Investment Performance in June 2014

After the blowout outperformance in May 2014, my portfolio performance in June 2014 was somewhat muted, relatively speaking.

Here is a graph of my portfolio performance:

 

Here is a table of returns:

Returns My Portfolio Kotak Classic SBI Midcap Nifty
Last Month 7% 5% 7% 3%
Last 3 Months 35% 17% 20% 18%
Since Nov, 2013 66% 27% 48% 23%

As you can see in the table above, my portfolio outperformed the Nifty by 4% last month. Over the last 8 months, this outperformance has been a whopping 43%. However, it has been the time for Small Caps and Midcaps. And my porfolio consists largely of such small caps and midcaps. Compared to the SBI Midcap Fund, my porfolio performance is not as phenomenal. In the last month, the performance has been in line.  And the BSE Small Cap Index has actually eclipsed my portfolio, though not by more than 0.5% over 8 months.

What went up? Ajanta Pharma and R.S. Software, both stocks accumulated in the last 3 months. Clariant, another favorite of mine. Muthoot Capital Services, Balkrishna Tyres, Bharat Forge, IRB Infra and Mayur Uniquoters. In short, a bunch of Midcap and Small Cap stocks.

Portfolio Composition at the end of June, 2014

I am trying to maintain the discipline of disclosing my portfolio over the weekend after expiry in every month.

Notable purchases during the month include a significant increase in my holdings in IDFC and Oberoi Realty, and an increase in my holdings in Idea Cellular and an initial position in Tata Global Beverages. I also bought a reasonable amount of Sabero Organics as a special situations play. Amongst small caps, I created small positions in Morganite Crucible and Mazda Engineering. I trimmed my holdings in JP Infra and in Alkyl Amines.

I have too diversified a portfolio. Over a period, it will only became like the Nifty Junior. I am therefore trying to increase the concentration in my portfolio, and for the moment, two stocks, IDFC and Oberoi Realty are in my focus. I intend to increase my holdings further. I will give an investment thesis on both next week.

I am also increasing my exposure to Idea Cellular, though at a slower clip than the above two. The reason is simple, telecom stocks have got back pricing power, and the eminent entry of Reliance Jio, to my mind, is an overblown fear. Reliance has not demonstrated that when it comes to engaging the consumer that it is better than competitors. This is true for its previous telecom foray, as it is true for its retail foray. I have little doubt that they will be a serious player in the telecom space, but existing telecom players are not going to roll over and die. Idea’s balance sheet is the best amongst Bharti, RCom and Idea, and it is executing its plan well. This can be a FCF business of high proportions.

Sabero Organics was bought mainly from the point of view of merger with Coromandel International. The merger should not happen within a month or so, and buying Sabero today means buying Coromandel at a 7% or so discount.

Stock Latest Price Inv. Price Overall Gain % % of Portfolio
IDFC 128.35 112.35 14.24 4.05%
ILandFS 23.4 13.81 69.46 3.50%
Selan Explore 594.5 317.72 87.11 3.46%
Oberoi Realty 259.1 204.00 27.01 3.36%
Larsen 1667.3 949.93 75.52 2.48%
Cummins 639.3 406.70 57.19 2.47%
IRB Infra 224.6 81.35 176.09 2.44%
Balkrishna Ind 735.9 232.34 216.74 2.43%
Sesa Sterlite 289.35 150.99 91.63 2.32%
Mayur Uniquoter 374.5 111.03 237.29 2.25%
Clariant 861.05 617.20 39.51 2.12%
NMDC 178.95 121.65 47.1 1.96%
Kaveri Seed 721.2 296.64 143.12 1.96%
EID Parry 209.4 141.47 48.02 1.93%
Bharat Forge 608.25 272.25 123.42 1.87%
Hind Zinc 163.9 121.00 35.45 1.76%
Ajanta Pharma 1522.6 1007.73 51.09 1.65%
Sun Pharma Adv 160.25 121.93 31.43 1.61%
MPS 345.45 128.66 168.49 1.59%
eClerx Services 1159.8 866.27 33.88 1.56%
Indian Hotels 102.3 53.51 91.16 1.56%
Tata Inv Corp 547.15 404.99 35.1 1.55%
NTPC 152.25 130.22 16.92 1.55%
Sobha Developer 511.55 288.64 77.23 1.51%
Munjal Auto Ind 78.5 33.99 130.93 1.48%
Oriental Carbon 269.9 113.21 138.42 1.46%
Syndicate Bank 157.85 69.59 126.83 1.29%
ITC 319.75 304.43 5.03 1.28%
PI Industries 329 144.63 127.48 1.28%
ILandFS Trans 206.8 134.39 53.88 1.28%
Reliance 1012.1 756.12 33.85 1.27%
PTC India Fin 31.55 13.93 126.5 1.27%
ICICI Bank 1384.65 933.81 48.28 1.26%
Tata Steel 518.9 274.05 89.35 1.23%
Grindwell Norto 408.25 231.16 76.61 1.20%
Muthoot Cap 156.75 94.02 66.72 1.20%
Bajaj Electric 336.5 209.83 60.37 1.19%
TCS 2399.55 1771.20 35.48 1.19%
VST Tillers 1766.55 421.86 318.76 1.17%
Banco Products 115.4 56.16 105.48 1.09%
Poly Medicure 503.35 278.36 80.83 1.08%
RS Software 276.4 206.52 33.84 1.07%
Sasken Comm 220.45 180.30 22.27 1.07%

This constitutes 79% of my total portfolio. I am disclosing those stocks which constitute more than 1% of my portfolio. IDFC has gone up from 3.4% to 4.05%, even without any price increase. Oberoi Realty has gone up from 2.4% to 3.4%. I fully intend to have both of these at 10% within the next 2 months.

