Hitachi Results Update

Hitachi Home & Life Solutions (I) Ltd. Has delivered lackluster results for the first quarter.

Sales grew at a decent 25.36 % from 148.49 crore to 186.15 crore.
Other Income fell from 4.52 crore to 1.58 crore
Profit before tax remained flat at 20.96 crore compared to 20.49 crore.
Profit After Tax fell 8.75 % from 17.37 crore to 15.85 crore.

It seems that the company has been impacted by the rise in input costs particularly copper and plastics. We have to see how the company manages to handle these challenges from here on and whether it can continue to display the growth that it has shown in the past.

INCOME FUNDS - CONTRA BETS

Income and Gilt funds which have performed badly over the past three years could be attractive contrarian bets for medium term investors. Income funds predominantly invest in highly rated paper of reputed companies, with almost 80 % of their investments being in AAA bonds. Gilt funds predominantly invest in Government securities.

Bond funds have given the following lackluster performance over the past 3 years:

Medium term Bond Funds Sector Average 4.95 % 5.89 % 5.22 %
Long and Medium Term Gilt Funds Average 4.64 % 5.84 % 5.04 %

Returns are as on 25th July 08 and are for 1,2 and 3 years, annualized.

Since interest rates in the Indian economy have been steadily rising over the past year or so, most of these funds have underperformed. A majority of the holdings of these funds being long term in nature, they have been severely marked to market downwards and as a result their capital values have eroded.

However during the credit policy on the 29th of July, 08, the RBI governor has given some hints that interest rates have peaked. Since he expects inflation to remain at current levels for the near future and ease off to 7 % by March 09, barring major shocks in the form of a huge jump in international commodity prices, there should be no reason to increase interest rates any further. If inflation does start to cool off by the beginning of 09, due to various factors like slowing demand for commodities, higher base effect, effect of past monetary tightening etc., then interest rates should stabilize at current levels and then start to fall off. Again hints of a slowdown in the economy makes lowering of interest rates of prime importance.

This could result in a surge in bond prices with a consequent increase in the NAV’ of income and Gilt funds. In fact interest rates do not even have to actually fall, for bond prices to rise. Just an indication from various parameters that interest rates are likely to cool off is sufficient to trigger a rally in prices of bonds. Markets discount the event well in advance and as a result well before interest rates actually fall, bond prices would start to rise. Depending on the sharpness of the fall in interest rates, bonds could deliver handsome returns from present levels.

ICSA Q1 RESULTS UPDATE

I had posted on the attractiveness of ICSA (India) Ltd. in an earlier post.
It has reported encouraging results for the first quarter of FY 09.
Sales increased by 97 % from 122.63 crore to 241.50 crore (YOY)
PAT increased by 71.28 % from 23.92 crore to 40.97 crore (YOY)
The EPS for the quarter works out to 9.3.
The company paid taxes of Rs.14.14 crore for the quarter representing 25.65 % of the profits before tax.
In my opinion a high percentage of tax payout testifies to the genuineness of the reported figures as opposed to accounting jugglery and speaks well for the company.

FIXED MATURITY PLANS - BASICS

FMP's (Fixed Maturity Plans) are becoming increasingly popular among debt investors in recent times. Since conventional Income funds and Gilt funds are marked to market, in a scenario where interest rates are rising, these funds deliver low or even negative returns.

How does the mark to market concept work? If a mutual fund holds a debt security which gives 8 % per annum (coupon rate) payable yearly, it stands to receive Rs.8 by way of interest on Rs.100 invested. Now if the market rate of interest on bonds of similar tenure increases to 9 % an investor in these bonds would get Rs.9 for Rs.100 invested. The older bond gets less attractive and its price would have to be readjusted to reflect the new market reality. Since the coupon rate (8 %) is fixed, the price of the bond is adjusted to Rs.99 (approximately), so that an investor gets the same return whether he invests in the new bond or old. This is a simple example of a 1 year bond. In case of longer duration bonds the price of the bond is adjusted to reflect the notional loss in interest over the duration of the bond.

If interest rates fall in the market, then conversely, the older bonds would be more valuable and their prices would increase to more than their face value. This concept of adjusting the price of the bond to reflect the changing interest rate dynamics in the market is called marking to market. This is the reason why, presently income funds are suffering from poor returns in the current period of rising interest rates.

