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surajmnair
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Quote surajmnair Replybullet Topic: How much to put into equities?
    Posted: 22/Sep/2006 at 1:27pm

Dear Basantji,

                            I just happen to see your analysis on being 75% in equities and 25% cash.

It seems so interesting,exciting and it is true as well.

But shall I ask you something.

Investing personally its all fine since we stick to our own conviction and we know the size of our wallet including the risk apetite.

But when we spread our services to investors on a business basis, things are shaky.

Bcos an investor whom we manage always compares

 

His appreciation with capital invested.

His appreciation with sensex and index

And last but not the least, over one year period of time, his portfolio might have given a good performance till march 31 and for the same he incurs a capital gains tax on his profts. He pays it off after seeing the paper profit and when market tumbes down , the portfolio depreciates heavily and chances that it might go below his capital invested.

 

For that if we remain in 25 or 10%cash for the particular investor right from the word go irrespective of market conditions, he will complain that why we have not invested is entire money if the market goes up from there. If we invest on his behalf fully , then the complaint is why we are not sitting in cash.

What do you think?

Is it a good idea that we invest 75-80% of his capital in equities and rest in money market investments or debt instruments?

Or  we can tackle the whole issue by investing in couple of good quality stocks like HDFC etc  that you have mentioned which would recover earlier and rest in value ones.

 

I would appreciate if you can help all of us with analysis on this.

I would welcome suggestions form all boarders in this.

 

For computation purposes lets take and ideal capital investments of 5 Lacs and lets analyse how an ideal portfolio should look like and percentage of allocation. Lets  forget the index levels for the moment.

 
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Quote basant Replybullet Posted: 22/Sep/2006 at 2:25pm

For that if we remain in 25 or 10%cash for the particular investor right from the word go irrespective of market conditions, he will complain that why we have not invested is entire money if the market goes up from there. If we invest on his behalf fully , then the complaint is why we are not sitting in cash.

_________________________________________________________________

Unless otherwise stated a person who manages portfolio has a mandate to be invested 100%. Let us assume that an investor who has Rs 500,000 wants to divide his portfolio between equity and cash as 75: 25. Therefore he has:

 

Equity: Rs 375,000

Cash   Rs 125,000

 

Now if he hands over his equity component to a portfolio manager who wants to keep 20% in cash the effective cash equity ratio of the investor works out to:

 

With the portfolio manager: Equity @80% of Rs 375,000 = Rs 300,000

                                               Cash  @ 20% of Rs 375,000 =  Rs 75,000

 

His personal cash holding                                                      Rs 125,000

 

Therefore his total asset allocation looks like Equity 60%(Rs 300,000) and cash 40% (Rs 125,000+ 75,000).

 

Because his portfolio manager wanted to time his entry and exit the investor's asset allocation has been severely hampered.

 

Now my point is to allocate as much as you want between equity and cash in totality (I have excluded commodities and real estate) and  not to interfere between how much to hold in cash in the equity component because that will more often lead to chaos and confusion as I have tried to indicate in my post titled Why does it not make sense to get into cash partiually

 

Now how much an investor would like to allocate between these asset classes is very much person specific. I normally want to hold 100% in equities and try and make up for my living expenses from my income. If there is an emergency it comes once  over several years we can use our credit card etc. But I have a very high risk approach to life and investing which might not be suitable for any one else. Have you read the link How much to put into Equity?



Edited by basant - 22/Sep/2006 at 2:28pm
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Quote surajmnair Replybullet Posted: 22/Sep/2006 at 3:05pm
Basantji,
 
                 Thank you very much for the insight.
Lets take 100%  investment in equity alone and the amount is 5 lacs per se.
In this case , how we allocate his equity portfolio amoung different companies - the so called steady compunders, emerging comanies., value buys and multi baggers.Sir, i would welcome if you could frame with an example portfolio as now we have different companies in our wish list like HDFC - steady compunder
HDFC Bank
TV18 - future mulibagger
Century textiles/ bombay dyeing- usually first company to recover sfter crash.
Rain commodities - Multibagger
Mc Dowells - Emerging company
Pantaloon etc.
I beleive this where the real insight is.
Second to keep in mind is his risk portfolio while allocating shares to him.
Basantji, would be grateful if you could answer this to add to our knowledge book.
 
