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Equity is understood to be a risky asset class. The assumption is, that while on the average, over the long term, we make higher returns in the stock market, these returns come with higher volatility and risk.

A figure often tossed around is that in the Indian equity markets, you should expect a compounded annual return of 14%-15%. This number is derived from the actual annualised return of just over 15% that the BSE Sensex has given in the 40-plus years since its launch in 1979.

It is commonplace to evaluate the risk of being in or investing in the stock market. The question I asked is whether there’s a risk in not being in the market? A risk in being out of the market?

The question arose because after a euphoric 2021 when the Indian market was zooming and the Nasdaq looked even better, 2022 has been a flop show, to put it mildly.

Equity markets around the world have done very poorly. So much so that there are only a handful of countries which are in the green year-to-date. And these are primarily commodity plays.

Suddenly all of those who wanted to be in the midst of action want to head for the exits and sit on the sidelines of the stock market(s).

But is there a risk to this wait-and-watch strategy? Does it impact your long-term returns?

Let's step back from the short-term noise and have a look at the historical data.

Opportunity cost, opportunity lost

In the 40-plus years of the Sensex's existence, your INR100 would have compounded to INR44,000.

But suppose you missed out on just 10 good days, which is about one day in four years, that shouldn't matter much, should it?

Data shows it matters a great deal — the INR44,000 goes down to INR15,000. So two-thirds of the return is gone by just missing out on 10 days.

If you miss out on 30 such days, which is an average of less than one day a year, you are down to less than INR4,000. As much as 90% of the gains are gone!

And this isn't something exclusive to the Indian market. For the S&P500, the numbers are even starker.

If you miss out on investing in just 25 good days in the 100 years of S&P 500, then instead of compounding from USD100 to USD21,000, you give up 90% of your returns and end up with USD2100 (this data excludes dividends, but the pattern is the same with the total return index).

If you miss out on 100 days in 100 years, your USD100 actually goes down to USD38.

Thus, it is clear if you miss out on these rather infrequent up days you lose big time. There is a huge risk in NOT being in the markets for the long term.

Timing the good days

The other incredible fact that we found was that while the timing of these up days was unpredictable, the only discernible pattern was that most of these up days come in the middle of a crisis or after a crash.

The big up move days are rarely part of a bull-run and in India, the only time we have found them as being part of a bull-run was during the Harshad Mehta scam period in the early 1990s which was a rigged market.

Otherwise, you never get one of these 8% or 10% up days in a bull-run. They always come after a crash or in the middle of a crisis, when pessimism is high.

Therefore, given where we are in the markets, my assessment, based on history, is that the risk is more in sitting out rather than being in the market.

If you step back and not talk about one day, one week or even one month but are looking at equity as a long-term investment in your asset allocation pie, this is the time to be back in.

Else, recency bias always misleads. We extrapolate what has happened in the recent past and expect it to continue but that isn't how markets, or life, works.

The bottom line

Around this time last year, everybody thought Nasdaq was a no-brainer and one could not go wrong buying Nasdaq. Which is why we had all these Nasdaq ETFs and funds coming in, people opening Robinhood accounts or accounts with other brokers. I had warned at the time that just because the Nasdaq had done well for two-three years didn't mean that it would continue to do well.

Nasdaq this year has been an absolute bottom performer. For the year-to-date, out of 40 indices, it ranks number 38 or something. It looks like suddenly the risks are very high there.

Also, if the risks appear very high in India, then they are so everywhere else. But all of this is, once again, only an extrapolation of the recent past.

Of course, in equity markets, only a long-term perspective works. If you have a six-month perspective, you do not know whether the market will be up or down. That is always the case.

None of the above means that the markets can't go down further. None of these big up days are predictable. One cannot say whether one or more of them will come next week or next month. So you should probably look at investing your equity allocation not just in one go, maybe split over two-three months - but stay invested.

You should have a long-term perspective, at least three to five years for whatever you think is your equity allocation.

Your investment strategy should depend on what your time frame is, what your objectives are, when you need the money and as I always say, always look at your portfolio on an asset allocation basis.

Not all your money should be in one asset or the other and it should be spread out geographically, and outside India as well.

(A version of this article first appeared in The Economic Times)

From the desk of Devina Mehra

If you want any help at all in your wealth creation journey, in managing your Investments, just drop us a line via this link and we will be right by your side as your wealth advisor, super quick!