An investor holding the bonds to maturity would still receive his principle back along with the coupon rate. This is the concept on which FMP's work. Investors are locked into the scheme until its maturity and intermediate withdrawals are permitted with very high exit loads. So whether interest rates rise or fall in the markets, investors get more or less the indicated yield at the beginning of the scheme. This is a useful instrument for investors who need the security of returns above all else and are not willing to leave it to the vagaries of the market.

FMP's act like Fixed deposit schemes of banks but are more tax efficient due to their structure of not promising any returns. Because of this, the returns from long term FMP's (more than 1 year duration) are subject to capital gains tax, the rate of which is less than the income tax rate for individuals in the higher tax brackets. Again in case of shorter duration FMP' s the interest generated is paid out in form of dividends which are tax free in nature and a percentage is deducted towards dividend distribution tax. Dividend distribution tax rates also being lower than the income tax rates, investors in the higher tax bracket stand to benefit from short term plans.

FMP's have the disadvantage of being illiquid and any withdrawals before the completion of the scheme are permitted only with high exit loads. Therefore investors should only invest in FMP's if they are absolutely sure that they would not require the funds over the duration of the scheme.

SLOWDOWN IN COMMODITIES

Are we seeing the beginning of the end of the great commodity run? I feel that, though it is premature to write off commodities, they are certainly headed for a major fall. The reasons are not far to see;

A slowdown in the global economy is imminent. We are already seeing the signs in America and Europe. A demand drop poses a major threat to commodity prices, since demand has been a major driver of growth. The Chinese have contributed to the demand by their massive infrastructure build up for the Olympics. This is compounded by the fact that China has put on temporary freeze, all polluting industries like metals, chemicals, plastics. A significant cool off in demand is expected as the preparations for the Olympics near completion, coupled by increase in supplies once Chinese industries resume production.

The demand destruction could result in a major fall in commodity prices. Already crude oil has fallen about 18 % from its highs. A similar trend is seen in some non Ferrous metals, data for which is given below:

The data below gives the Commodity, Price on 2nd Jan 08, Year High and Price on 26th July,08.

Aluminium 2365 3291 2936
Copper 6665 9000 8258
Lead 2579 3459 2180
Nickel 26500 33250 19005
Zinc 2383 2825 1891
All prices are on London Metal Exchange, in US $ and per tonne.

Steel and plastics are still going strong and prices are buoyant in these items.
If commodities correct even moderately from current levels, it augurs well for Indian stocks, because we have witnessed a strong sales growth for the companies who have come out with results till now. Margins are under some pressure due to rise in input costs. If commodity prices come down, it could bring some cheer to the bottom lines of companies.

INVEST IN SAFE STOCKS

In the present market scenario, with volatility being the order of the day, I believe investors should stick to safe stocks with solid managements behind them. Even though some sectors have been beaten badly, investors would do well to not look at how much a stock has fallen from its highs, to base their investment decisions on.

It is important to differentiate between stocks and sectors where the losses are justified because something is basically wrong with their business models and those where the present drubbing is due to some temporary factors which are likely to ease out with time. Fundamentally sound stocks offer an incredible opportunity to buy at bargain basement levels and simply wait for fundamentals to reassert themselves.

In my opinion, there are enough indications for the real estate sector to be de rated by the markets. The main reason of course being that, the valuations of these stocks were NAV based. The NAV being the value of the land holdings of the company translated into potential for development. Since the companies decided their own NAV’s, this factor was open to various interpretations. Now with real estate prices crashing, the NAV has come down, though the extent of the fall is debatable. Again deals are not happening on the ground. Some sale is made at an inflated price and this is used as a benchmark to justify valuations of similar properties. The fact that the deal holds only a notional value is conveniently ignored.

Since most of the real estate companies listed on the stock exchanges are recent entrants, there are no parameters to judge their track records. In the absence of historical data by which to evaluate them, such stocks pose a significant risk on the downside. Though their prices may look extremely attractive when compared with the highs achieved by them, investors would do well to remember that a lot of tech companies fell to 10 % of their top valuations following the 2000 dot com bust.

A marked contrast are the PSU banks, many of them having decades of history and giving great dividend yields, now available for less than book value. I believe the reasons for the drubbing they have received are temporary in nature, as discussed in a detailed previous post on PSU bank stocks here.

