!
21%
168%
OPR
MOM
96/95
36%
5%
-1%
OPR
MOM
97/96
30%
7%
13%
OPR
MOM
98/97
22%
-37%
41%
EXP
MOM
99/98
22%
10%
25%
2942
198
89
94
46
132
121
35%
16%
14%
17%
14%
49%
12%
23%
18%
11%
14%
11%
31%
14%
24%
10%
9%
11%
9%
40%
6%
2.6
1.3
2.2
1.1
0.7
2.2
1.4
3.8
1.2
1.8
1.3
0.7
4.6
1.5
0.8
1.7
-2.2
1.8
0.9
0.0
1.2
21
33
7
16
4
14
10
16%
23%
12%
21%
36%
20%
2%
12%
20%
12%
22%
40%
19%
8%
13%
22%
13%
22%
35%
18%
12%
14%
25%
14%
22%
39%
24%
12%
16%
25%
9%
19%
28%
24%
12%
0%
0%
0%
0%
0%
29%
0%
-17%
26%
57%
24%
98%
41%
679%
-26%
69%
59%
8%
24%
49%
86%
20%
85%
21%
25%
24%
83%
-3%
28%
2%
-28%
-6%
-44%
11%
3%
40%
-15%
-25%
-15%
-30%
20%
-39%
1433
167
110
493
29%
41%
17%
20%
20%
30%
16%
20%
26%
29%
12%
15%
3.2
2.6
1.1
1.2
1.2
2.8
1.3
1.4
-0.2
0.1
1.4
2.0
31
16
22
28
22%
16%
17%
16%
23%
17%
20%
20%
24%
18%
18%
21%
21%
17%
22%
21%
22%
18%
15%
20%
19%
0%
0%
0%
30%
53%
65%
76%
33%
43%
20%
33%
14%
8%
46%
13%
20%
34%
2%
-11%
-13%
15%
-15%
-5%
6467
29%
22%
20%
1.3
1.9
-1.5
25
24%
27%
27%
27%
28%
0%
51%
31%
18%
5%
12%
3368
41%
34%
33%
4.0
4.0
-0.4
29
9%
9%
9%
11%
12%
0%
36%
29%
49%
59%
2668
52%
39%
34%
3.2
4.1
-0.2
39
13%
13%
15%
16%
18%
0%
36%
38%
44%
45%
35%
6891
11%
9%
3%
1.1
1.6
1.7
25
12%
15%
16%
16%
13%
0%
85%
47%
33%
-42%
-33%
1238
306
251
341
1401
42%
55%
15%
13%
22%
38%
38%
11%
11%
14%
41%
44%
10%
6%
18%
3.6
2.6
1.1
1.4
2.2
4.3
5.0
1.7
3.5
2.0
-0.5
-0.4
0.8
4.4
-0.3
45
19
3
9
18
12%
5%
-9%
8%
7%
12%
9%
0%
9%
15%
12%
13%
11%
11%
15%
13%
12%
12%
9%
14%
14%
16%
17%
10%
14%
0%
29%
0%
0%
18%
51%
166%
-105%
74%
142%
53%
101%
5213%
110%
28%
41%
22%
48%
-5%
14%
37%
81%
75%
42%
11%
15%
85%
35%
20%
29%
5033
50%
40%
40%
2.1
5.2
0.9
15
20%
25%
24%
21%
25%
26%
62%
27%
3%
29%
5%
2385
1875
50%
17%
28%
20%
33%
11%
3.9
1.9
4.3
3.7
-0.1
2.4
7
29
22%
#####
20%
14%
20%
14%
17%
12%
15%
11%
0%
0%
7%
#DIV/0!
20%
36%
0%
10%
-7%
5%
-35%
6%
49260
1934
161
64%
23%
-2%
47%
29%
-2%
55%
22%
-2%
5.4
1.9
2.0
9.4
1.9
7.1
-1.0
0.1
2.2
44
17
12
13%
-5%
2%
11%
18%
6%
11%
21%
-1%
11%
20%
5%
12%
18%
0%
16%
23%
0%
25%
-615%
323%
14%
43%
-117%
17%
33%
-868%
31%
29%
-101%
34%
31%
200%
22969
261
823
32%
12%
45%
31%
4%
33%
29%
9%
36%
1.1
3.3
4.9
2.4
10.2
7.3
0.3
7.2
0.1
13
69
34
20%
-1%
9%
21%
0%
10%
24%
5%
11%
27%
5%
9%
32%
5%
10%
0%
5%
0%
8%
-103%
27%
11%
27125%
38%
38%
47%
-2%
26%
42%
28%
20%
-3%
16%
5074
36%
38%
44%
3.0
2.8
0.3
16
13%
12%
12%
12%
15%
16%
12%
47%
14%
56%
4%
1961
30%
24%
23%
2.0
1.8
-1.4
18
5%
15%
17%
21%
21%
0%
217%
49%
30%
13%
22%
1234
39%
24%
31%
3.3
3.5
0.7
13
16%
17%
16%
12%
14%
14%
