Friday, August 12, 2016

Overeating invariably leads to indigestion

GREETINGS TO ALL OUR READERS FOR 70th INDEPENDENCE DAY OF INDIA.
 
Thought for the day
"Man has no right to kill his brother. It is no excuse that he does so in uniform."
—Percy Bysshe Shelley (English, 1792-1822)
Word for the day
Polyphonic (adj)
Consisting of many voices or sounds.
Malice towards none
Indian Railway proposes to allow private parties to buy train names for a fee.
Would be great source of revenue and peace if the government makes it a policy and sells the names of all its schemes, e.g., Dhirubhai Ambani Gram Sadak Yojna or Godrej Worli Sea Link!
First random thought this morning
Almost every day, newspapers carry reports raising doubts about how Dr. Zakir Naik might be working against the national interest for long.
If these reports are even partially true, the security apparatus of the country might need a complete overhaul.
Not having done in the aftermath of 26/11, should be considered a brazen lapse on the part of the administration.

Overeating invariably leads to indigestion

In our country - SIP, Asset Allocation and Diversification are indubitably most misunderstood and misused terms in the context personal investing, in my considered view.
With due regard to the utility, competence and integrity of the investment advisors and wealth managers, I feel that their training and orientation lacks the understanding of investment basics. This deficiency in understanding is transmitted in the behavior of common investors and fully reflected in their investment patterns.
For example, consider the following—
(a)   A systematic investment plan (SIP) is typically used to meet multiple objectives, e.g., investment discipline, benefit of compounding, avoiding the need to time the market, ease of managing investments, etc.
       However, it is common to see advisors recommending SIP as a tool of cost averaging. Conceptually, cost averaging can only done in a static asset. How is it possible to do average cost in a dynamic asset like mutual fund portfolio that may change almost every day. In India even the constituents of benchmark indices have changed rather frequently!
(b)   Asset Allocation (AA) is a procedure usually followed to bring the asset portfolio of an investor in synch with his risk appetite and life cycle. The task cannot be completed unless the advisor has a complete knowledge of the investor's assets, both financial as well as non-financials. This is seldom the case in Indian context.
       Tell you an interesting anecdote relating to this.
       Once I was sitting with the promoter of a south India based pharmaceutical company, who had material stakes in real estate business also. His wealth manager from a renowned global bank was also sitting with him. The promoter had got a few crore in dividend from his company and wanted to invest the money.
       The wealth manager was privy to only 0.5% of his total asset portfolio. Nonetheless, he suggested him a 50:40:10 Equity:Debt:Gold allocation. In the equity part he suggested a set of mutual funds including a pharma sector fund and a mid cap diversified fund with 37% exposure to midcap pharma companies. In debt he suggested FMPs with material exposure to real estate bonds.
       These suggestions were made to a person whose ~90% legal networth was invested in the equity of a single pharma company; 9% networth was in rent yielding (fixed monthly income) real estate and 1% was cash. Being a Andhra landlord, it is anybody's guess that he must have few kilos of gold at home that does not reflects in his balance sheet.
       In this case, what would you think of the advisor suggesting the referred asset allocation plan, that I leave it to you.
(c)    In the name of diversification, investors are many a times sold a variety of mutual fund schemes which not only are similar in risk profile, sectoral exposure, but in fact contain the same securities.
The point I am trying to make is that the greed dominating the investor's sentiment near the peak of a market cycle and fear overwhelming them closer to the bottom of a typical market cycle is no co-incidence.
It is the understanding, training, orientation and skilling of both investors and advisors that is lacking.
Unfortunately, it is not the investors & advisors alone, but the regulators & government may also be wrong about the dynamics of the equity investment in India.
In my view, post liberalization of trade and commerce in 1990’s, the number of self entrepreneurs has certainly increased in the country. This has coincided with the sharp fall in public sector employment. The aggregate private sector employment level has not been able to compensate for fewer opportunities available in public and unincorporated private sector. Consequently, the total number of employees on live payrolls has fallen sharply since early 2000’s.
The combination of two – lower employment opportunities and liberal business rules – has perhaps forced people towards entrepreneurship. The number of self owned enterprise has swelled in past one decade, implying people are investing in more in equity, but not in listed equity.
As per 67th round of NSSO survey (June 2011), there were 58million unincorporated enterprises in India (excluding agriculture, construction and those registered under Factories Act). Over 85% of these enterprises are run by the owner himself, without any hired worker. 44% of these were run from the residence of the owner. These enterprises employed 108mn people against just 39mn on the live payroll in organized sectors, including 11mn in private sector.
These self owned enterprises generated annual gross profit of Rs628.36bn; whereas all listed companies in India generated gross profit of Rs610.44bn in FY12. 1/3rd of this profit was earned by top 36 PSUs. Top 100 listed companies accounted for over 76% of this value addition.
The point I am making is that there is a strong equity culture amongst Indian households. However, factors like fewer employment opportunities, better business opportunities and dismal performance of publically traded equity have led them to invest more in their own business and/or home equity rather than listed equity.
Advising these people to invest in equity, directly to through NPS, EPF, ULIP etc. may actually not be a good idea. Because, these are the people who are highly aspirational but can ill afford any additional risk. They are therefore easily swayed by the forces of greed and fear.

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