Investors in this market need to have the conviction in the stocks they own, so as to ensure that they do not panic in case of a sudden fall. Hence they would do well to invest in businesses which have stood the test of time and which can be valued using simple and conventional methods.

ARE WE IN FOR BETTER TIMES?

What a difference a week makes! Around the same time last week we were surrounded by prophets of doom, who forecast levels of new lows for the Indian markets. Predictions ranged from 8500 to 12000 for the sensex. Any upside was said to be a technical bounce back, destined to be short lived.

Since then, the incumbent government has managed to hold on to power and the Finance minister is taking of unleashing a new wave of reforms. Prominent among them are banking, pension and insurance reforms, which could spur a new wave of foreign investments into the country. The nuclear deal shows the country in a positive light and promises good prospects for the few companies operating in related sectors.

Crude is finally taking it on the chin. From highs of $ 147/bbl to $ 125/bbl the cooling of crude oil represents a major plus for economies like India who depend largely on imports for their requirements. A further fall to $ 110/bbl is expected, though I suspect that once something which has gone up the way crude has, starts falling, it is unlikely to rest with a fall of just 20 % or so. This has been amply demonstrated by the fall in our stock markets since January and could also happen with crude.

Other commodities are likely to follow suit and this could act as a booster to the Indian economy. Again after the Olympics in September, a slowdown in imports from China is expected. Also on the supply side, a lot of chemical and other polluting industries which have been forced to stop production are going to resume their supplies.

The inflation front has delivered an unexpected bit of good news. Inflation growth has slowed down from 11.91 % to 11.89 %. Although the difference is marginal, the good news is that after many months, we are actually witnessing a slowdown in inflation. A cursory glance at the inflation numbers reveals that a large component of the inflation growth is the rise in prices of fruits and vegetables. Inflation contributed by manufactured goods has slowed down. This is a positive because fruits and vegetables induced inflation is seasonal in nature and could easily reverse with better rainfall.

Companies results are better than expected, though most analysts would say that they had expected results to be good, with the effects of the slowdown coming in only in the third or fourth quarter of this year.

Things have more or less worked out the way I had expected them to in a post last week titled "Where do we go from here". Although I will be the first to admit that I never expected all these factors to pan out so soon or all together. This is what has caused a tremendous rally in the markets and, though I could be wrong and all the above factors could suddenly reverse, indications are that we should recoup some of the lost ground.

VALUE BUY - HITACHI

Hitachi Home and Life Solutions (India), previously known as Amtrex Appliances is a leading manufacturer of window and split air conditioners.

The demand for its products is extremely strong considering the growing Indian middle class with its disposable income and the recent tendency to buy premium brands. In this context Hitachi's wide range of energy efficient products would place it at a considerable advantage in relation to its competitors. Its parentage and technological advancement should make it a product of choice among discerning consumers.

Hitachi also makes commercial and industrial air conditioners ranging from floor standing AC's, microprocessor controlled AC's, AC's for factory use and AC's for intelligent building cooling. With malls and modern residential complexes coming up at a rapid pace, this segment should witness high growth in the coming years. Hitachi also manufactures refrigerators and washing machines.

Financials:

For the year ended March 08, Hitachi clocked a turnover of Rs.446 cr and a PAT of Rs. 42 cr, giving an EPS of 18.40. PAT for the March 08 quarter was Rs.11.6 cr, a 100% growth over the March 07 quarter. The market price of the stock is Rs.145 as on date, giving it a PE ratio of 7.8. This appears undervalued considering the brand equity the company enjoys and the premium pricing its products command in the market.

The market capitalisation of the company is Rs.332 cr and the M Cap to sales ratio is 0.75. As against this Blue Star, operating in a similar segment has a PE ratio of 19 and a M Cap of Rs.3304 cr, with sales at Rs.2221 cr. The M Cap to Sales ratio for Blue Star is 1.5. Although Blue Star is more active in the commercial and industrial segment, Hitachi has taken steps to enter this market aggressively. The valuation gap between the two is wide, and Hitachi holds the potential to narrow down this gap.

Major risks are that Copper is a major input for air conditioner manufacturers and rising Copper prices could impact margins. Hitachi's products are priced higher than its competitors and in a recession consumers could downgrade to lower priced offerings.

