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How good are fund managers?

September 13, 2010

Every Sunday, financial daily The Hindu Business Line (BL) publishes an interesting section called ‘Basket of X’ in its Investment world page. Every week, BL invites a fund manager from a leading fund house (it calls it ‘X’) and allows him to pick 5 stocks of his choice that he thinks will give best returns in a week going forward. BL does not reveal the name of this fund manager and instead calls him ‘Don Diego De La Vega’. Set of these five stocks, selected by Don Diego (Fund Manager), is called the ‘Basket of X’. Then there is another basket of 5 stocks that are randomly selected by BL. Next week, this Basket of X is compared with the basket of random selection, based on the return generated by them in one week time. Whichever basket generates higher return is the winner of the week.

Source: The Hindu Businessline

I have compiled this year’s (till 12th Sept 2010) Don Diego’s performance over random selections. It is interesting to note that most of the time these fund managers (Don Diego) have underperformed the random selections. To be precise, out of a total of 36 times, Random selections have managed to beat Don Diegos’ selections 21 times, whereas Don Diegos have managed to beat random selections only 15 times. Also out of these 36 performances, 16 times Don Diegos’ selections have generated negative returns. In contrast, random selections have given negative returns only 11 times.
Though I am not trying to prove anything here, but the question here is that how good are our so called financial market wizards/fund managers. Looking at the Don Diego’ track record we can say that Efficient Market theorists have some merits in their arguments. Especially the one where they say, capital market experts (read fund managers) are good for nothing!

Week Don Diego’s Return (%) Random Selection Return (%) Winner
5th Sept -0.03 0.16 Random
29th Aug -3.88 3.17 Random
22nd Aug -5.99 2.67 Random
15th Aug -2.46 6.17 Random
8th Aug 0.51 1.7 Random
1st Aug 1.24 -3.82 DonDiego
25th July -9.3 0.8 Random
18th July 1.35 0.09 DonDiego
11th July 1.5 2.2 Random
4th July 0.17 4.5 Random
27th June 1.02 1.12 Random
20th June 1.86 -0.89 DonDiego
13th June 0.77 -0.03 DonDiego
6th June 1.8 1.64 DonDiego
30th May 2.09 0.3 DonDiego
23rd May -4.56 -4.26 Random
16th May 4.5 1.6 DonDiego
9th may -5.29 -0.16 Random
2nd May 1.52 -1.43 DonDiego
25th April 0.87 1.14 Random
18th April -3.31 -0.34 Random
11th April -1.09 2.89 Random
4the April -1.6 1.32 Random
28th Mar -1.93 3.55 Random
21st Mar 1.05 -0.78 DonDiego
14th Mar -4.22 0.42 Random
7th Mar 3.42 3.24 DonDiego
28th Feb 0.72 0.35 DonDiego
21st Feb -1.95 -0.44 Random
14th Feb 5.81 0.65 DonDiego
7th Feb -1 -0.38 Random
31st Jan -5.85 -5.7 Random
24th Jan -3.81 -6.91 DonDiego
17th Jan 1.56 0.35 DonDiego
10th Jan 6.93 4.19 DonDiego
3rd Jan 0.57 2.98 Random

Take on Bharti-Zain in Businessline

September 5, 2010

Recently, I was quoted in Hindu Business Line regarding Bharti’s falling user base in Africa. In its June quarter results, Bharti reported a user base of 36 million for its recent acquisition, Zain Telecom (Now Bharti Zain). This was almost 6 million lower than the user base of more than 42 million that it had reported during its acquisistion of the company in March 2010. When I posed this question to Bharti’s management in the comapny’s 1st Quarter (June 2010) analyst call, they did not divulge further information on this issue. In my opinion, this massive fall is the result of a change in ownership. It also indicates that the African telecom markets are not free from intense competition. It is possible that these 6 million subscribers may have shifted to MTN, Africa’s largest telecom service provider.

Posting the link of the article here. Take a look:

Why has Zain’s African subscriber base fallen?

The Wall Project Pune

June 4, 2010

Recently I attended first volunteers meet of ‘The Wall Project‘ Pune chapter and met a good energetic bunch of people. This project  is mainly about spreading awareness about social causes thru paintings on city’ walls. Tho nothing got finalized in this meet, we had some good discussions on possible venues (walls), budget etc. If everything goes well, first project should be happening by 1st week of Sept.