Or WhatsApp us on +91 88501 69753

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“Most of the up days come in the middle of a crisis or after a crash. They are rarely part of a bull run and in India, the only time we have found them as being part of a bull run was in Harshad Mehta’s scam time which was a rigged market,” says Devina Mehra, Chairperson & MD, First Global.

It is getting bad. Will it get worse before it gets better?

Let me just step back a bit as we are right in the midst of movements like these and there is a lot of noise and one is trying to predict short term movements.

Just look at what has happened year to date globally and in India. Equity markets around the world have done very poorly or so there is only a handful of countries which are in the green year to date. These are primarily the commodity plays and so markets like Saudi Arabia, UAE, a handful of South American countries like Columbia and Brazil. Only about five-seven countries are positive.

Same time last year, everybody thought Nasdaq was a no-brainer and one could not go wrong on Nasdaq. Which is why we had all these Nasdaq ETFs and funds coming in, people opening Robinhood accounts or accounts with other brokers.

Nasdaq this year has been an absolute bottom performer. For the year to date, out of 40 indices, it is number 38 or something. It looks like suddenly the risks are very high there. That the risks are very high in India, risks are very high everywhere else.

But if you step back and have this thing in your mind that if you remain in Indian equity markets in the long term you will compound at an average of 15% plus because that has been the long term average.

In 40 years of Sensex, your Rs 100 has compounded to Rs 44,000. Suppose you missed out on 10 good days, which is one day in four years and suddenly your returns of that Rs 44,000 goes down to Rs 15,000. So two-thirds of the return is gone just for missing out on 10 days. If you miss out on 30 days which is less than one day a year, and you are down to less than Rs 4,000, 90% of the gains are gone!

We often think of the risk of being in the market. There is also a risk of being out of the market. The other thing which we found was that for S&P, the numbers are even starker. In 100 years, if you miss out on 100 good days, then instead of compounding from $100 to $21,000 you are actually down to $40!

The other thing which we have found was that if you miss out on these up days, obviously you lose but the other incredible part was that most of these up days come in the middle of a crisis or after a crash. They are rarely part of a bull run and in India, the only time we have found them as being part of a bull run was in Harshad Mehta’s scam time which was a rigged market.

Otherwise, you never get those 8% or 10% up days in a bull run. It always comes after a crash or in the middle of a crisis. So, the risk is more in sitting out rather than being in the market.

So, if you step back and not talk about one day, one week or even one month but are looking at equity as a long-term investment in your asset allocation pie, this is the time to be back in.

This has been the channel view that money is made or returns are generated in the equity market not by buying or selling but by spending time in the market. So we are perfectly aligning with the big picture risk. The question is that while it is important to stay invested in this market in the short term, should one also be mentally prepared that the fall is not over yet?

That could certainly happen. None of these big up days are predictable. One cannot say whether it is going to come next week or next month. So invest not just in one go, maybe over two-three months but stay invested. In equity markets, the downside risk is there which is why you should have a long term perspective, at least three years plus.

If you have a six-month perspective, you do not know whether the market will be up or down. That is always the case. Exactly I was telling someone, a friend of mine who just sold some ancestral property and he was saying maybe in six months or 12 months I will buy another property. So where should I park the money? Should I give it to you to manage? I said you put it in a bank FD because that is the only place where you know for sure that after six months you will get at least principal plus back.

So it depends on what your time frame is, what your objective is and as I said always look at it on an asset allocation basis. Not all your money should be in one asset or the other and it should be spread out geographically also and outside India as well. That has always been my advice.

For the equity lovers, what is the advice? What are the pockets which are looking interesting? Do you buy more of the same that you did in the previous peak or do you think newer leaders will emerge after the recent fall?

So again, take a long-term perspective. It is not always the same stocks or sectors that continue to do well. The Sensex has given this 15% compounding but if you look at the original Sensex and you had remained invested there, you would not have made that because that has all these Hindustan Motors and Scindia Steamships and the Paper and the textile companies and so on. Now we have a completely different set of companies. Some of which like IT which did not even exist then.