 

THEORY OF REFLEXIVITY

The theory of Reflexivity propounded by George Soros, seeks to demonstrate that financial markets cannot discount the future correctly because, in certain cases, the behaviour of financial markets affect the so called fundamentals which they are supposed to reflect. It implies that financial markets do not merely discount the future; they help to shape it.

Therefore reflexivity is a self fulfilling prophecy which occurs when markets react to the expectations of its participants. A feedback loop occurs, wherein prices are driven by perceptions and the movement of prices help to reinforce expectations.

Consider the example of the Indian stock markets after its all time high in January, 2008. Once the markets started falling from its highs, investors, particularly FII' withdrew from the markets in large numbers. This caused stock prices to fall further. The fall in prices led to a perception among investors that markets were overheated. This in turn led to further selling in the markets, thus creating a feedback loop, where the prices were affected by investors' negative perceptions, which were in turn reinforced by falling market prices.

This selling and absence of fresh inflows by FII' led to the Rupee weakening against the Dollar, which resulted in inflation rising and interest rates going up. As a consequence, profitability of companies, which was projected to grow at 20 % on an average, started slowing down. Though not the only reason for slowing growth numbers, this example serves to illustrate how markets can influence fundamentals.

Soros contends that, "such boom/bust sequences do not arise very often, but when they do, they can be very disruptive, exactly because they affect the fundamentals of the economy." Conventional market theory acknowledges that all the available information is built into prices and current markets correctly discount the future. Soros thinks that this interpretation of the way markets operate is severely distorted . He works on the principle that whenever he takes a position, he does not automatically presume that the markets are wrong, but allows for the fact that he himself could be wrong on his call.

This article relies heavily on a speech made by George Soros on April 26, 1994 to the MIT Department of Economics World Economy Laboratory Conference Washington, D.C.

WHERE DO WE GO FROM HERE

With crude showing signs of cooling off, stock markets look poised for a rebound. It also depends on the vote of confidence scheduled for the 22nd and the inflation figures. In my opinion it’s a good time for long term investors with a time horizon of 2 years and above to go on a shopping spree.

Oil, which has been a major drag on the markets is projected to react to $100 to $110/bbl in the next six months. The reasons are slowing demand for gasoline in the US, the relatively lower growth in GDP projected by India and China and the comments of the King of Saudi Arabia seeking lower oil prices. If oil prices fall as expected, this would provide a huge boost to economies like India and consequently their stock markets. Since higher oil prices are already factored into current market levels, any positive news could act as a trigger.

On the political front, the exit of the left parties should act as a pleasant surprise for stock markets, only if the government survives the vote of confidence. In such a scenario, the Government would be free to aggressively push reforms in insurance and banking sectors. Moreover the disinvestment process of PSU’s would get a huge boost, bringing quality new issues to primary markets and increasing the depth and liquidity of our markets in addition to improving sentiment among battered investors. Also opening of the insurance sector would bring a flood of FDI into the economy, thereby strengthening the Rupee.

Inflation poses a huge risk to the markets, but again most of the bad news is built into prices. Though inflation is not expected to fall off any time soon, it is after six months that the higher base effect will kick in. Since, in India inflation is measured on a YOY basis, we are getting inflation figures compared with last year’s figures. Inflation was quite low at this time last year hence we are seeing disproportionately higher inflation growth figures. Also by this time we will see some of the measures taken by RBI to curb inflation take effect. Another positive would be the normal monsoon, at least till now, which would bring down the prices of food articles.

A caveat here is that any of the above scenarios not happening could act as a dampener. But in my view, current prices hold value for investors willing to wait it out and having the capacity to bear some potential pain in return for longer term capital growth.

A CASE FOR SIMPLICITY IN INVESTING

In a book, I recently read, the author gives the example of a person who turned this life savings of $ 2,000 into $ 1 Million by following a simple strategy. When the dividend yield of the Dow Jones Industrial average went up to 6 %, he put all this money into stocks. When it went below 3 %, he got out of stocks and put the realised amount into a savings bank account. It took him 30 years to achieve the above result, but still it is no mean feat. Though I am in no way advocating that investors follow this method, the fact remains that the techniques that make you the most money are often the most simple to execute.