If you want to know more about ‘The Wall Project Pune’ check this http://wallprojectpune.wordpress.com/

or contact  @wallprojectpune / @sahilk on twitter.

Take Charge… Invest in Stocks!

June 3, 2010

It is very surprising to see a lot of people never receive the financial independence that they desire. It is often because they just can’t take that 1st step to investing, particularly in stocks. Investing in the stock market is often seen as something very technical and complex. People often give excuses like investing is too dangerous, too complex, too time exhausting, and only for the super rich. Also, business schools and various fund managers have made it seem more difficult by propounding complex investment theories. But in reality stock investment is one of the easiest and most rewarding options if understood well.

Indeed it may seem daunting to think about stock market investing if you have no background in this field. But the truth is that stock market investing, like any other skill, can be learned with enough background reading and analysis. Also, Investing in the stock market need not be an overly risky prospect if you know what you’re doing. The point here is that the stock investing is for everyone, not just the affluent. The simple way to get started is to follow a sound fundamental investment philosophy and invest for long term!

Baa, Bahu aur Sensex!

May 28, 2010

Sensex is on a roll again. Media is inundated with the news of ongoing correction in the markets, having rallied too high too quickly. After a quick run to 18000 in March 2010, Sensex has once again fallen by more than 10%. Some say the fall is not logical and mainly pushed by repetitive global (read European) crisis, while others claim that the fall is inevitable given the unsustainable rally by Sensex and it should correct even more.

There is much debate on this, lots of opinions being expressed on TV, in the pink papers, in the Internet on: Are these rallies justified? Does Sensex need more correction? What exactly should be the course of action for an investor given the extreme volatility of Sensex?

As we know that every stock has a fair value, Sensex too has a fair value. This fair valuation of Sensex depends on the financial performance of its constituent companies. As the earnings of companies go up, the value of Sensex also goes up. But sometimes for some negative economic or sector specific reasons, companies’ stock prices fall irrespective of the rise in their earnings. As a result we see a fall in Sensex.

This can explain current fall in Sensex.  Most of the Sensex companies have registered a good quarterly performance and have reported a rise in earnings. Ideally, incorporating this rise in earnings, the Sensex should be fairly valued at around 18000 levels and it did touch that level sometimes back. But looking at the current global scenario there is very good possibility that any more bad news could lead to a further fall.

So, what should be your action now? If you were part of the intelligent few who made the most of the crash and invested at the Sensex low, you could consider selling some of your stocks which appear to be overvalued. For others who missed the bus last time, could still find opportunities to buy wonderful stocks. Many stock prices have already started falling. A bit of patience and analysis could get you the opportunities to invest in fundamentally strong companies at throw-away prices!

PS: Please forgive me for the heading! 🙂

Do Bonus Shares really enhance your wealth?

March 1, 2010

We all enjoy getting bonuses at work. Don’t we? Bonus is something you get free and that’s why we all love it! That is what shareholders of a good company feel when their company decides to throw a few shares (free of cost) in their direction. Investors like to invest in companies which give bonus shares. A bonus issue is taken as a sign of the good health of the company.  Let us see, what bonus shares are all about and why investors like investing in such companies.

What are bonus shares?
Bonus shares, as the name suggests, are issued free to existing stockholders in proportion to the number of stocks held by them. It is essentially a book transfer by which a sum of money equal to the value of the bonus shares is transferred from the reserves to the equity capital in the company’s books of accounts. The issue of bonus stocks enlarges a stockholder’s stockholding without any dilution in his proportionate ownership of the company. These shares are issued in a particular proportion to the existing holding. For example, 1 for 1(written as 1:1) bonus would mean you get one additional shares, without paying anything at all, for the one share you hold in the company. Similarly if the company has declared 2:1 bonus share that means you will get two shares for one share you have. Thus a shareholder holding two shares, post bonus holds three shares of the company. Or, if you hold 100 shares of a company and a 2:1 bonus offer is declared, you get 200 shares free. After the bonus issue, total number of shares of that company will now be 300 instead of 100 at no extra cost. The company also announces a record date for the issue of bonus shares. The record date is the date on which the bonus takes effect, and shareholders on that date are entitled to the bonus. After the announcement of the bonus but before the record date, the shares are referred to as cum-bonus. After the record date, when the bonus has been given effect, the shares become ex-bonus.