Again, if you look at the shorter term, even in 2021, it was like a rising tide lifting everything – some more and some less but everything went up. Now that is not the market so one has to be a little more selective. Currently, we look at our portfolios every three months on a zero base basis. Though usually 85-90% of the stocks remain as they were in the previous quarter, we still look at that as if we were investing afresh.

Right now, our overweight sectors would be capital goods, textiles, parts of chemicals and very selectively autos. We also had energy but that is not looking that great anymore. In telecom and IT also we still remain somewhat overweight even though year to date, that has not been a great performer but given that my bet has been that this year a rupee depreciation will be significant - we have now started to see that. I have been saying it for over six months now and so the export oriented sectors continue to be in our focus list.

The other thing is what seems to have shaken up the world is interest rates and inflation. A) Have the markets priced in the worst and B) how critical are interest rates and inflation in the current scheme of things?

Yes suddenly they have become very centrestage. In India or other emerging markets, periodically inflation rears its head; but for the world, inflation has come back after decades. Literally for the first time, if not in the living memory of people, certainly in the career memory of people who are in the markets. In the US, it is at a 40-year high, in Germany at a 48-year high and Spain also at a 40-year high.

For most countries in the world, especially in the western world, inflation is at a 20-30-year high. Even in India, the Wholesale Price index inflation for FY21-22 was over 13% which is a three decade high. It is off the charts and therefore something which people had not factored in.

Interest rates matter to the markets. If I put it very simply, any security that you buy whether it is a bond or a share is valued as a discounted value of future cash flows. So as interest rates go up, the discount rate goes up and therefore the value of those cash flows, especially cash flows which are out further into the future, reduces. Which is why you say growth does not do well and which is why all these new age tech companies where the cash flows were out in the future, have seen the biggest hit because as interest rates go up, their value reduces most dramatically compared to companies which have cash flows and profits today.

So that will remain an overhang but it is a question of how much equity markets have already priced in. Nasdaq is about the worst index in the world today. The central banks will continue to raise interest rates no doubt. The Fed’s remarks are quite clear that they have to bring inflation under control and historically, inflation in the US has almost never come under control without real rates being positive which means interest rates being higher than the inflation rate.

Currently inflation is 8.6% while the interest rate in the US after the latest hike is 1.75%. I am not saying that it will go up to 10%, but there is still a lot of room for interest rates to go up. In my opinion, India has been somewhat late in raising interest rates. Now, of course RBI has done two rounds but still it will take more to align interest rates to where they should be. So, definitely that is going to be an overhang on markets.

(A version of this article first appeared in The Economic Times)

From the desk of Devina Mehra

If you want any help at all in your wealth creation journey, in managing your Investments, just drop us a line via this link and we will be right by your side as your wealth advisor, super quick!

Or WhatsApp us on +91 88501 69753

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Another article about inflation? Reason to get a bit fed up (pun unintended)? Of course! But there's no getting away from it.

Inflation is currently the tail that's wagging the dog of the entire financial, and for that matter real, world. Inflation is driving policy, especially interest rate policy of central banks plus some fiscal policy (like the duty cuts on fuel in India).

After decades of being a tame, domesticated animal in the developed world, it has come roaring back. Consumer inflation is at a 40-year high in the US and Spain, 48-year high for Germany, 2-3 decades high elsewhere.

And it doesn't look like it's slowing down. In the US, Friday's inflation number of 8.6 per cent year-on-year was 0.3 per cent ahead of the previous one as well as the estimate. Based on month on month data (May 2022 over April 2022), over 70 per cent of items in the CPI basket are now running at an inflation rate of over 4 per cent annualised, up from just 30 per cent a year earlier.

The last time inflation was so high, the Fed Fund rate was in the 13 per cent range. It is 1 per cent now! 

While I'm not making the case that the Fed rate is headed to double digits, it can go a lot higher than what was anticipated. The tight labour market is also making reining in inflation expectations more difficult in the US.

More on the relationship between the Fed rate and the US consumer inflation a bit later.

As for Europe the headline inflation is around the same as the US at 8.1 per cent. However, there it is more driven by food and fuel, so while in the US, core inflation (inflation net of food and energy) is at 6 per cent in Europe it is 3.8 per cent.

The dreadful inflation number meant the 2-year US Treasury yields soared 0.55 per cent points in just two trading sessions. The terminal rate expectation i.e. the rate at which markets expect the Fed to end the hiking cycle shot up to 4 per cent.