 

If making money is the ultimate objective, why do we then follow exotic strategies in our hope of beating the markets in the short term? Could it be that the more we try to outwit the markets, the more we fail? I have tried to examine the reasons behind why people (including myself) go for complicated strategies in trying to outperform. One of the reasons is that we like to have our profits on a regular basis, rather like the coupon payout on a bond. We seek the regularity of bonds with the high returns of stocks. We hate the lumpiness of stock market returns as a result of which the maximum profits occur in short intervals with the markets either going down or sideways in the intervening periods. The fact that the profits made in the good years more than make up for the losses or opportunity cost of down years, tends to be neglected by us.

Another reason could be that we seek a sense of control. We feel the need for activity in the markets, thinking that if we do nothing, we are simply watching while opportunities pass us by and this creates a pressure on us to act. Comparisons with profits made by neighbours and acquaintances make us feel that we are being left behind, while others are raking it in. This psychology was at work in the bull ramp up till January, where most investors got carried away by stupendous returns made by active market players and were attracted to invest in stocks. To compound matters, most investment analysts were predicting still higher levels.

For some investors, outperforming markets is a matter of intellectual satisfaction. Everyone gets an ego boost when their trades turn out right. When we get things right a few times, we tend to feel that we have found Alladin's lamp. Only in retrospect do we realise that in the short term, markets are far smarter than us. I have seen a few experts claim that they can manage to outperform markets on a consistent basis, whatever the time horizon. I do not have the data to judge their claims, but I feel that for the average investor, the simpler the investment strategy, the higher will be the returns.

 

 

PSU BANK STOCKS

PSU Bank stocks are starting to look somewhat like the Indian cricket team after they ran into Mendis in the Asia Cup. Battered and bruised. But these stocks, currently out of favour could provide a mix of steady income and capital growth to investors' portfolios. Let's look at some reasons as to why PSU Banks are now discarded by the public.

1. It is felt that PSU Banks' profit margins would be eroded due to mark to market losses on their treasury holdings. While this is true, banks generally hold these bonds to their maturity. So while mark to market losses could dent their margins in the short run, these would provide above normal profits when interest rates cool off. Even if interest rates do not ease, these bonds would continue to provide interest at the coupon rates and on maturity the entire principal would be received by the bank.
2. Due to rising interest rates demand for loans would decrease. Again PSU banks are not aggressive in their approach to giving out loans to people. In fact this conservatism was said to be one of their drawbacks when the going was good. With the current scenario, where private sector banks are being downgraded because of NPA fears, PSU banks are relatively well insulated from NPA'. Though demand growth may slow down somewhat, PSU banks are well equipped to handle this because of their diverse clientele and their reach in rural areas. Since it is expected that agricultural growth will be better this year, PSU banks are well poised to capture a part of this growth to make up for demand slowdown from cities and corporate.
3. Rising interest rates would put margins under pressure, because of higher cost of funds. This would also work to the advantage of PSU banks because of their larger base of CASA (Current And Savings Accounts) deposits. Here banks have access to a large pool of funds at extremely cheap rates. This would partly offset the higher cost of funds, at which they borrow for term deposits and other longer term borrowings.

Now for some reasons, as to why PSU banks are excellent investment candidates at current levels.

1. Most of these banks are available at or below their book value. These businesses are not going to disappear from the Indian markets in a hurry. Then why give them such abysmally low valuations? Most of them own huge pieces of real estate, in prime locations. These are generally being carried on the books of the banks at cost price. So, if the treasury holdings of banks are marked to market, then the real estate should also reflect current market prices. If this is done then the disparity between book value and market price could widen further.
2. The current dividend yield on PSU bank stocks works out to anywhere between 4 to 6%. This is one category which offers the highest dividend amongst all the available sectors in India. Although, if profits decrease, the banks might lower dividends, but in the longer term they have a history of paying out a large portion of their profits in the form of dividends. So eventually the dividend payouts ought to revert to their mean. In fact the high dividend yields give investors some kind of protection against further sharp downsides in stock prices.
3. Most banks have modernised their operations, downsized excess staff and improved service levels. Gone are the days when they operated from dingy branches with grumpy clerks. The PSU banks of now are the match of their private counterparts in terms of ambience and ease of banking. Not only that, they also have a human interface for customers who are not comfortable with handling computers and ATM', unlike private banks.
4. PSU banks are being discounted at 4 to 5 times past year' earnings. Although earnings are expected to come down in the current year, as discussed above, this is likely to be a temporary phenomenon. Since markets have a tendency to discount the future by about 6 months, the stock prices of these banks could rise well before interest rates start easing.

