This short note was circulated to our clients on 18th September 2017.
Zara Investment Advisory has expressed its cautiousness with regard to the overall market valuations based on facts. Yet we are positive specific stocks, though, in the current market, these are few and far in between. Our cash position of 15-16% of the multi-cap portfolio in direct equities reflects our caution with regard to the market, yet reflects our readiness to be fully-invested should opportunities present themselves on a stock-specific level.
The argument we hear against our approach especially our huge scepticism of equity mutual fund investing at these levels are as follows:
- The markets are reasonable in relation to historical average price to earnings or average price to book: The argument is fine if you choose to ignore balance sheet issues. The Sensex today has approximately 80% more debt on balance sheet with ~50% lower margins than at the end of the financial year 2006 if that is just as good for someone to buy at historical averages; we have no arguments to give. To illustrate the point, we would rather buy a 2-year-old Mercedes car at 30% discount than a five-year-old Mercedes car (with a suitably worn out engine/balance sheet) at 30% discount. We will not behave differently in the equity market.
- Then there are those that think the future is bright so paying any price is fine. Such investors are sold equity mutual fund schemes on systematic investments by distributors saying the equity market with all its fluctuations over 5 to 7 years is bound to generate 15% plus returns. I provide a link to a newspaper article written by an IIM professor challenging such thinking through examination of rolling returns of the equity markets(click the highlighted text). If this doesn't convince an investor of the faulty distributor selling premise, nothing will. The price at which you buy largely determines your investment returns.
- Most investors think the funds chosen by their distributor has a god given right to outperform the markets. Yet as per factual data sent to you on equity mutual fund performance in the period 13 April 2016 to 11th September 2017( excluding sectoral funds and value research not rated or rated 1 and 2-star funds-Click the highlighted text above), we find very few do so over long periods that matter. In fact, none of the methods used by distributors to identify future winners in equity funds have been shown to work historically or otherwise. In fact, most of these techniques like picking current five-star rated funds have been proven to be failures as shown by the published research of the biggest and best mutual fund performance rating agency in the world Morning Star. You will realise with the principal officer having been part of the inside workings of a mutual fund, Zara Investment Advisory brings a level of analysis to the table in regard to mutual funds that could truly make a difference to an investor’s portfolio( please read our Investor memos for the months of October 2016 and November 2016 on our website www.zarainvestmentadvisory.in).
To reaffirm facts that are much misrepresented on corporate performance. I provide a link to a newspaper article interviewing a Credit Suisse India representative on earnings growth. After reading this, you may decide how bright the immediate future seemingly reflected in recent market movements truly is( please click the highlighted text).
Zara Investment Advisory was started with the primary aim of contributing to a more prosperous society through education and wealth creation. It is this intention that will drive every article/thought/action of ours. In this context please do share your views of how you think we can best help you.All your suggestions are welcome.
In your service
Dinesh da Costa, CFA 1st October 2017
Principal Officer & Investment adviser
Zara Investment Advisory
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