Quarterly Updates

Quarterly Update-Sep, 22

quarterly update sep2022 blog image

“Time heals everything”

Markets have proven again and again that it is certainly true for the markets.

We started the year with Russia-Ukraine war and it seems we are going to end with possible conflict between China & Taiwan. Inflation was at multidecade high not only in developing countries, but even in developed economies like US, Europe, etc. Everyone including us will see geographical disputes, GDP, Pandemics, Calamities as a major risk to the market and hence to our long-term goals. However, as most of us have experienced now, sooner or later markets will come back to the same levels or even higher. Whatever the risk was, whether it was Demonetization, Pandemic, War, Elections, etc, it is the Markets which finally came victorious. Even in this year, markets corrected in 1st half and now witnessing a decent recovery. It may correct from here and can go higher as well in the short run. But we are very much sure that it is going to be higher only in the long run. So, we can fairly assume that most of the risk fades away in the long term.

Interesting part is whether its investors or analysts, we all are focussing too much on these short-term risk even knowing that it will fade away in the long run. In all the big events we miss the biggest risk of all- Inflation. This is the only thing which takes toll on your wealth in short as well as long term. Think of the market for past decades and you will find that it has always bounced back. However, inflation has only gone up for any period. Your Rs 100 in market can become 110 or 90 in the very next year but inflation will surely make it an equivalent of 93 or 95. So, better to think of a strategy which beats inflation in the long run.

If we look at inflation data for the last 10 years, the average CPI inflation has been at 6.1% in India.

The annualized returns from various asset classes and their comparative outperformance over Inflation is listed below:

  • Equity (Sensex) – 12.2% (Outperformance over Inflation: 6.1%)
  • Debt (FDs) – 7.1% (Outperformance over Inflation: 1%)
  • Gold – 5.4% (Outperformance over Inflation: -0.7%)
  • Real Estate (Housing Price Index) – 6.4% (Outperformance over Inflation: 0.3%)

If we go through the above data, looks like equity is a clear winner and best tool to fight inflation. It’s true as well up to certain extent. It doesn’t mean that we should be 100% in equities. There have been many periods where Debt or Gold has outperformed Equities over 3- or 5-year periods. Also, equities come up with higher volatility and risk as compared to other asset classes. The best way to fight inflation is to have asset allocation which provides inflation beating returns at the time of exit. Its okay to have lower returns than inflation during the journey as it helps to accumulate assets at discounted prices. What matters most is portfolio should have given inflation beating returns at the time of exit.

New Addition to the List of FinAtoZ Approved Products:

Edelweiss Balanced Advantage Fund: This is a hybrid fund investing in debt, equity, and arbitrage. Their equity exposure can range between 30% to 80% depending on the market conditions. The fund managers maintain the equity levels by hedging their portfolio i.e., hedging their equity allocation when markets are moving down. This helps in reducing the downside if the markets fall. Hence, they have low volatility and better risk-reward ratio. Hence, we have added this fund in our approved list of Hybrid funds.

Unifi High Yield Fund: This is a Debt PMS offered by Unifi. This fund invests in fixed income opportunities with an aim to generate Core Inflation + 5% p.a returns. It predominantly invests in Alternative NBFC with good fundamentals and proven track record with an average maturity of 3 Years. They also invest in equity segment through event-based arbitrage, REITs, and Directional calls to enhance the returns and manage liquidity requirements. Unifi are also managing interest rate risk very well as it holds the debt to maturity. This fund has given 13.6% CAGR and Std Deviation of 1.75% p.a in the past. Minimum investment is 1 Cr and it is suitable for Mod Aggressive customers with average holding period of 3-5 Years.

Myre Capital Vaishnavi Tech Park Opportunity-II: – As an extension to Myre’s Vaishnavi Tech Park Opportunity- I, the Vaishnavi Tech Park Opportunity II provides investors with an opportunity to own a fractional share in a newly constructed Grade A+ Office Property in Outer Ring Road in Bangalore. The tenant, SmartWorks, signed a lease for nine years. As a well-established IT Hub, Outer Ring Road is the most sought-after location in Bangalore, offering the most extensive stock of office space with the lowest vacancy rates. Moreover, as a Platinum-rated asset (Rating provided by the Indian Green Building Council), the property is of the highest quality offering excellent prospects for capital appreciation. Investors can seek to earn a rental yield of 7-8% per annum. In addition, investors can expect to benefit from capital appreciation at an IRR of 14% at the time of exit nine years from now.

Update on few of the FinAtoZ Approved Products:

Buoyant PMS: The fund manager has deployed cash heavily in June and July taking advantage of Market Correction (15% Cash in May fell to 5% in July). IT Companies are in margin pressure facing revenue growth challenges amid fear of Recession in West. Hence their exposure in under-weight here. Overall, they have increased allocation in large cap and small cap to 40% and 38% respectively.

Few Products that were Analysed and Rejected:

We at FinAtoZ continuously evaluate new and upcoming products in the market. However very few products that are evaluated make it to the final list of approved products. Some of the investment products that were evaluated and rejected are:

IIFL Pre - IPO Series: This is a high-risk product that invests in companies headed for IPOs or those in late-stage growth. We rejected this as risk-reward of this was not favourable. Risk was higher but the returns looked slightly lower than listed equity.

Piper Serica Angel Fund: This fund invests in very early-stage companies. In the current environment of liquidity squeeze, these kinds of companies will find it very difficult to survive. So, the risk-reward in the current environment is not looking favourable.

Strata Chennai Office Project: We rejected this fractional real estate opportunity as the asset is 9 years old, hence the potential for capital appreciation in this asset is low. And since the tenant is not a blue-chip company with a lock-in of 3 Years, it could potentially pose a higher level of vacancy risk.

We will continue to analyse such products that may come in the market from time to time. When we find the right product fit for clients based on risk-reward, we may approve the same at that point of time.