24%
17%
-16%
46%
-2%
2791
2698
56%
22%
35%
24%
44%
17%
2.7
3.8
5.7
4.8
0.1
-1.6
13
45
22%
7%
22%
7%
21%
6%
20%
6%
20%
7%
25%
0%
30%
19%
23%
2%
32%
13%
14%
40%
22%
27%
1405
101
491
54
13%
28%
41%
17%
8%
28%
33%
13%
11%
21%
29%
12%
2.0
2.2
3.3
1.5
3.1
4.0
5.7
2.2
2.5
2.5
0.8
3.4
22
18
12
14
15%
20%
13%
11%
15%
17%
16%
13%
13%
16%
16%
17%
13%
13%
15%
17%
10%
14%
14%
15%
7%
0%
0%
0%
37%
0%
110%
69%
28%
19%
85%
59%
26%
14%
17%
14%
-26%
-6%
19%
-22%
-32%
-30%
16%
5%
1381
135
145
146
143
177
31%
15%
25%
20%
16%
34%
23%
9%
20%
13%
10%
29%
21%
10%
19%
13%
10%
24%
1.9
1.1
2.3
1.3
1.5
1.9
2.4
1.6
3.3
1.6
4.6
2.3
1.9
1.8
-0.4
1.5
6.7
1.3
19
35
10
12
5
14
21%
13%
14%
16%
3%
16%
20%
14%
13%
17%
16%
19%
20%
13%
15%
16%
13%
18%
19%
17%
15%
18%
13%
21%
19%
19%
13%
18%
13%
21%
0%
0%
0%
0%
0%
0%
29%
34%
-8%
31%
784%
56%
17%
24%
34%
21%
76%
25%
16%
28%
7%
36%
45%
35%
-7%
-13%
-6%
2%
-13%
-4%
-15%
-5%
-20%
-10%
-30%
-5%
1602
182
423
131
219
1029
351
325
317
362
295
977
55
931
47%
17%
44%
51%
19%
9%
35%
18%
38%
16%
29%
23%
27%
14%
29%
11%
27%
37%
-5%
-31%
42%
14%
32%
7%
20%
20%
24%
11%
32%
14%
36%
35%
16%
-16%
33%
15%
30%
11%
23%
18%
19%
8%
2.3
5.0
3.6
1.7
2.3
2.7
1.9
2.1
1.4
1.8
2.4
1.7
2.0
0.6
4.9
7.2
3.4
6.6
1.9
2.1
2.2
4.7
1.8
2.3
7.4
1.8
2.4
0.6
1.4
4.2
-1.4
1.3
2.0
-6.2
-0.3
3.7
1.8
3.2
1.4
0.4
1.2
0.1
13
85
23
15
8
37
20
18
17
30
27
16
3
41
22%
9%
10%
21%
29%
12%
15%
11%
24%
#####
11%
#####
#####
23%
20%
9%
15%
23%
33%
8%
16%
12%
24%
#####
12%
#####
18%
31%
18%
8%
14%
24%
31%
14%
19%
14%
26%
15%
13%
14%
17%
35%
20%
5%
15%
25%
23%
7%
19%
13%
27%
18%
13%
16%
17%
33%
22%
3%
15%
31%
14%
8%
20%
11%
31%
12%
13%
16%
16%
32%
0%
8%
16%
0%
6%
0%
0%
13%
0%
0%
0%
0%
0%
0%
-4%
60%
73%
10%
58%
-16%
55%
116%
1%
#DIV/0!
39%
#DIV/0!
#DIV/0!
68%
13%
16%
51%
27%
35%
132%
47%
91%
48%
#DIV/0!
23%
#DIV/0!
36%
48%
32%
-23%
21%
15%
-14%
-50%
42%
41%
44%
28%
25%
23%
9%
2%
42%
-52%
14%
44%
-45%
0%
22%
-48%
25%
-24%
8%
16%
5%
12%
20%
184%
12%
35%
-53%
12%
50%
18%
8%
7%
-7%
7%
25%
20%
1388
97
28%
24%
28%
21%
30%
21%
2.2
1.6
2.2
3.2
1.5
1.8
421
26
11%
13%
11%
16%
12%
16%
14%
16%
18%
17%
0%
18%
31%
56%
50%
18%
25%
9%
34%
8%
5%
7%
1134
575
80
26%
12%
33%
22%
10%
33%
22%
6%
26%
1.9
0.9
0.7
2.7
1.1
1.2
0.7
2.2
0.1
20
11
4
15%
20%
52%
17%
19%
54%
14%
18%
39%
17%
21%
48%
16%
20%
56%
0%
0%
0%
52%
9%
31%
14%
12%
-18%
20%
32%
21%
4%
4%
52%
5%
7%
10%
ENAM Securities
August 2004
35%
9
VALUATION BENCHMARKS
P/E 2001
CONSUMER
PEG
I
AC T
SERVICES
PEG
I
AC T
PHARMA/AGRO
PEG
I
AC T
<8
HDFC
0.4
18
8
