“There are decades where nothing happens; and there are weeks where decades happen”
This quote by Mr. Vladimir Lenin perfectly sums up what we saw in the last 6 months: A once in a century event, health care crisis, unprecedented lockdown, WFH culture, high unemployment, steep market correction followed by questionable recovery and finally hope for a vaccine that will be the panacea of all these ills. We have seen it all. Things may seem worse but below trend shows some hope for us:
This period gave us many lessons in a very short span of time. In this newsletter, we will try to focus on some of these lessons especially in the field of personal finance. We will also discuss some key actions that we have taken because of these unprecedented times. We will also touch upon few of our earlier actions that helped us to sail through these tough times. To conclude, we will share some updates about our chosen products and new addition to our chosen product list.
Below are key learnings from the past six months and improvements made to our research process:
1. Sufficient Emergency Cover: This is the first goal that we cover in our financial planning exercise. This goal is to cover any unplanned contingencies like medical illness, job loss etc. As a thumb rule one should have at least a minimum of 6 months of expenses deposited in Liquid funds/ Bank account/ FD etc. Although, most of our clients had a separate corpus to take care of this goal, we were surprised to find out that it was missing for some of them. This led to stopping or reducing of SIP in some cases and some redemptions as well in extreme cases. So, it becomes important for us to ensure that this goal is planned well for our clients going forward.
2. Adequate Health Insurance Cover: Decades of savings for goals can go away in a jiffy when one gets ill. During these depressed times, this reality suddenly dawned on us. Many of us have been using the excuse of corporate health cover till date only to realise that even our job is not secure. Moreover, we have seen several cases when the health insurance is denied to a couple after they got a lifestyle disease like diabetes, arthritis etc. Current times demand swift implementation of this important facet of financial planning. So, we have taken a mission to work with our clients to improve their cover on the health side. Just to give you an example: As per our assessment, our typical client will need a health cover of at least 50 Lacs to cover the risk of hospitalisation expense in a meaningful way going forward. If you don’t have this much cover, its time talk to your financial advisor and get this executed ASAP. We have done phenomenal work over last few years to gather details on cost effective health insurance policies that can help our clients with the right cover without pinching their pockets.
3. It’s very difficult to time the markets: Some of clients have tried timing the markets around March-April time frame. Their actions were backed by research articles from big media houses. However, in all the chaos, the principle of “One cannot time the market consistently” remained valid. As against most expectation, markets went up. Somehow, in the race of predicting GDP, we forgot about massive liquidity injection from Central banks. So let’s not try to predict the unpredictable. Our belief in the following Wall Street adage: “Asset Allocation is Supreme. All else is noise” has got stronger as another key learning.
4. How to manage Liquidity risk in debt funds: Any debt instrument (be it FD or debt fund) has basically 3 kinds of risk - Interest rate risk, Credit risk and Liquidity risk. First two risks need to be managed all the time to get some extra returns as compared to safer instrument. We have been doing this for all the past years. However, liquidity risk was more theoretical and had never occurred during past several years. However, this year, it became a reality with unique circumstances of lockdown and moratorium. Unemployment and pay cuts coupled with dried working capital led to unprecedented redemptions from credit risk funds. At the same time, moratorium was scaring any new buyers of bonds. This resulted in closing of Franklin debt funds for any investments and redemptions. Though, the decision of winding-down proved to be good as far as the increase in their NAV is concerned, this gave rise to unnecessary illiquidity in portfolio which we had never intended to. Hence as a key learning, we have introduced some new measures like monthly tracking of cash position and redemptions in all our selected debt funds. This will help us to manage liquidity risk much better in the coming time.
Changes made to your investment portfolio:
In the following section, we will cover few portfolio changes that we have done over the past few months and their impact on your respective investment portfolios. Kindly note that some of these actions may not have been applicable to your investment portfolio due different risk profile, goal duration and other factors:
1. Asset Allocation – Increase in equity: With market crashing in March, we started increasing the equity allocation to our investment portfolios. We created switches/STPs from debt to equity to rebalance the overall portfolio. At the same time, we continued aggressive allocation in SIP as well (unless there was an emergency at the client’s end). Both these actions resulted in lowering of the average acquisition cost for equity for our customers. This has also helped our portfolios to recover faster. It will further add onto the returns when market move up from here in the medium to long term.