Since nothing like this has happened in the last three or four decades we have to go back to history to see what the Fed possibly could do.

To recap, currently the consumer inflation is running at 8.6 per cent while the Fed rate is 1 per cent this means that the real rate of interest is 1 per cent minus 8.6 per cent that is a negative 7.6 per cent!

Historically, or at least since the 1950s, inflation has never been brought under control without the Fed rate being higher than the inflation rate i.e. without the real rate being positive.

The only exception was during the commodity inflation of 2011-12 which was mainly driven by energy and agricultural product prices. Since it was almost entirely supply driven and also did not exceed 4 per cent in any case, the Fed could afford to sit it out.

This time also the bet was that inflation was supply led and transitory, however that was not the case as there were many other factors also at play, including excess liquidity pumped in by the Fed and the cash handouts.

Even if we remain optimistic and expect headline inflation to drop by half to 4.0 - 4.5 per cent by early 2023, the terminal rate may need to be moved a lot higher in order to have any reasonable chance of controlling the rapid price increases.

The next question is: why do interest rates matter? You can look at the value of a security (share or bond) as the value of all future cash flows accruing to holders which are then discounted at a particular rate. As interest rates go up, this discount rate goes up and hence the value of cash flows received in the future goes down.

Thus, increasing interest rates have a negative impact on the prices of all risk assets, including both equity and fixed income - not to mention the riskiest ones like cryptocurrencies. It leaves few places to hide.

On the other hand, not clamping down on inflation soon enough can result in entrenched inflation expectations and an extended period of inflation and volatility like the 1970s which frankly would be the nightmare (and unlikely) scenario.

The more likely scenario is drastic action by the Fed even if it forces the US economy into recession.

The silver lining? A considerable part of the market correction may have already happened, given that Nasdaq is about the worst performing index in the world year to date.

As an aside, remember my warnings when all those nice sounding NASDAQ ETFs and funds were being launched in 2021? I'd pointed out then that Recency Bias should not blind you to the fact that just because Nasdaq had done well at that point for 2 to 3 years did not mean that it would always do well.

So the inflation, policy, economy and financial markets dance saga continues - we will have to wait for the next installments.

Of course this is all from our narrow perspective of the financial markets. More on the real world impact another time.

(A version of this article first appeared in The Economic Times)

From the desk of Devina Mehra

If you want any help at all in your wealth creation journey, in managing your Investments, just drop us a line via this link and we will be right by your side as your wealth advisor, super quick!

Or WhatsApp us on +91 88501 69753

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The rising price of crude oil due to the ongoing Russia-Ukraine conflict is burning a hole in our pockets. Everyone around the world is feeling the pinch.

Just as the global economy started registering signs of recovery from the negative effects of the pandemic, the war  exacerbated the situation. 

If anyone has been following the recent oil price news, it would appear to be all doom and gloom. Thankfully, there are steps you can take as an investor to protect your global investments. Let’s examine how the oil price rise affects the global economy

Stock Market

Researchers at the Federal Reserve Bank of Cleveland have recently discovered that there is hardly any correlation between the stock market and oil prices. Surprising, isn’t it? However, this study doesn’t imply that oil prices have little bearing on stock market prices; it only suggests that experts cannot predict the manner in which stocks react to oil price rises.  This is because correlation isn’t causation. 

An economist at the IMF named Andrea Pescatori put the above theory to test in 2008. He discovered that no correlation exists with a confidence level of 95%. Conventional wisdom suggests that an oil price rise would lead to increased input costs for business owners as well as lower demand from consumers who are spending more on fuel, thereby reducing corporate earnings. In the same vein, the opposite should happen when oil prices drop. However, Pescatori discovered that the variables moved in the same direction occasionally with the relationship being weak. 

On the other hand, high oil rates can lead to job creation and increased global investments as it becomes feasible for oil companies to take advantage of higher-cost shale oil deposits. Having said that, soaring oil prices negatively impact businesses and consumers with increased manufacturing and transportation costs. 

Transportation

There is a strong correlation between the spot price of oil and transportation. This is common sense as transportation requires fuel. Maybe in the future the dynamics might change due to rapid electrification of vehicles, but for now, the rising oil prices have a domino effect on the rates of other commodities. 