Then again there are some intangible factors which work in favour of PSU banks. Customer loyalty is one of them. Then the low cost of operating accounts unlike private banks which charge customers for every small service. According to a Assocham survey in 2006, 60 % of Indian businessmen prefer PSU banks for sourcing credit cards and 80 % of them approach PSU banks for personal and educational loans. As mentioned above their rural reach, access to cheap funds via CASA and diverse client base give PSU banks an invaluable brand equity.

Future prospects include disinvestment by the Government, which could provide a real trigger to stock prices. Consolidation among banks is likely to take place in 2009, when several PSU banks are expected to merge to acquire size and financial muscle to take on foreign banks

Risks associated with PSU banks include Government interference in the form of farm loan waivers and tendencies to favour political constituencies through banks. Inability to face competition from foreign banks, which are expected to hit Indian markets due to opening up of the banking sector in 2009 could be a negative. Even the larger PSU banks are considered miniscule when compared to their global counterparts. This lack of size could hamper the growth of these banks. Lack of autonomy in incentivising employees to improve productivity and retention of key employees could be a concern.

VALUE BUY – AUROBINDO PHARMA

Aurobindo Pharma is a manufacturer of Active Pharmaceutical Ingredients (API'), formulations and intermediates, having a wide portfolio of products in various segments such as anti infectives, anti retrovirals, cardiovascular systems , CNS etc.

Strengths:

It has 5 units for manufacture of API' and 4 for manufacture of formulations, catering to regulated markets where norms relating to manufacture are extremely stringent. It has invested heavily in modernizing its plants to make them compliant with USFDA/European standards. This is a significant step in improving quality standards and would be beneficial to the company in the long run. A significant presence in US markets is accounted by a large number of approvals from the USFDA. In addition the company is in the process of filing for 30 more drug approvals in the coming years. Acquisition of Milmet Pharma (UK) and Prarmcin (Netherlands) has given it the required presence in major European markets. It has maintained its efforts to increase its presence in Europe by filing drug master files in various European countries. About 40 products are awaiting approval in various European countries, which could be a significant driver of revenues and profits going forward. In May 08 it has received 9 product approvals from MCC to market products in South Africa. It has now a total of 31 marketing authorisations approved by MCC.

Since the company manufactures a majority of the intermediates required for the manufacture of API', it has been relatively insulated from the cost pressures due to rising intermediate costs affecting a majority of its competitors. The company has focussed on diversifying its product portfolio by going into the formulations business, which is likely to impact bottom lines positively since formulations is typically a higher margin business as compared to API'.

Risks:

Prices of chemicals and intermediate inputs are on the rise due to the global commodities boom. This could have an adverse impact on the bottom line of the company.

The company operates in regulated markets of the US and Europe. Delays in the approval of drugs can have an effect on new launches thereby putting a constraint on the growth of the business. Also the quality parameters not only with respect to the final product, but also in the practices followed in their manufacture are very stringent, any slip ups can cause serious problems.

Financials:
For the year ended March 08, the company achieved sales of Rs.2234 crores, a growth of 19 % over the previous year.
Profits increased from Rs.229 cr. to Rs.290 cr. A growth of 27 %. However this was aided by an increase in other income from Rs.39 cr. To Rs.118 cr.
The EPS for the year stands at 53 giving a PE ratio of 5.5 at current prices. If other income is excluded, it gives an EPS from operations of 32.
The real undervaluation of this company is observed in its balance sheet. The company has Net Current Assets of Rs.1800 cr. as on 31.3.07. Against this the Market Capitalisation is just Rs.1500 cr. on date. This makes Aurobindo Pharma a real value buy.

IN DEFENSE OF FUND MANAGERS

There has been a lot of mutual fund bashing going on recently, with investors upset that fund managers have not been able to protect investors in the current downside. I am also guilty of criticizing these guys in a previous post. Everyone wants a scapegoat when things go wrong. But I now think we ought to take a relook at what went wrong with the decisions that fund managers made and were they entirely responsible for not saving investors from the terrible erosion in values that has taken place. I would not go so far as to say that there was nothing they could have done to protect investors, but given the circumstances it was extremely difficult to act any other way.