Is it actually free?
Though, bonus shares don’t cost to shareholders technically, bonus shares are not free. Companies do not generally distribute their entire profits to the stockholders as dividends. A fairly large part of the profit is retained and added on to what is commonly called the reserves of the company. Reserves are back up funds which a company keeps for meeting unforeseen increases in expenditure, and for financing its future expansion or diversification programmes. But when the reserves have more cash than required for the reinvestment, then companies use these free cash reserves for issuing bonus shares to share holders. For this, the company transfers some amount from the reserves account to the share capital account by a mere book entry. Bonus shares are issued by cashing in on the free cash reserves of the company. As, shareholders do not pay; the company’s profits are also not affected by issuing these bonus shares. Bonus shares increase the total number of shares of the company in the market, i.e. after the bonus issue a company will have more free floating shares in the market.
Let’s see how. Suppose initially, a company had 10 million shares. This year the company decides to issue bonus shares in 2:1 proportion. With a bonus issue of 2:1, there will be 20 million shares issues in addition to 10 million existing shares in the market. So now, there will be total 30 million shares. This is also referred to as equity dilution. The earnings of the company will also have to be divided by the increased number of shares.  Since, bonus issue has no impact on the profit, it remains the same but the number of shares has increased, the EPS will decline.

Will the price change after a bonus issue?
Ideally, the stock price should also decrease proportionately to the number of new shares issued. But, in reality, proportionate price changes may not occur. That happens mainly because of increased liquidity and enhanced investor confidence in the company’s management. After the bonus issue, the stock becomes more liquid which makes it is easier to buy and sell. Also, issuing bonus shares signals that the company is in a position to service its larger equity. A company will not normally issue bonus stocks unless it is confident that its future growth prospects justify an expansion in its equity capital. Therefore, the expectation of a bonus issue by any company normally creates a climate of optimism and cheer in the stock markets and usually results in a rise in the price of a company’s stocks just before or upon the announcement by it of a bonus issue.

Does bonus issue increase your gains?
Though, getting bonus shares is a positive development for the investors, bonuses may not necessarily generate free gains for investors. Bonus issue does create a tiny upward and short-lived bias because of above mentioned reasons. But for most of the companies this appreciation in price dies in the long run. If we look in Indian stock market, we see that except for some large companies like TCS, bonus issues did not add much to investor wealth, especially in the long run. In fact, investors in several companies have lost substantially, even after taking into account extra shares they received through bonus issues. Anu’s Lab is a notable example of this phenomenon. Anu’s Lab gained more than 19% the day it became ex-bonus but its price started slumping soon after. Currently Anu’s Lab is trading at 44% lower price compared to its pre-bonus price (see the list).

Below table gives a list of 40 companies which issued bonus shares in FY 2009-10. As expected, most of the companies (32 out of 40) reported appreciation in stock prices soon after they became ex-bonus. But this euphoria could not stay very long for most of the companies. Out of these 40 companies, only 21 companies could maintain their price appreciation (as on 5th Feb 2010). Out of these 21 companies, only 16 companies are reporting more than 15% price appreciation.  Companies like Anu’s lab, Vishal InfoTech, Country Condo, Veer energy and Anil Modi Oil are trading way below their pre-bonus prices. Investors, who invested in these companies with the motive of handsome appreciation in future, must have burnt their fingers badly. Investment in such companies has resulted into depletion of wealth instead of appreciation of investor’s wealth. So we can say that buying a share solely because of the bonus issue is a “purely speculative” trade. It has very little to do with enhancing investors wealth. Though companies with bonus issues attract a lot of interest in the current market which creates an up move in stock prices, the long run sustainability of the up-trend mainly depends on other factors like fundamentals of the company and general market conditions. Before making any investment decision, investors need to do through fundamental analysis of bonus-issuing companies.

List of Companies with Bonus Issues in FY2009-10

*Prices are adjusted after bonus and splits. †Prices on 5 Feb 2010.

