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LECTURE NOTES ON
INVESTMENT ANALYSIS AND PORTFOLIO MANAGEMENT
PART 1
SUDHANSHU PANI
DRAFT - JAN 2019
DISCLAIMER:
THIS IS A FIRST DRAFT AND HENCE ERROR PRONE. PLEASE DO NOT QUOTE. IT CONTAINS
MATERIAL THAT WILL BE FOLLOWED IN THE CLASSROOM. IT IS NOT THE RECOMMENDED TEXT
BOOK. RATHER A COMPANION TO CLASSROOM. DUE CREDITS HAVE BEEN GIVEN TO REFERENCES.
Chapter 1: INTRODUCTION TO THE
INVESTMENT ENVIRONMENT
Categories of Financial Markets
Categories of Assets Classes
Categories of Exchanges
Categories of Indexes
Managed Portfolios-Mutual Funds, Hedge Funds, Pension and Endowment funds
The various players and institutions in the Financial Markets
Example: Refer the following slides from the JPMorgan – Guide to Investing -Asia 2018. This is a
sample of the information that investors peruse and a glimpse of the approach they use. The objective
of this course is to understand such investment process and use investment process to manage money.
RECALL:
The factors of production – Land, labour, Capital and Entrepreneurship.
Sectors in the economy – Household, Firms, Government
The effective role of real assets and financial assets in the above two determines how
efficiently an economy is able to perform. Real assets – land, factories, knowledge, machines,
produce goods and services, while financial assets help in problem of allocation of capital
better by moving capital into areas that need capital and give better returns.
1.1 Categories of Financial Markets
Financial markets may be described as markets that are involved in exchange of securities.
Here the buyer exchanges the currency with the seller who holds the security of an asset.
Important aspects of a financial market:
1) Cash – An I-owe-U from the sovereign
2) Security – confirmation of ownership of an asset
3) Market place – where assets can be traded
4) Buyers and sellers
5) Supply and demand
6) Capital Markets: Capital Markets help firms and governments raise capital by issuing
securities such as equities and bonds. These securities are issued for various tenor.
Primary capital markets deal with first time or followup issuances and secondary
security markets deal with the trading of these securities. Equity gives an ownership
stake in the company to the holder while the bond holder gets a promise of a stream of
interest payments. Stocks/Shares, Short term bonds, Long term bonds, Masala Bonds,
G-Sec, Non-Convertible Debentures, Optionally Convertible debentures.
7) Money Markets: The money market deals with securities with maturity dates less than
1 year (?? Is this a correct understanding). These are issued by the government or
Firms. In India, the RBI acts as the money manager for the government. The tenors
range from the overnight market among the banks to 365 day T-bills. Treasury bills,
Certificates of Deposit, commercial paper, Repo, Reverse Repo.
As a rule – investments is about a play on time, longer time=>higher risk
The consideration – i.e transaction valuation is based on the stream of cash.
But this is not the area of our discussion.
8) Derivatives Markets: These are artificial markets. Securities / contracts are issued that
will have a well-defined way of valuing the issuance. Usually Derivatives contracts
have value based on an underlying asset. Common derivatives include forwards,
futures, options and swaps. Widely used to hedge and speculate or execute an
investment view.
India has a distorted market where the derivative segment is 8-10 times the
size of the cash market. Derivatives provide leverage, lower transaction
costs and lower tax incidence (??)
9) Forex Markets : It is a a large-interconnected international market. A market that
never sleeps as currency is traded in some part of the world at every instance
depending on time zone. Forex markets are usually OTC (over the counter) markets
and based on demand and supply. Currency derivatives or ETFs are not part of this
market.
10) Commodity Markets: Markets such as the LME (London Metal Exchange) and
mercantile exchanges such as those in Chicago(CBOE), Singapore, Hongkong etc
11) Electricity markets
12) Cryptocurrency markets
Exchanges
13) Stock exchanges
14) Foreign currency exchanges
.
1.2 Categories of Assets Classes Equity- Domestic / International listed / Private equity
Residual claim, limited liability
Debt
Can you check out the yield curve today. Or Look at the yields from all debt
instruments today.
Land
Real estate
Gold
Crypto-currency
Structured Products – Equity linked derivatives
Alternate Investment products
1.3 Categories of Exchanges An exchange is an example of an organized market that facilitates trading of assets.
Important features here include facilitation of price discovery (facilitation of finding
buyers and sellers through an online platform or common location), trading, clearing,
settlement, counterparty risk management and surveillance to keep the markets
orderly according to the law / regulations.
