Investment University

As an investment professional, the question I face the most is some version of this: "What do you think of the market?" "Where do you think the market is headed?", "Will the market go up or down?"

And really the only answer to this is: "Which market are you talking about?" Because my reply depends on this.

Otherwise asking whether the market is going up or down is like asking whether a Giant Ferris Wheel is going up or down. The direction for you depends only on which passenger cab you are in.

Now think of the Investment Universe as this giant wheel with each asset class being represented by a cab. At any time, certain asset classes are going up and some others are going down. Put another way, there is always a simultaneous bull market somewhere in the world, even as there is a bear market elsewhere. The outcome for your investment portfolio depends on which passenger cab you are in.

Before we go further, let's first understand what's meant by an asset class. The textbook definition is: An Asset Class is a grouping of investments that exhibit similar characteristics and are subject to the same laws and regulations.

Historically, the three main asset classes were considered to be equities (stocks), fixed income (bonds, fixed deposits etc), and cash equivalent or money market instruments. Since then, many others have been included: for example, real estate, commodities, futures, options and other financial derivatives, cryptocurrencies etc. As you would notice these include both physical assets like real estate as well as financial instruments.

While these are broad categories, these can be further divided by geography and other characteristics. For example, equities in Japan or South Korea may behave very differently from the equities in the US. Similarly in Fixed Income, the categorization is not just by geographies but also by credit rating and issuers - like government bonds, Investment grade Bonds and Non-investment grade Bonds (also called High Yield Bonds).

Asset Allocation determines most of your returns

The first thing to remember is that 85 to 90% of your investment returns are determined by your asset allocation - that is is the mix of various asset categories in your investment portfolio. This is to say that your choice of whether you are in US Technology stocks or German Real Estate or Singapore bonds will determine more of your investment Returns rather than the specific choice of stocks and bonds.

This, in some ways, makes investment simpler as you do not have to look for the needle in the haystack in the form of the multibagger stock you can boast about -what you do need to do is to be in the right mix of investment categories or asset classes at the right time. 

What matters is that you/ your Investment Manager/ Advisor has the right skills to do this.

According to Venkatram Mandalapu, the CEO of NV Consultancy, "In a fast-paced market environment, some asset classes tend to outperform the other. To keep up, asset allocation is the answer to weathering any storm through the key concept of diversification."

A truly smart Fund Manager can create a Permanent Bull market in your portfolio. Which brings us back to the Giant Ferris Wheel. If you can hop off the cab (asset class) going down and get onto to one going up, your portfolio can be in a permanent uptrend.

What you must avoid at all cost is SCCARs

"A Single Country Single Currency Single Asset exposure can SCAAR you forever," says Shankar Sharma, Vice Chairperson, First Global.

What is meant by this? Most of us, when we think of investments, think of investing only in our home countries and that too in a single asset class - usually equities.

Therefore if you are from India you might think of investing only in Indian equities. We all have this bias due to sheer familiarity if nothing else -but this can be very dangerous to your financial health because there can be long periods of time when a single market is not performing or is in a bear phase.

What you need is tactical and dynamic asset allocation because of this reason.

There is nothing called a Bull Market or a Bear Market 

There is always a bull market and there is always a bear market coexisting at any point in time - depending on which geographies or asset classes you are looking at.

What this means is that certain categories of investments will be in a bear market while at exactly the same time, some other categories will be in a bull market!

A trip down history will make this clearer.

Let's go back nearly a quarter of a century to the Asian crisis of the late nineties. This hit South Asia hard from Taiwan, South Korea and Hong Kong to Thailand, Malaysia and Indonesia. Suddenly the gleaming Asian Tigers had a comeuppance, with both the stock market as well as the currencies crashing.

In dollar terms all these markets were down 50 to 90% within a year. This was a disaster few saw coming as the 90s were go-go years for these economies and many other developing economies wanted to emulate their success. This brought home very starkly the dangers of being exposed to a single market, even if it is a high growth one.

However, the real story is that even as these Asian markets were in a tailspin, European equity markets were up over 25% in that same year and US Treasuries were up 20%.

That is a pattern we will see repeated time and time again as a crash or a bear market in one Geography or asset class is accompanied at the same time by other markets or assets going up.

Most of us remember the 2000 tech crash well, when after the first Dot com and tech boom, there was a major crash not just in the Nasdaq but across the US markets. US equity markets halved between March 2000 to October 2002. Even as this was happening gold was up 14% and both oil and US treasuries had good Returns.

A corollary to this is that no market is in a permanent bull phase. For example, nowadays many investors think that you cannot go wrong buying the US Stock market and particularly the Nasdaq. However there have been long periods of time when the Nasdaq ie US Technology has not been in a good asset class to be in.

For example, over the entire period between 2003 and 2007, the returns from US equities were very very tepid. Even from the post crash lows they went up only over 61% over this period and did not even take out their 2000 highs. In fact, NASDAQ did not reach its 2000 high right upto 2015!

Over the same time span, the Emerging Markets went up several times. The Emerging Market Index was itself up three and half Times. Brazil was up 10 times. Markets like India were up six to seven times. Oil tripled. Gold and commodities were up 130-150%. As always bull and bear markets co-existed.

In the last 10 years prior to 2020: Emerging markets were in a bear market while US markets were in a bull market. Despite, both being Equities!

Overall, Equities were in a bull market while commodities were in a bear market.

Till a few quarters ago when the commodity cycle began to turn. Oil and then metals began to turn towards prices that had not been seen for 10-15 years. More recently, food and other Agri commodities are racing towards their highs of a decade ago.

The point that is that there are simultaneous Bull Markets and Bear Markets.