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Quote basant Replybullet Posted: 22/Sep/2006 at 3:41pm
ALthough how hard I try I think that this is very very difficult for me to answer. Risk is person specific while returns are generic so we cannot mix them. Ideally one should have
 
1) 60%-70% in sector leaders
3) Other allocations are strictly dependent upon the investor's preferences.
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Quote Equity Buff Replybullet Posted: 22/Sep/2006 at 11:55am

Dear Basant,

Would you suggest following:
 
A) 35% of portfolio in fundamentally strong Large Cap stocks (blue chips in the A Group, but not cyclicals).
 
B) 55% of portfolio in fundamentally stong Mid Cap growth stocks, which are sector leaders in growing sectors like Retail (Pantaloon, Trent), Media & Entertainment (TV 18, ENIL, Adlabs) etc.
 
C) 10% of portfolio in good growth oriented small cap stocks.
 
Rgds
Equity Buff.
 


Edited by Equity Buff - 23/Sep/2006 at 6:29pm
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Quote Equity Buff Replybullet Posted: 23/Sep/2006 at 7:26pm

Dear Basant,

Awaiting your reply on my above post (pls take your time if you are busy).

Rgds. 

 
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Quote basant Replybullet Posted: 23/Sep/2006 at 9:28pm
A) 35% of portfolio in fundamentally strong Large Cap stocks (blue chips in the A Group, but not cyclicals).
 
B) 55% of portfolio in fundamentally stong Mid Cap growth stocks, which are sector leaders in growing sectors like Retail (Pantaloon, Trent), Media & Entertainment (TV 18, ENIL, Adlabs) etc.
 
C) 10% of portfolio in good growth oriented small cap stocks.
________________________________________________________
 
Sorry, it just skipped my mind..You could increase (c)a bit at the cost of (b) maybe 5%- 10%  because the real winners will come from (c) and if you can get a sector leader in (C) please do let us know. Smallcap sector leader is the best case for a multibagger!
 
I would have the followinbg definition for  alarge/mid and a small cap:
Large cap - Rs 2000 crores +
Midcaps- Rs 500 crores - Rs 2000 crores
Small cap - Less then Rs 500 crores.
 
Many people take a large cap at Rs 4500 crores+(US $ 1 billion) but in the Indian context we need to revise that a bit. ALso Pantaloon is now a large cap by any definition. It started as a small cap (Rs 80 crores).
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Quote Equity Buff Replybullet Posted: 23/Sep/2006 at 10:33pm
 
Thanks Basant,
 
Yes, I forgot Pantaloon is most certainly a Large cap today and no longer a Mid cap.
 
Want your views on following if hypothetically one were to construct a new portfolio today :
 
35% of portfolio Large cap stocks:
 
4 stocks with approx equal weight (8.75% each). 
 
50% of Portfolio Mid cap stocks:
 
5 stocks with equal weight (10% each)
 
15% of Portfolio Small cap stocks:
 
5 stocks with equal weight(3% each).
 
Thus total 14 stocks in portfolio.
 
Will appreciate your comments in terms of portfolio weightage given in Large Cap, Mid Cap, Small Cap and also the number of stocks in each category: Large cap (4 stocks), Mid cap(5 stocks) and Small cap (5 stocks).
 
Based on company performance, as time goes by, one can increase/decrease the weights in individual stocks in each of the 3 categories Large cap, Mid cap & Small Cap but still maintaining the overall category weights Large Cap (35%) Mid Cap (50%) and Small Cap (15%) the same.
 
Await your views.
 
Thanks & Rgds
Equity Buff
 
 
 
 
 
 
 
 
 
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