Ram­nath Venkateswaran,

Fund Man­ager – Eq­uity, LIC MF

Dalal Street Investment Journal - - SPECIAL REPORT -

How im­por­tant is port­fo­lio weight­ing if one has to beat mar­kets?

Two im­por­tant con­sid­er­a­tions for build­ing a port­fo­lio to out­per­form the broader in­dices over the longer term are : (1) Iden­tify stocks with a high price ap­pre­ci­a­tion po­ten­tial com­pared to the over­all mar­ket and (2) Have a sig­nif­i­cantly higher weight on these stocks com­pared to the po­ten­tial lag­gards. Hence, port­fo­lio weight­ing is a sig­nif­i­cant el­e­ment of port­fo­lio con­struc­tion.

As a fund man­ager, how to you de­cide on which stocks to give how much weigh­tage?

Port­fo­lio con­struc­tion at our firm is the cul­mi­na­tion of the fol­low­ing steps: (1) Quan­ti­ta­tive model to iden­tify stocks;

(2) De­tailed re­view of the stock ideas from a fun­da­men­tal per­spec­tive fac­tor­ing in val­u­a­tion pa­ram­e­ters; (3) Drill-down to 30-40 stocks in the port­fo­lio based on the phi­los­o­phy of the fund. If it is a value-ori­ented fund, ma­jor­ity of the

AUM will be in com­pa­nies that can jus­tify their mar­ket cap­i­tal­i­sa­tion within 3-4 years of nor­malised prof­itabil­ity. If it is a growth-ori­ented fund ma­jor­ity of the AUM will be in com­pa­nies with high scal­a­bil­ity and healthy re­turn ra­tios. Weight to a par­tic­u­lar stock is a func­tion of: (1) Gap be­tween the cur­rent price and what we per­ceive as ‘fair value’ es­ti­mate of the un­der­ly­ing busi­ness as­sum­ing con­ser­va­tive pro­jec­tions; (2) Liq­uid­ity of the stock—a mea­sure to check if we can exit the stock with min­i­mal price dis­rup­tion in case some of the un­der­ly­ing as­sump­tions change. The in­di­vid­ual weights to stocks is fur­ther as­sessed from a macro-per­spec­tive to check if we are tak­ing too high a con­cen­tra­tion on par­tic­u­lar macroen­vi­ron­ment fac­tors like in­ter­est rates, be­nign com­mod­ity prices, etc..

Is there any ev­i­dence that equal weigh­tage port­fo­lio can give in­vestors an edge to out­per­form mar­kets?

There is no sin­gle port­fo­lio or a magic for­mula that can out­per­form the mar­kets con­sis­tently. It is up to the in­di­vid­ual in­vestor's risk ap­petite and his/her ap­pre­ci­a­tion of risks. Wise in­vestors have em­pha­sised that main­tain­ing a con­ser­va­tive ap­proach of cap­i­tal pro­tec­tion, adopt­ing a clear-headed ap­proach to ben­e­fit from volatil­ity from mar­kets is a good way to make money over the longer term.

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