Portfolio Changes in May

In May, my largest purchase was Ajanta Pharma. Ajanta Pharma has been a favourite of the www.ValuePickr.com forum, because this was one stock which has had remarkable operational performance. I could never purchase Ajanta earlier, even though everyone at ValuePickr has it as one of their top picks. I used to think of it as expensive, so I gave it a miss, in favour of stocks like Avanti Feeds, Kaveri Seeds, PolyMedicure, Mayur Uniquoters, and VST Tillers, also from the ValuePickr stable. But the recent Pharma underperformance in the stock market, and Ajanta’s continued operational outperformance, meant that Ajanta again looked cheap, after its results in May, around a level of 1050. So now, this has the some decent weight in my portfolio. I expect gains to be muted, till Pharma becomes a market darling again. But it is in stocks which are not market darlings where bargains are to be found.

I also added more of RS Software, simply because there is great value in the stock. Currently, again, in line with the IT trend, it is not going anywhere. But I am patient. I also added some EClerx, because of a price drop. This is a company which I like very much, and I will keep adding, as the price keeps falling as the dollar keeps falling. I don’t think the market has even understood that EClerx performance this year will be unaffected by the dollar-rupee equation, since the entire revenue is hedged at higher dollar rates. It is next year, that performance will be adversely affected.

I also added some quantity of Akzo Nobel. I wish I had a chance to invest more, but the price ran up. Makers of Dulux paints, it will be a key beneficiary if the Auto and Housing sectors revive. I think this is a great company, and along with Clariant and Cummins, it will remain the core of my MNC portfolio.

I added some Munjal Showa, Muthoot Capital, Poddar Pigments and Kesar Terminals, all with dramatic gains after I purchased the stocks. All of them represent great value, and as the market runs out of value, I expect that all of them will see a dramatic PE rerating.
What about sells? I finally sold out of MCX, at a small profit. I still think it could potentially give a great return, but the uncertainties in terms of stake divestment and regulatory overhang are simply too high. Not worth it for a relatively risk averse investor, especially when the markets have some many other stocks going up.

I also sold out of Igarashi Motors, with a nearly 100% return. I still think this is a great company, but it is too export dependent, and performance will suffer with the dollar falling. I will return to it some other time.

I also sold some NTPC (bad call, it rose sharply after I sold), and BKT and Cummins. I sold small portions of my total holdings in all 3. NTPC, because in this market, it is not worth holding on to an annuity stock. I intend to get rid of it completely. BKT, because of dollar rupee concerns for a pure exporter, and Cummins-well, selling Cummins was a mistake. The only saving grace is that I sold a small portion of my portfolio holding.

I also sold JB Chemicals (invested in Ajanta instead) and Alkyl Amines Chemicals. Alkyl Amines Chemicals will suffer due to alcohol prices going up in this year. I also sold Balaji Amines because of the same reason. I also sold GMM Pfaudler, because I did not like certain related party transactions they carried out. Maybe it was a mistake to sell.

Investment Performance in May 2014

Here is a graph showing my investment performance in May 2014. This investment performance should be seen in the context of the hedging that I had carried out, to protect myself on the downside in the case that the election results would be unfavourable to the markets. This is despite my being reasonably certain of the results. However, sometimes one believes what one wants to believe, and I think it was prudent to, when faced with an event that could cause a catastrophe in the markets, protect one self on the downside. What I did is that I purchased Mayend out of the money put options, with strike prices 5% to 10% lower than the Nifty and the Bank Nifty on the date of purchase. Why the Bank Nifty? Well, I have mostly small and midcaps in my portfolio, and in the case of an unfavourable result, the likelihood that my stocks would perform worse than the Nifty was a given. On the other hand, the Bank Nifty moves more closely to my portfolio, so I preferred to hedge with the Bank Nifty. I wish it was possible to trade in Midcap Nifty options, but those options are not enabled.

The portfolio performance below includes the cost of the options, which of course, given the sharp market upmove, expired without any value.

Portfolio performance cannot be assessed without understanding the risk the portfolio carries. This was one key takeaway for me from the book by Howard Marks, The Most Important Thing. In this case, the risk that I carried on May 16, 2014 (Election Results Day) was much lower than most other investors, who were not similarly hedged. Hence, if I had a lower performance than my benchmarks, I would not (or should not) have been unhappy.

With the caveat above, I present the graph below with my performance for the month.

As you can see, I had a blowout month. I far outperformed the Nifty, and the Kotak Classic Fund. I did much better than the SBI Magnum Midcap Fund.

This is also understood in the table below:

Returns My Portfolio Kotak Classic SBI Midcap Nifty
Last Month 21% 9% 11% 10%
Last 3 Months 38% 17% 17% 18%
Since Nov, 2013 55% 21% 39% 20%

Since November 2013, I have returned 55% on my portfolio. The SBI Midcap Fund returned 39%, while the Nifty returned 20%. In May alone, I outperformed all 3 of my benchmarks by at least 10%, inspite of my portfolio being hedged.

Reasons to be proud. Whether this result is due to luck in the timing or particular choice of stocks, or some small ability, we will see in the long run.