Astra IDL
<12
Marico
0.4
23
0.4
17
9
10
<18
Cas trol
Skb Cons umer
Kodak
3.6
3.0
1.0
55
23
12
18
19
19
Proctor & Gamble
2.4
25
22
Archies
0.6
37
17
CRISIL
0.6
21
19
Navneet
1.1
24
23
Monsanto Chemicals
0.3
33
11
Knoll Pharma
0.8
22
15
Burroughs Wellcome
0.6
17
15
Glenmark Pharma
0.5
16
16
Agrevo
German Remedies
1.0
0.8
28
21
17
17
Rhone Poulenc
Wyeth-Lederle
Abbott Labs
E Merck
1.3
0.7
0.6
1.4
23
21
17
25
18
19
19
19
Parke Davis
Novartis
2.4
0.7
25
24
23
24
Smithkline Pharma
0.8
14
26
Pfizer
1.0
28
27
Hoechs t Marion
0.6
25
30
Glaxo
2.1
17
33
Cipla
Dr. Reddys
1.5
0.9
21
16
42
48
AUTO/ANCC
PEG
I
AC T
Bajaj Auto
India Nippon
1.0
0.3
18
21
8
8
TVS Suzuki
0.4
16
8
Swaraj Engines
0.5
31
9
Punjab Tractors
0.6
25
10
MICO
0.3
13
11
Sundram Fastener
0.5
16
12
Hero Honda
0.5
27
15
-0.1
15
27
<24
<30
Cadbury
0.7
23
26
Nes tle
1.2
31
26
Colgate-Palmolive
0.7
19
29
Reckitt & Colman
1.8
18
Britannia
0.8
0.5
23
30
Dabur
23
30
Nirma
0.4
26
33
29
TELCO
<40
NIIT
Hindus tan Lever
1.5
45
46
0.8
33
35
0.6
-85.1
20
16
41
41
Geometrix
0.6
29
50
Subex Systems
Sonata Software
Polaris
Satyam Comp
0.3
1.0
2.6
0.8
26
43
63
67
84
88
TV18
4.7
16
111
BFL Software
Vis ualSoft
Digital
Hughes Software
Infos ys Tech
HCL Technologies
0.9
1.5
2.4
2.1
1.7
3.9
29
36
19
34
40
17
100
119
122
127
134
143
Aptech
Thomas Cook
<50
Birla 3M
1.3
17
50
>50
Indian Shaving
4.8
23
121
ENAM Securities
August 2004
10
Think Client Management
 WHO is the CLIENT?
 WHAT does he want from you?
 HOW are you shaping his expectations & mindset?
 WHY should he stick to you?
“Most clients would rather have their fund manager fail
conventionally than succeed unconventionally.”
— Marc Faber
ENAM Securities
August 2004
11
CHANGING NEEDS OVER A LIFETIME
12
10
Equity/Bonds
Property
Income
8
Art/Misc
Own Business
6
House
4
Durables
2
Daily Exps
0
BANK/FD
Mutual Fund
ENAM Securities
Pvt. Advisor
August 2004
12
KYC and Thyself!
Relative
Asset Allocation
Pvt. Banks / Pension Funds /
Macro Funds/ Fund of Funds
Country Allocation
Regional Funds
Sector Allocation
Country Funds/ Mutual Funds
Large Cap
Small
Cap
Absolute
ENAM Securities
HNW / PMS / Absolute Return
Funds/ “Hedge” Funds
August 2004
13
Key Success Factors
Pvt. Bankers / Pension Funds / Macro Funds
• Institutional Marketing
• Deployment of Large Pools
• Capital Preservation
Regional Funds
• Marketing Scale & Scope
• Economist
Country Funds
• Fund Manager
• Technician
Absolute
Return
Funds
BCA GLOBAL
BCA EMG MKTS
BCA CHINA
INDIA FUNDS
• Stock Picker
ENAM Securities
