When you talk a lot, you end up talking a lot to a lot of people. The range includes some self made businessmen (i have super duper respect for them), venture capitalists (its a bloody jungle out there), private equity players, fund houses…and of course complete strangers.
When I talk about Portfolio Construction..i mostly come away amused. Most (well almost all) investors believe that they can get an alpha to the market. One hundred percent of the people I talk to are CONVINCED that they will get an alpha. ‘I will get x% in a mutual fund and about x+5% in a self created ‘equity’ portfolio. More like your mom’s laundry list.
- Most people do not know what is alpha, but they say ‘more than mutual fund’
- They have no clue HOW MUCH ALPHA DO THEY WANT
- There is no plan to buy equity – i mean they want to buy but not scientifically
- They do not know which direct equity to buy
- So most of the time it is just some ad hoc stocks.
- They have full time, taxing 12 hour days 5-6 days a week job
- they also have a family which expects them to give time
- their day jobs have NOTHING (repeat, nothing) to do with equity research
- they of course have no clue from where the alpha will come from
- I ask them ‘where did Franklin India Blue Chip fund get its alpha from…
- Mostly that question is met by ‘how does it matter?’
- Getting alpha if they do direct equity is considered their right
- They obviously do not do Fundamental Research or Technical Research
- A question like if a company makes ‘glass containers’ can you compare the PE to the glass industry or container industry..OMG!!
Let us assume you want alpha from the Sensex. This means you need to buy ALL the industries contained in the index. You then take each and every share and decide whether you want to buy that share or some other company in that industry. For example banking for example – you find that the heavy weights are SBI and Icici. However you decide that you will buy Hdfc bank, Indusind bank and Kotak bank..HOWEVER you will leave the banking weights unchanged. Thus you are not fooling around with the industry weightage in your portfolio, but you are choosing different banks.
On the other hand you decide that the sensex has too many commodity stocks – Reliance, Coal India, Ongc, Hpcl, Bpcl, Cairn India – so you decide to drop 3 of those companies and pick up Colgate, Gillette and Nestle. Logic? well you feel that brands carry more value to the shareholder than commodities. I AM NOT SUGGESTING or questioning what you are doing, JUST enumerating what you do.
Thus you are expecting ALPHA in your portfolio by changing weightage AS WELL as changing some component in the index.
Now you should be able to even tell me how much is alpha going to be. Say 3%? Well this is not a small target at all. Big large funds are not able to sustain this % over long periods of time.
However, do remember that mutual funds come with a cost. However the benefits of portfolio selection, research, portfolio construction (allows you to mix and match funds), good regulation, reporting, etc. allows you a nice peaceful sleep.
And it allows you to concentrate on your job. Do not underestimate the effort which goes behind constructing a good portfolio and running it for long periods of time. Franklin Templeton, Motilal Oswal, Naren Sankaran, Hdfc mutual fund…all have long track records in the public domain. To think you can outperform them requires some huge huge confidence.
I am not sure I have that.
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