2. Addition of International Funds: We started adding international funds especially exposed to US based tech stocks over the last 1-2 years. US tech markets have performed exceptionally well during these unprecedented times. We added further in March- April time frame via STPs. This has helped to get good returns on these funds along with achieving geographical and currency diversification. Though these funds have done well, we are also cognizant of the risk of over-allocation to a particular sector / geography. Hence, we will take care that we are not over allocated and have a more balanced portfolio. Currently, we continue to be positive on US and especially its technology sector and leading companies from non-US countries like China, France, Japan etc. which provides further geographical diversification to our portfolios.
3. Thematic Funds: We had taken around 10% exposure to pharma & healthcare sector between 2016 and 2018 for some of our riskier portfolios. We were confident about our selection as we have added this sector at steep discount. It was an underperforming till 2019. However, 2020 was pretty good for this sector and our chosen funds have beaten the markets by a huge margin. During the same time-frame, we also took exposure to infrastructure funds in some portfolios. With Covid situation, fiscal deficit has started ballooning, and it seems difficult for the Govt. to now spend much on infrastructure development. Hence, we have pulled out from the infrastructure sector and invested the proceeds in other diversified large cap funds.
4. Debt fund selection: We have stopped taking any credit risk in debt funds for the time-being. With economy struggling, debt defaults can rise in coming months. Hence, we have avoided any credit risk in all debt funds for past 6 months. As repo rate is also at all time low, we are avoiding any longer duration in our debt funds. To achieve these objectives, we have started focusing on liquid funds, money market funds, arbitrage funds and banking & PSU debt funds. We have chosen funds with highest credit quality in these categories and average maturity not crossing 3 years. With this conservative approach, we may be losing some extra returns in debt category, but current conditions require an extra bit of caution.
Updates on products other than Mutual Funds:
1. PMS: Our chosen PMS of 2018 and 2019 like Unifi & Motilal have shown great improvement in performance over the last 6 months. They have been consistently outperforming their respective benchmarks as well. The outperformance is especially worth mentioning for Unifi which has outperformed its benchmark by close to 15% over the past three years. We have also recently added some new PMS viz. Marcellus and Buoyant. Between them Marcellus has shown a very high resilience and has outperformed its benchmark. However, Buoyant had been pretty volatile during last six months. We have been keeping a close watch and talking to the respective fund managers on a continual basis. We will take corrective action (if need be) as when the situation arises.
New addition to PMS - We have recently added a new PMS provider called Global Freedom Fund (GFF) to our chosen list of products. This is a global multi asset fund started by a world-renowned fund manager, Mr. Shankar Sharma. This fund invests in stocks all across the globe including USA, Europe, China and East Asia. The fund also takes tactical allocation calls into commodities like Gold, Silver and Crude Oil etc. It also invests in global real estate investment trusts. This product is especially suited for NRIs and someone who wants to investment in USD directly. Minimum required investment ticket size is $100K.
2. Peer to Peer Lending (P2P): We had started redeeming monthly payouts from Monexo before Covid itself. We are making a successful exit here with a double-digit return. We continue to remain invested in our other chosen product called Liquiloans and we are advising fresh investments as well. Liquiloans continue to lend money to high quality borrowers and their NPAs are very well contained.
3. Real Estate Products: Our chosen real estate product from SmartOwner is holding its line with good market navigation. Covid induced lockdown had initially slowed down the projects. However, the real-estate activity has now started picking up with opening-up of economy. Investments with Smart owner have exposure to 3 segments- Residential, Commercial and Co-working spaces. Residential is already back to pre-covid levels in terms of enquiries and deal conversion. Demand in co-working spaces is also picking up with lot of companies opting for co-working managed spaces. However, commercial is not doing well and may suffer temporarily due to Covid. Having said that, commercial portion of SmartOwner fund(s) is currently in development stage and they will be coming to the market only after 2-3 years from now. There is a high possibility that by that time, things will be much better and profitable exits should not be an issue. Moreover, Smartowner should be able to use the current depressed commercial property prices to their advantage. Hence, we continue to be positive on the investments we have advised via SmartOwner.
To sum up, we have had a topsy-turvy ride during the past six months. We don’t know whether the ride becomes smoother or we will continue sailing through rough waters for the time to come. But what we know for sure is that we need to continue our journey keeping our eyes focused on the shores. We should not get overly worried by this turbulent phase 😊. Together we will surely sail through!