August 2004
14
Risk Mitigation
 Formulas / Computers are tools, not cast in stone
 Sterling Crisis
 LTCM
 Markets discount the rate of change ; most metrics measure history
 Understand logic of EMT, CAPM and Beta; do not be bound by it.
“Risk is something I manage between my ears.”
— Warren Buffett
ENAM Securities
August 2004
15
Make Explicit Bets
 Asset / Sector / Class
 Use Computing to make interrelations and risk explicit; scenario modelling
 Catalyst
 Reflation ; Upgrading Debt Rating ; Margins…
 Valuation
 Payback, DCF, etc
→ What will make you change your mind?
→Your weightage should not be led by overconfidence !
ENAM Securities
August 2004
16
IDEAL PORTFOLIO
PBTx
FMCG
SERVICES
PHARMA AGRO
Zee
l. edge
<5
marico
MISC
POWER
Essel
Goodlas
75%
ENGG
Traf. Hse
S.Honda
Revthi
G.Norton
TVS
E Valve
IP Ring
Wartsila
A Copco
Esab
Bajaj
P Trac
MICO
Denso
Honda
Telco
S Fstnr
VSNL
CRISIL
German
Knoll
<15
ITC
SKB-CH
T. Info
WIPRO
Pfizer
Wyeth
HPP
Cummins
Carrier
OTIS
<18
P&G
Castrol
Ind Hotl
WIH
Ranbaxy
SKB-P
ABB
Ingersoll
RCI/Cad
HLL/ISPL
Nestle
Infosys
T Cook
Glaxo
HMR
<11
>18
AgrEvo
Cynmde
Novartis
Foseco
A Paints
ANCC
I.Nippon
Munjal
Rhone
Astra
<9
AUTO
Nalco
Hoganas
ENAM Securities
August 2004
17
Decompose | Decompose | Decompose
Sectors
Large Cap
Medium Cap
Small Cap
Total
FMCG
Pharma
Banks
IT
Telecom
Media
Engg
Autos
Commodities
Total
ENAM Securities
August 2004
18
Decompose | THEN | Consolidate
 A good investor is a good businessman and vice versa
Aggregate Portfolio Metrics
Sales
OPIDT
PAT
DIV
NW
Debt
Net Blk
Wkg Cap
OPM %
Sales / NBIK
Wkg Cap/ Sales
ROI
ROE
Div y/d
P/BV
EV/EBIDTA
P/E
PE/G
ENAM Securities
August 2004
19
Typical Career Path to Nirvana
Analyst
Head of Research
Fund Manager
Abs. Manager
Own Funds
Large Fund Manager
Marketing Guru
Even Larger Fund Manager
ENAM Securities
August 2004
20
How is your Portfolio Tilted?
OWN
INTERESTS
CLIENT TIME
PROFESSIONAL
COLLEGUES
FAMILY
WORK
COLLEAGUES
BUILD A CONSCIOUS LIFESTYLE !
ENAM Securities
August 2004
21
HEAVEN AND HELL

AMERICAN SALARY

AMERICAN WIFE

ENGLISH HOME

ENGLISH CAR

GERMAN CAR

GERMAN FOOD

CHINESE FOOD

CHINESE HOME

INDIAN WIFE

INDIAN SALARY
YOUR REAL WEALTH = YOUR HAPPINESS = YOUR
STATE OF MIND = WITHIN YOU
ENAM Securities
August 2004
22
SUMMARY
 UNDERSTAND YOURSELF OBJECTIVELY
 UNDERSTAND THE INVESTMENT LANDSCAPE
 UNDERSTAND THE UNDERLYING INVESTMENT
 UNDERSTAND THE MARKET PARTICIPANTS
 FOLLOW BASIC PRINCIPLES AND STICK TO THEM!
 BE HAPPY!
ENAM Securities
August 2004
23