Company Bonus Ratio Ex-BonusDate Pre Bonus Price*(Adjusted) Ex-Bonus Price*(Adjusted) Price† on 5Th Feb 2010
% Gain/Loss
@Ex Bonus Price
% Gain/Loss
@current Price
Intra Infotech 02:01 28/01/2010 17.2 18.05 16.9 4.94% -1.74%
Nakoda Textiles 01:01 22/01/2010 14.36 16.3 12.07 13.51% -15.95%
Websol Energy 01:01 29/12/2009 172.05 171.9 136.5 -0.09% -20.66%
Splash Media 03:01 23/12/2009 135.71 142.45 194 4.97% 42.95%
JP Associates 01:02 17/12/2009 144.93 149.4 125.25 3.08% -13.58%
CNI Research 01:01 17/12/2009 16.78 16.9 17.3 0.72% 3.10%
Diamond Cables 01:03 16/12/2009 122.59 128.75 115.6 5.02% -5.70%
Int Conveyor 01:01 10/12/2009 40.12 42.1 34.2 4.94% -14.76%
Adani Enterpris 01:01 10/12/2009 422.43 429 467.2 1.56% 10.60%
Valson Ind 01:01 07/12/2009 35.63 39.15 24 9.88% -32.64%
Reliance Industries 01:01 26/11/2009 1096.88 1064.6 981.3 -2.94% -10.54%
IOCL 01:01 29-10-2009 321.2 315.25 307.9 -1.85% -4.14%
Numeric Power 01:01 14/10/2009 254.3 259.3 315.35 1.97% 24.01%
Anil Modi Oil 01:01 14/10/2009 22.23 21.1 13.85 -5.08% -37.70%
Sundaram-Clayton 01:01 09/10/2009 116.25 114.6 115.3 -1.42% -0.82%
Falcon Tyres 02:01 25/09/2009 155.66 156.4 179.75 0.48% 15.48%
Jaybharat Textiles 01:02 16/09/2009 344.3 361.5 452.35 5.00% 31.38%
Jindal Steel 05:01 14/09/2009 562.05 575.5 609.85 2.39% 8.50%
Ramcoind 01:01 14/09/2009 62.99 66.05 55.35 4.86% -12.13%
Hiran Orgochem 04:01 10/09/2009 10.46 10.95 8.5 4.68% -18.74%
Navneet 03:02 08/09/2009 39.02 42.6 45.4 9.17% 16.35%
Country Condos 02:01 04/09/2009 7.48 7.8 5.18 4.28% -30.75%
Tilaknagar Ind 02:01 02/09/2009 72.78 76.35 100 4.91% 37.40%
GEE 01:04 25/08/2009 57.88 60.7 50.2 4.87% -13.27%
Linkson Interna 02:01 21/08/2009 22.67 23.75 87.15 4.76% 284.43%
Glodyne Techno 01:01 20/08/2009 361.65 379.7 485.35 4.99% 34.20%
Kanani Industr 02:01 20/08/2009 158.5 163.58 249 3.21% 57.10%
Orient Abrasive 01:01 12/08/2009 21.4 21.6 27.65 0.93% 29.21%
Vishal Info 01:02 06/08/2009 18.97 20.8 11.5 9.65% -39.38%
Munoth Capital 07:02 05/08/2009 14.9 15.63 17 4.90% 14.09%
Avance Tech 04:01 03/08/2009 1.39 1.47 4.47 5.76% 221.58%
TRF 01:01 31/07/2009 422.1 409.8 752.4 -2.91% 78.25%
Divis Labs 01:01 30/07/2009 552.98 551 567.85 -0.36% 2.69%
Veer Energy 01:02 29/07/2009 18.97 19.84 8.73 4.59% -53.98%
Ind Tra Deco 02:03 27/07/2009 0.46 0.48 0.38 4.35% -17.39%
Anus Labs 01:01 24/07/2009 13.03 15.6 7.22 19.72% -44.59%
Transcorp Int 01:02 02/07/2009 31.63 33.15 43.8 4.81% 38.48%
Dolphin Offshore 02:05 29/06/2009 196.86 206.65 370 4.97% 87.95%
Indiaco Venture 01:01 19/06/2009 41.7 43.75 53.05 4.92% 27.22%
TCS 01:01 16/06/2009 389.3 389.8 726.05 0.13% 86.50%
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