They coexist. All the time.

It only takes deep understanding of markets, to understand this. And exploit it.

Smart, proactive Asset, geographical & Sector Allocation, coupled with tight, tactical Risk Management can indeed create a permanent bull market for your wealth.

"To remain in a permanent bull market Asset allocation and Percentage (%) allocation plays a very important role. One of the assets will always have its run in any given point of time," says Charudutta Joshi, Board Member Greenback Capital Limited.

Do ask: is your investment manager or wealth advisor capable of understanding, and then exploiting these simultaneous, bull markets and bear markets?

Or are they just a one-trick, Equity-bull-market pony?

A Fund manager who defines their investment Universe very very narrowly normally saying something like 'I invest only in my circle of competence'. What it really means that they invest within their comfort zone. That type of investment strategy or philosophy becomes a trap for you as an investor because that fund manager will do well when their type of securities are in a bull phase but when markets change as they invariably will, your portfolio can underperform for years together.

It is something like the fable of looking for your keys where there is light rather than where you are likely to find them.  So fund managers that confine themselves to a narrow area are unlikely to be able to find you the keys to riches.

As Luis Freire CIO & Managing Partner of BTA Wealth Management puts it, "Diversification ensures that by not 'putting all your eggs in one basket,' you will not be creating an unwanted risk to your capital. Diversifying your investment portfolio is important because it keeps any part of your investment assets from being too heavily weighted toward one company or sector."

Therefore, the question to ask is: how good is your investment manager at the business of managing risk while continuing to generate Returns.

Allow me to give you some examples from our own experience.

In India, in the month of February last year, we saw plenty of dangers looming up because of the virus.

As a result, we immediately took protective action through our Tactical Insurance for Portfolio Protection Strategy: TIPP Tech, which uses derivatives only for the purpose of hedging. And by buying Government treasuries.

Our TIPP Tech saved our clients from a lot of damage in India as well as in the Global Stock Market.

From that point onward, i.e., March-end, we remained fully invested, riding the entire Bull market.

However, from the month of October, we started to buy a matrix of put options, via TIPP, again which was hedging at different points in time, different elements of our portfolio.

Therefore, we kept capturing the upside that the markets gave us without running the risk of big losses.

On the Global side where there are far better Risk Management and investment options available, it is so easily possible to diversify beautifully, across the world, into several uncorrelated asset classes, and individual stock Positions, that one can escape big meltdowns: just the massive range of choices available: 13,000 stocks, 100s of Fixed Income and REITs, dozens of commodities (previous metals, industrial, strategic like Rare Earth), all, when combined together into a perfect portfolio symphony, can capture most of available upside, without endangering portfolio safety.

And one can hedge each security, as well as a basket, too!

Just imagine the flexibility on offer globally!

See how we did it in 2020

We moved away from our large American Technology stocks positioning around August last year and we increased our positions in Emerging markets and commodities.

As a result, we have had a very decent run even from the time that the NASDAQ became wobbly, with a flat-lining of major stocks like Amazon, Netflix, Facebook, Microsoft in the second half of 2020.

At about the same time, significant opportunities arose in commodities and thereafter in carefully chosen REITs. Of late, we have once again lightened up on commodities.

Further, our portfolios have been extremely well-balanced, with our overlay of TIPP Tech.

 Therefore we kept capturing most of the upside that was on offer across the world, without running the risk of suffering massive losses, should the market have fallen.

Therefore the way we do things at FG, whether in our India PMS or Global PMS and Global Fund, is completely different from the rest: we are extremely vigilant at all points in time and we keep adding layers of protection of risk management, on an on-going basis.

We always keep scanning the environment for durable shifts in trajectories of asset classes, sectors, countries.

Then, by tactically hedging our portfolios, through a combination of TIPP Tech and Tightened Stop losses, we almost ensure that even if there is a massive crash, we don't suffer massive losses as other PMS and Funds routinely do. (Some losses can and will happen, of course. We are concerned only about big losses)

This creates sustainable portfolio returns, even if it means foregoing some extra upside, once in a while.

Nobody minds that!

What should be your takeaway?

Simple: You just need to choose your Investment Manager or Wealth Advisor wisely and then leave the Tactical aspects like asset classes and sectoral allocation, the Risk Management, to that carefully chosen Investment Manager.

And then only you can enjoy the full benefits that the market offers.

The best Fund Management & PMS Services companies should be able to deliver this tactical Risk Management, that smoothens out your portfolio returns, by prevention of massive losses, thereby creating a near-permanent bull market in your portfolio.

If they can't ensure this, they don't deserve your wealth.

The key learning for you is that if your choice of investment manager is right, you have solved your entire problem completely with regard to the management of your money/ funds: if your investment manager has the capabilities to navigate good markets and bad markets, that's all the analysis & work you need to do.

For example, if this so-called liquidity-driven market collapses, is your Investment Manager or Wealth advisor already aware of this risk and have they done adequate, proactive Risk Management and sectoral diversification?

Investing Heaven is possible: one can participate in all the Bull markets that are happening in India and globally while not running the risk of massive capital loss: that is what this business of investment  & portfolio management skill is.

So stop worrying about navigating markets. Stop worrying about whether markets are too high.

Because that's what our job, as Investment Managers, is.

And that's what we do the best in this business.

And to end, this is how one can create a Permanent Bull Market: Smart proactive allocation, and risk management.

That's what Smart Money Managers or Fund Managers do.

We look forward to building steady and safe wealth for you.

(A version of this article first appeared in Khaleej Times)

From the desk of 

Devina Mehra & Shankar Sharma

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, super quick!

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