It has been said that funds did not take profits at higher levels. I think that, even though funds did book profits, by mandate an equity fund has to have a majority of its corpus in equity. Being in another asset class is not a call for a fund manager to take. When investors have given him the money to deploy in shares it means that they have studied the implications of having a portion of their assets invested in equity, with the associated risks. If investors had indeed wanted fund managers to periodically rebalance their portfolios, they should have invested in the various asset allocator mutual fund options in the markets or, opted for the dividend payout option. Let's face it, it was our greed that got us to invest in pure equity funds and not sell the units at higher levels.

Another point people make is that fund values have fallen more than the benchmark indices, which is quite true. But one has to realise that however diversified a fund might be, it's portfolio is still quite concentrated when one compares it to its benchmark index. The concentration may not be in the number of scrips held, they may be quite diversified but a large percentage of the fund's assets are concentrated in a few top holdings. Generally a large cap fund has about 45 to 50 % of its holdings in 10 stocks. This is exactly what enables an actively managed fund to outperform the indices when they go up. It is but natural that the converse should be expected to hold true on the way down. If the past 5 year track record of the top funds is compared with that of the indices, we find that the funds have hugely outperformed.

A criticism that I have also made in the past is that the fund managers were invested heavily in flavour of the month stocks like infrastructure and real estate. But as investors, our investment psyche is such that we generally look at how well funds have done over a 1 year period. We then invest in last year's better performers. In doing so, we do not allow fund managers to take a longer term call. If investors focussed on 3-5 years returns, I feel fund managers would be emboldened to avoid hot stocks which are overpriced and concentrate on value instead. Whichever way one looks at it, a fund has to have assets under management, to stay in the business. Assets can only be garnered by showing fantastic returns in the short term.

I have recently seen the concept of SIP' being attacked as not being a suitable investment strategy. I would like to differ on this. ICICI Prudential Growth Plan, not one of the top ranked funds, has given SIP returns of 18.57 % over a 3 year period and 29.60 % over a 5 year period. I have deliberately not included a top performing fund, in order to give readers an idea of the average fund returns. Returns are as on 31.05.08. Anyway, the best method of judging a SIP is when the markets have recovered after being down for a while. This is where the benefits of Rupee cost averaging works out. If the markets have fallen precipitously as they have done recently, investors do not get time to accumulate enough units at lower levels. The error in estimating the efficacy of this strategy is compounded when the lowest NAV' are used for calculating the returns. In my view SIP is an extremely efficient and simple way to create wealth in stock markets. If an investor sticks to his SIP plan, I am sure that when markets recover, he would be amply rewarded for his discipline and persistence.

The above does not in any way absolve fund managers from their duties as guardians of public wealth, but we, as investors, need to realise that they are after all human and are subject to the same failings as we are. They have done an admirable job in the past in beating market returns and can be expected to do so in future, if we allow them some leeway and time to get their act together again.

LESSONS FROM JAN 08

What percentage of the Indian investor population regrets not getting out at 21000? My guess would be 95 %. Even long term investors are shocked to see the value erosion in their portfolios now. Some of them are even thinking of cashing out, while they still have some profits left on the table. Panic is slowly creeping into the markets as stock values are rapidly eroded.

Looking back it seems that we all got too greedy. But aren't we doing the exact opposite right now by becoming too fearful? We felt that markets would never come down and miscellaneous analysts were egging us on by outdoing each other in predicting higher sensex levels. Some of us were afraid to sell thinking that we would miss out on the gains of tomorrow. The exact reverse is happening at the present moment. When so-called support levels are breached, analysts predict still lower levels. We are afraid that if we buy a stock today, tomorrow it will be available 5 % cheaper.

I am not saying we are at the bottom. I don't profess to know what the bottom is and am not interested in guessing. But I do know that valuations are attractive, just as they were stretched in January. Just like various theories were bandied about to justify high valuations, doomsday scenarios are being painted now.

One cannot sell at the exact top or buy at the bottom. We can take a call based on reasoned past and present indicators and a likely future scenario. Had someone taken a valuation call in December 07 and sold out at 18000, he would have seemed foolish initially as markets rallied another 12 % or so. But in hindsight his actions would have looked extremely wise. Similarly a purchase now might look foolhardy, but it is certain to pay off handsomely in the next 12 months. We need to learn lessons that history teaches us, if we are to profit from the folly of others.