Equity

Performance measurement – the difference between TWRR and XIRR

Performance reporting in the PMS industry had no standardized reporting till SEBI mandated managers to only report TWRR.  (Time Weighted Rate of Return).

TWRR measures skill of a fund manager – TWRR does not care about quantum of money invested, only the return earned over the time period money was invested.  It is calculated by multiplying returns over each time period money is invested and dividing it by the total time period. Alternatively, one can calculate this by assuming units are being issued at prevailing prices and calculating how the NAV of each units has evolved (MF method).

The stock market is not being irrational

In our last communication on 5 May, we had shared that we need to be realistic in return expectations as monetary policy is reversing which will have an impact on multiples.  We are seeing this play out as the market reprices risk.  There is a higher probability vs the last few months that inflation will stay elevated and that developed world Central Banks will need to raise rates aggressively and that could push their economies into recession.

Need for realism in return expectations

Conversations with partners over the past few days suggest some partners are not appreciating the change in monetary policy underway and what that means for future returns.

Hence, some points we have made earlier merit repetition.

The Fin Tech Valuation delusion

Technology buzzwords – “ML. AI. Blockchain. Platforms” are fueling investor delusions.   We share 2 articles and also explain why we don’t own any “FinTech” as of now. 

Technology buzzwords are fueling investor delusions

Will Technology firms take value away from Private Banks?

A question we introspect on significantly is whether the next stage of value migration in Banking will be from Private Banks to Digital players.

Our working hypothesis at present: well-run Banks will grow aggregate profits; however, their valuations will drift downwards as ROEs will decline. 

The flaws of Sharpe Ratio

Sharpe ratio seeks to determine risk-adjusted returns, or “returns per unit of risk”.   The higher the Sharpe ratio, the better the fund’s historical risk-adjusted-performance.

Solidarity’s Sharpe ratio since inception is ~2x that of the NIFTY.  This implies for the same level of risk, we have delivered twice the return.   

The shocking resilience of India’s stock markets

Commentators are wondering why the Indian stock market is “shockingly resilient” amidst the devastation caused by the Covid second wave.    Their premise is that Covid’s second wave is causing significant devastation and death.  2021 GDP growth has been downgraded.  Rising raw material prices will erode margins. The virus has spread across the country and will cause massive unemployment.  Analysts have started downgrading estimates.   Stock price valuations are 2X of China.  So why has the market fallen only 5% since February?

Is Value Investing dead ?

Over the last few years, traditionally defined “Value” stocks have continued to get cheaper while “Growth” oriented cos have done very well.  The divergence is stark and is now prompting questions whether Value Investing is dead. 

The categorization of stocks between “Growth” and “Value” is erroneous.   Anything that is low PE multiple and out of favour with markets is typically labelled “Value” and anything with high multiples and fast growth is labelled “Growth”. 

Implications of SEBI new guidelines on Multi-Cap Funds

SEBI came out with new guidelines last evening where Equity Multi-Cap Funds now compulsorily need to invest at least 25% of their corpus in “Mid Caps” (firms ranked between 101-250 in pecking order of Market Cap) and another 25% in “Small Caps (firms ranked 251 or higher in pecking order of Market Cap).   This needs to be achieved by 31 Jan 2021.

In this note we want to address the following issues

a)      How did SEBI get here?

b)      Our view on this order

c)       What this order means for Small and Mid-Caps in the short term?