Some food for thought
"Never cut what you can untie."
—Joseph Joubert (French Writer, 1754-1824)
Word for the day
Camp (n)
Something that provides sophisticated, knowing amusement, as by
virtue of its being artlessly mannered or stylized, or self-consciously
artificial and extravagant.
First thought this morning
A Congress leader who is very active on social media,
highlighted that it took a Pakistani leader (Imran Khan) to remember a great
Indian hero (Tipu Sultan) on his death anniversary. He basically implied that
the Indian leaders not remembering Tipu Sultan on his death anniversary is
disappointing. As usual, his tweet created a storm in the tea cup (Tweeter).
For few hours his critics abused him & Tipu incessantly. Patriotism of Tipu
is a matter of acrimonious debate and I do not want to get into that this
morning. What interested me was a retort tweet from opposite camp, chiding the
Congress leader for not remembering Lord Basaveshwara (or simply Basava) whose
birth anniversary coincides with Tipu's death anniversary.
I know about Lord Basava, because my daughters study in a school
named after him (Basava International School) run by Karnataka Lingayat
Education Society. But a cross check with my contact list indicated that the
awareness about this reformer saint is negligible outside Karnataka. This is
unfortunate. Like the Kabir and Ravidas in UP, Jyotiba Phule & Sahu Ji Maharaj
in Maharashtra, Narayan Guru in Kerala, Raja Ram Mohan Roy and Vivekanada in
Bengal, Perriyar E. V. Ramasamy in Tamil Nadu, and many other reformers in all
states, Lord Basava did remarkable work to eradicate the malice of
untouchability and casteism from Indian society.
It is misfortune of children studying in schools that they are
not being adequately taught about these great reformers and their struggle.
Mostly, children are aware about legends from their own state only. The
awareness though is limited to Q&A likely to come in examination.
To make our children truly nationalists and patriots, they need
to be taught about the great leaders, cultures, architecture, customs and
places in all the states so that they feel proud in associating with the entire
country rather than their own city and community.
The comforting thought this morning is that both my daughters
have learned about the teachings of Lord Basava and strongly despise any kind
of discrimination on the basis of caste, religion and gender.
Chart of the day
Active vs passive
In global investing context, the debate over passive vs. active
styles is very old. However, in past year or so, this debate is gaining
currency in India as well. Riled by severe underperformance of broader markets
vs. benchmark indices, and setbacks for many Alfa fund managers and famous
stock pickers, investors are getting attracted to Index funds and ETFs which
track benchmark indices like Nifty and Index. Lower cost of fund management
& fee is also an added attraction. Rise in AUM of pension funds, which are
majorly investing in Index products is also one of the reasons for
popularization of passive investing.
Investing in Index Fund and Index ETF is called passive
investing, because these funds replicate the benchmark in their portfolio
without any discretion to the fund manager. The portfolio changes only when the
constitution of the underlying index undergoes a change.
Theoretically, the performance of a passive fund shall mirror
the performance of the underlying index. But in practice there could be some
differences due to transaction cost, impact cost, and time lag (tracking error)
etc.
Before discussing merits of passive investing in India, it is important
to note the long term returns in some popular global indices.
Firstly, let us take a 20year period horizon (1999-2019) that
normalizes two major boom bust cycles (dotcom and subprime) and capture at
least one full commodity and rate cycle.
As you can see from the table below, Except for the two emerging
countries, India and Indonesia, none other major market yielded any meaningful
return in these 20years. In many case returns were negative even relative to
the policy rate. The situation would appear even worse if we consider actually
borrowing cost for an average investor.
However, if we take the 10year period post market bottoming in
summer of 2009, we see decent returns in many markets. The reason for these returns
are two fold — (1) very low base and (2) abnormally low interest rates leading
to meaningful re rating of equity valuations.
In this phase, incidentally, India's Nifty yielded returns
identical to USA's S&P500. China, South Korea and Singapore equities
however continued struggled even in this period. This was the phase when
Chinese growth engine started to stutter for the first time in two decades.
Europe and Japan did very well as all foreseen disasters were successfully
averted by extremely loose monetary policies of ECB and BoJ respectively.
However, if we take a period of 5yrs from 2014, to account for
the Fed tapering, global growth peaking in 2018 and beginning of Sino-US trade
war, we see moderation in returns in most jurisdictions; India, Japan and China
being notable exceptions.
Prima facie, India's Nifty50 has yielded consistent 12% CAGR
over 5yr, 10yr and 20yr period. This makes a strong case for passive investment
in India. However, if we take a slightly broader view, we shall see that
broader markets have materially outperformed the benchmark in India.
....to continue tomorrow