Currency

We have seen in the past that high oil prices have a pronounced impact on the Indian rupee, as India imports a large chunk of its crude requirements. As seen in the oil prices chart, if current trends continue, then the rupee is bound to depreciate. This will have an overall reverberating effect on the Indian economy and the stock market.  In such a scenario, the RBI intervenes to arrest the rupee’s fall. 

Current and Fiscal Deficits 

India meets its crude oil requirements through imports. Our increasing dependency on these imports means expenditure rises as oil prices surge, thereby negatively affecting the country’s current account deficit. 

Always remember, nothing is permanent. There is a lot of flexibility associated with global investing – and you can always turn a crisis into an opportunity by taking the right steps. 

When commodity prices rise, you can reorient your portfolio tactically by taking higher exposure to commodities both directly and via commodity stocks.

Need expert help with this? Click here to Enquire and we will be there to hold your hand through it all with our global advisory services.

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Moments after the Reserve Bank of India hiked the policy rate by 50 basis points, Devina Mehra, Chairperson, First Global, spoke exclusively to Moneycontrol on the impact of the hike and key risks to markets.

With this hike, has policy caught up with reality?

Of course, the RBI has been behind the curve on rate hikes. It took too long to react to inflation. Wholesale Inflation (WPI) was at a 30-year high for FY22. Many Emerging Market central banks had been raising rates multiple times for over a year. Therefore, on the way to catching up with reality is the way I would put it.

The government also doing some fiscal side and policy tinkering to cool down inflation—the reduction in duties on fuel.  Wheat export ban. Some restrictions on sugar exports. Likely to happen on cotton also.

Still overall inflation will be an overhang on household budgets and demand—coming as it does on top of business and job losses. This will impact GDP numbers as well demand for goods and services.

On balance, do you expect to see further correction in the markets in the coming days?

I do not see substantial immediate downside risk in the markets. I expect global markets, especially the US, to see a sharp rally at least in the short-term given the recent fall, especially the 40-90 percent crash in a large number in individual stocks.

While India did not fall to that extent, it is nevertheless likely to participate in the rally. I expect India to outperform the global markets this year, continuing its outperformance of last year—it was in the Top 10 global markets after something like a decade.

Of course, I do not expect an across-the-board rally the way it happened in 2021. This time the rally is likely to be more selective than was the case last year.

What could be the worst-case downside?

The outcomes in the real world are only a range of probabilities. At present, I don't see a huge downside at least in the next few months. The markets are in a range where you should consider selective buying.

And the worst case is always something you can't anticipate.

No one obviously anticipated COVID or its impact at the beginning of 2020. At the start of 2022, the Russia-Ukraine conflict didn't even make it to the top 10 risk areas globally.

The biggest risk to markets from here?

As far as the Indian economy is concerned, demand destruction is likely to continue, especially below the premium end with inflation taking big chunks off the household budgets.

This is already showing up in volume declines across areas from FMCG products to two-wheelers. The only industries/ niches doing well are those catering to the creamy layer from premium cars/ SUVs to high-end real estate.

Globally, the rate hikes will be an overhang on asset prices. I do not expect central banks, especially the Fed, to pay attention to asset markets till they manage to force down inflation and inflation expectations.

What changes in terms of equity strategy?

The thing to remember is that you cannot hope to catch the absolute bottom in any market. Our data shows that if you were invested for the last 40 years and missed out on just the best day of the year each year, over time your returns would come down by more than 70 percent!

Given where the market is currently, it will be prudent to start the reinvestment process or at best split it over a couple of months.

Do you see FII selling abate or accelerate in the coming month?

One, from the point of view of market movements I never like to track FII flows because over the long term or even on a month-to-month basis there never has been any correlation between market movements and FII flows. That is clearly borne out by data.

Having said that, we must also understand that the moves in FII flows are generally to do with broader trends rather than India-specific reasons.

After all, India is less than 3 percent of the world's market cap and is hardly central to the decision making by asset- allocators.

Hence, the move in foreign portfolio investments is driven by other factors generally speaking. Looking at them through the Indian lens is futile.

(A version of this article first appeared in Moneycontrol)

From the desk of Devina Mehra

If you want any help at all in your wealth creation journey, in managing your Investments, just drop us a line via this link and we will be right by your side as your wealth advisor, super quick!

