Portrait of a Portfolio – I

I have been managing an equity portfolio for someone since the past 5 – 6 years. While the returns over the past 6 years or so have been just about acceptable (CAGR of 17%), not much advance planning went into it. Of course, I do spend a lot of time in assessing and worrying about the positions (mostly direct equity longs) but there were no targets or goals till the beginning of the current calendar year. I can be quite cavalier about my money and take risks and yet not lose an iota of sleep even if I end up deeply and irrevocably in red. I once remember dunking 50% of one of my annual bonuses on a stock only to see it dropping 80% in value in the months to come. That was some years back and I still flinch whenever I come across that company’s name again. I had done almost everything wrong in that trade. I now always keep a printout of the chart (see the grotesque graphic above) of that trade at hand to serve as a grim reminder. I’ve not repeated that mistake yet. A set of scathing and self berating doodles are annotated on the chart and a bit more mature post mortem occupies its place of pride in my trading journal.

But it was my money and I had no qualms in losing it. With someone else’s money however, the game is completely different. There is a lot of responsibility and fear when you realise that the person has reposed not just his/her funds, but his/her trust in you. I do not know if professional fund managers think like this. They should, in my opinion. Recently there was talk of allowing the National Pension Scheme (NPS) to invest a small portion of its funds in the equity markets. The logic is impeccable – domestic, sticky money can be routed to the ever hungry infrastructure sector and its reliance on Foreign Domestic Investment (FDI) can thus be reduced. Point to note being that the country has not done too well in terms of attracting FDI this year. The Foreign Institution Investments (FII) that have been propping up the local markets to dizzying heights are not the same as FDI. I think everyone agrees that there is a Schwarzenegger sized opportunity in India’s infrastructure sector. I guess obstinacy and arrogance have stalled that move. Or is it could be that a similar sense of heightened anxiety and responsibility over playing with the public’s money is keeping the boring pension funds away from the capital markets? Bull!

Coming back to this portfolio that I manage: the advent of 2010 saw all the stock market experts proclaim the new year to be range bound and choppy. All surprisingly chorused that stock specific action could not be ruled out however. Given the avalanche of such advise, I decided, for the first time to have a calendar year end target for the portfolio. The return expectations being very sensible (15% per annum), my target therefore is to grow the portfolio by 17.65% between the period 1Jan’10 to 31Dec’10. Given the range bound prognosis of the local experts, I realised that frequent trading by booking short term gains and doing this a multiple times over will be key to reaching the target. Since we pay 15% as short term capital gains tax on equity profits, the 15% target was scaled up to 17.65%. This translates to a tiny 1.364% per month. Easy? That’s what you think! Not my experience really. Brokerage charges were not considered – but these would be offset by the fact that there would be some (non taxable) long term gains and that the effective tax outgo would be less than 15% of the net gain since some interim short term losses would certainly be available to set off against a part of the short term gains.

The chart on the right shows how I have fared in managing that chunk of money.  The solid green line scripts the movement of the portfolio value while the red line is the NIFTY. The light green bars climbing up from the x-axis depict the cash position in the portfolio. As you can see, luckily for me, I went all in just at the start of Sep’10 – just before the current climb began! Mostly in frontline counters. The light blue line is the monthly cumulative target line and as you can see I’ve crossed the target (represented by the faint dashed horizontal line at the top of the chart) already. I crossed it on 5Oct’10 with 87 calendar days to spare! So what should I do? Get out of it all, stay in cash and spend the remainder of the year with a big grin plastered on my mug planning and plotting the CY’11 strategy? Hardly. Interesting days lie ahead and much remains to be done. But I’ll feel awful if I dip below the blue line again. Since this time around there would be no FIIs to pull me out. The big mistake for me this time around happened during the onset of May’10. While the NIFTY fell c 8% – 9% during this time, this particular portfolio fell 12% – 13%. The additional delta was on account of a large long call on the NIFTY. And that hurt, I got numbed and I just let theta take control and it was game over very quickly. The only saving grace was that, unlike the earlier blunder of mine (mentioned above; on my own money), a lot of market participants got suckered and lost a lot of money in May this year. So, I had August company.

I’m worried about what will happen to this portfolio for the remainder of the year. A lot of public issues are going to hit the Indian capital market scene very soon and they are expected to suck out money from the ring. The canary is expected to sing loudly in the coal mines this winter. And then a quick round of profit booking by the FIIs cannot be ruled out. The street also looks divided on whether the Reserve Bank of India (RBI) will affect another round of rate hikes. I guess the market will wait for some times for the results to start hitting the newsreels and then whatever will happen will happen. But yes, I will definitely post about how I fared during the first week of next year!