Or WhatsApp us on +91 88501 69753

Chat soon!

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How do we achieve the state of steady returns with lesser volatility?
First Global’s Investment strategy is based on our unique, proprietary Human + Machine Model, as opposed to the traditional human only module of fund management of other fund houses.

In our fund management model, machine learning systems typically select between 80-100 stocks from an overall Universe of around 600 +700 stocks.

From this list of the best possible combination of factors that go into making a list of strongly outperforming stocks, we select between 40 and 70 stocks.

Based on extensive data analysis conducted over decades of data in India and globally, this unique model of investing results in a well- chosen basket of largely un-correlated picks.

The result of this is that we get a basket that outperforms strongly over a period of time, yet with low volatility.

By having several uncorrelated streams of returns we are able to build portfolios that generate alpha without the typical beta of concentrated portfolios. That is the beauty of our model.

Almost everybody else follows the exact opposite strategy of very concentrated bags which results in very highly volatile results with massive drawdown periods as was witnessed in March 2020.

Moreover, it is only through holding securities that have very low correlations across them, that true diversification is achieved. And that results in higher than market returns, with lower than market volatility and that is what is truly valuable.

What’s the role of artificial intelligence, machine learning and deep data in our unique investment approach?

Our approach to Investing is a unique combinatorial Human+ Machine Model as against the traditional Human only model and this sets us apart from the others in the Asset management industry.

At First Global, we have married extreme Big Data Science, Artificial Intelligence with our 30+ years of analyzing global wealth making processes.

With vast computing power, we comb mountains of financial data, annual reports, quarterly and annual numbers across decades, ratios, conference call transcripts, press coverage, social media chatter, macroeconomic data, quantitative sentiment indicators, etc.

There are more than 280 factors that are used in our Artificial Intelligence and Machine Learning Model. These include Natural Language Processing factors like Analyst calls, annual reports commentary, and several other aspects.

Hundreds of ratios and variations of ratios are tested continuously to find the best combination of Return, valuation, margin, growth acceleration, and several others for each particular market.

Further factors are added as our data science lab constantly tests new factors.

All these factors are then combined into a Machine Learning Model which throws up a list of stocks and assets every quarter. The use of AI+ML give us edge in analyzing a large universe of 21,000 exchange traded securities that meet our minimum market cap and liquidity criteria.

Hence, much of the heavy lifting work is done by our AI+ML model, to which there is a human overlay led by our Investment Strategy Team cherry picking the best of best available choices in any Market.

Does First Global offer any customized plans and how?

We do offer customized plans for our Segregated managed accounts where the minimum investment amount is $1 mn. These plans or portfolios are again designed using FG ExoTech, our proprietary Human + Machine driven quantitative investment model that analyses and selects from a universe of 21,000 exchange traded securities that meet minimum market cap and liquidity criteria.

What can be the risks in investing in a Pure Equity Scheme?

All research on investments shows that 85 to 90% of the returns of a portfolio come from Asset Allocation. The key to successful investing is to have a presence in every Asset Class – because at any point in time, some Asset Class is going to be in a Bull Market (for example, Technology in 1998, Emerging Markets in 2004-07, Commodities in 2003-08, US equities – Tech 2010 onwards, Japan in 2013-15, Global Fixed Income in 2009 onwards), and some will be in a Bear Market.

Most Investors in India suffer from poor Asset Allocation decisions because there is no single product that gives investors dynamic Asset Allocation: somebody sells them Equity, somebody sells Debt, some recommend Gold – these choices are bewildering and, more often than not, the wrong choices get made by Investors.

If you invest only in Indian (or your home country) equities,  SCCARs (Single Country, Single Currency, Single Asset Risks) is the risk you are taking and various crises during the world history have shown that this can deal a mortal blow to your portfolio. For example during the Asian crisis of the late 90s Asian market crashed 50 to 90% and investors who were exposed only to home markets faced complete disaster.

All Indian investors face this massive risk of SCCARs (Single Country, Single Currency, Single Asset Risks). Consequently, Indian Investors with no diversification over Global Multi-Asset Allocation Products.  suffer poor, suboptimal returns, as the tables below show:

Compound Annual Return Last 10 years
Sensex Index (USD) 8.5%
MSCI WORLD 18.8%
S&P 500 25.3%
NASDAQ Composite 22.9%
NASDAQ 23.1%

And this is after a massive run up from the March 2020 lows. In the decade prior to that, the Indian market gave only 1-2% annualized USD returns!

Through First Global’s top-down Global Asset Allocation Single Window-All Weather (SWAW) Investment Products, an Investor gains exposure across all major asset classes across the world, and the weighting of each Asset Class is changed to suit the view on that Asset class.

A Multi Asset Class, Single Window approach ensures that an investor always has exposure to one Bull Market or another irrespective of where (and in which asset class) they happen in the world. This is because Asset Classes move in an uncorrelated manner: having dynamic exposure across all Asset Classes ensures an investor can gain far better risk-adjusted returns.

Moreover, for Indian investors, who are still comfortable only with India, we have an Indian Multi-Asset Allocation PMS, which has diversified investments across various Indian asset classes: Equity, Fixed income, Commodities, Precious metals etc. This Multi-Asset portfolio ensures steady, consistent, strong, low volatile returns. The volatility of our Multi-Asset PMS is just 10% compared to 25% for the market. Hence, through a Multi-Asset portfolio one gets, steady, strong risk-adjusted returns, which is very essential in the prevailing volatile market conditions.

How do we do Diversification of funds in the First Global India Super 50 Portfolio?

Our portfolio is highly diversified across sectors and stocks because lack of diversification in one’s investment portfolio can truly leave one SCCARd. For an investment portfolio to be able to withstand any kind of market conditions, it is important to avoid SCCARs: Single Country, Single Currency, Single Asset Risks.

When we look at diversification, we do not consider just the number of holdings, but also the correlation across the different holdings.

A portfolio with 30 stocks might have very little diversification if all the holdings are from similar sectors, as is the case with many PMS schemes on offer. If all the holdings are from 1 or 2 sectors, in reality such a portfolio has just 1-2 large bets and is not diversified at all.

We ensure that we have true diversification in our portfolio. Correlations across our various holdings are very closely monitored. We have very strict limits on stock level as well as sector level weightages in our portfolio.

Also, we do not rely on the traditional method of measuring sectoral risk where each stock is exclusively categorized into a particular sector or industry. Stocks can have non-zero sensitivities to multiple sectors. Our unsupervised clustering algorithms identify such sensitivities and give us a truer picture of actual sectoral allocation.

Thus, our models help us in creating multiple uncorrelated streams of returns, such that something reduces risk, and something always gives you returns. Therefore, one can actually decrease risk and increase return, with diversification, as long as one constructs the portfolio properly.

The idea that diversification sacrifices performance is a myth peddled by fund managers who do not have the capability of providing dynamic and tactical diversification, across geographies and asset classes. Or even within a single market (e.g., market).

Also, data shows that in any Market period spanning one year or more, anything between 40 to 60% of the Securities in a market beat the market.

For example, if you take India Nifty 500, and analyze the data over 10 15 20 years, every year anything between 250 to 350 stocks beats the market.

On a global basis exactly the same percentages play out.

What this tells you is something extremely important: That as long as one has built systems to choose properly from the outperforming part of the market, and can easily beat the market without sacrificing any returns and in fact, one can beat the market with far lower volatility.

Therefore if you take the example of the entire world, out of 20,000 securities that we analyze, roughly 8 to 11,000 will beat the market every year. From that we pick a very small fraction: between 0.5 to 1%!

It is actually a very carefully crafted selection of the best of the best available choices in any Market. That is not a very wide selection by any standards! Hence, Diversification does not mean lower returns, rather diversification leads to a far higher quality of returns, i.e., returns with lower volatility.

And the results are there for all to see. Our risk-adjusted returns on any parameter, Returns/ Volatility, Gain to Pain etc are the best in class – roughly double the value of the next best.

In case you need further information or clarification at all, just email us back on this email ID and we will respond real quick.

We look forward to building substantial long term wealth for you and your esteemed clients by being partners in your wealth creation journey.

(A version of this article first appeared in AIF & PMS Experts India Pvt. Ltd.)

From the desk of Devina Mehra

If you want any help at all in your wealth creation journey, in managing your Investments, just drop us a line via this link and we will be right by your side as your wealth advisor, super quick!

Or WhatsApp us on +91 88501 69753

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