Stock markets, Derivative markets – NSE, BSE
Bond markets – NSE, BSE, Metropolitan Exchange
Bullion exchanges – NCDEX, MCX
Primary dealers market
Bitcoin exchanges
Commodity exchanges – NCDEX, MCX
1.4 Categories of Indexes An index tracks the change in the prices of an asset. It is used to compare the
performance of an asset, or the manager. It starts with a normalized value with a base
year. Widely used in the investments industry to measure performance. Most funds
have a mandate to beat their benchmark i.e provide a relative return. Absolute return
funds try to achieve an absolute return irrespective the performance of their
benchmark. Indexes are further used to create derivative products and exchange
traded funds.
Examples:
NIFTY 50
SENSEX
BSE 500
NSE 500
BSE, NSE -100
BSE, NSE – 200
Various other benchmark indices exist. Check the benchmark for the popular funds
you know.
1.4.1 Nifty Construction – Highlights The NIFTY 50 is a 50 stock, float-adjusted market-capitalization weighted index for
India. It is used for a variety of purposes, such as benchmarking fund portfolios, index
based derivatives and index funds.
The NIFTY 50 is derived from economic research and is created for those interested
in investing and trading in Indian equities.
Market Representation: The NIFTY 50 stocks represent about 65% of the total float-
adjusted market capitalization of the National Stock Exchange (NSE).
Liquidity: Market impact cost is the best measure of the liquidity of a stock. It
accurately reflects the costs faced when actually trading an index. For a stock to
qualify for inclusion in the NIFTY 50, it has to reliably have market impact cost
below 0.50 %, when doing NIFTY 50 trades of Rupees (Rs) 10 crores.
What is the difference in construction between BSE Sensex and NSE Nifty?
Price Return Index vs Total Return Index
Price return index calculates the returns only on the basis of prices. Total return index
also adds the dividends, interest and any other cash flow. SEBI has made TRI
mandatory for funds.
1.5 Managed Portfolios-Mutual Funds, Hedge Funds, Pension and
Endowment funds Asset portfolios are managed by individuals and institutions who specialize in these
functions and thus help the small savers or asset owners.
1.5.1 Mutual Funds
Example factsheet– ICICI Prudential Bluechip Fund
1.5.2 Refer Morning Star Category Definitions to get a flavor of Mutual funds
as an Asset class.
Equity
Large-Cap
Mid-Cap
Multi-Cap
Large & Mid Cap
Small Cap
Value Funds
Contra Funds
Dividend Yield Funds
Focused Funds
Sector Funds
Energy
Financial Services
FMCG
Healthcare
Precious Metals
Technology
Infrastructure
Other
Global - Other
Index
ELSS
Fixed Income
Ultra Short duration
Low Duration
Money Market
Short Duration
Medium Duration
Medium to Long Duration
Long Duration
Dynamic Bond
Corporate Bond Funds
Credit Risk
Banking & PSU
Government Bond
10 yr Government Bond
Floating Rate
Fixed Maturity Intermediate-
Term Bond
Fixed Maturity Short-Term
Bond
Fixed Maturity Ultrashort
Bond
Allocation
Conservative Allocation
Balanced Allocation
Aggressive Allocation
Dynamic Asset Allocation
Multi Asset Allocation
Equity Savings
Retirement
Children's
Fund of Funds
1.5.3 Portfolio Management Services (PMS)
REPORT OF PORTFOLIO MANAGERS - As on October 31, 2018
REPORT OF PORTFOLIO MANAGERS - As on October 31, 2018
PMs reported for the month - 285
Discretionary# Non-Discretionary Advisory*
No. of Clients 130337 6203 2574
AUM (Rs. Crore) 172422.40
Listed Equity 98375.57 16454.71
Unlisted Equity 563.87 58.88
Plain Debt 1091145.11 70572.92
Structured Debt 317.07 355.40
Equity Derivative 474.95 -1.60
Mutual Fund 10809.26 10073.09
Others 15448.86 983.78
Total 1,217,134.69 98,497.18
Grand Total 1,488,054.27
Notes :
1. *Value of Assets for which Advisory Services are being given.
2. #Of the above AUM Rs. 1063208.34 Crore is contributed by funds from EPFO/PFs.
3. The above data is based on the monthly reports received from portfolio managers.
Total No of clients AUM (in Rs. Crore)
Month Discretionary Non-
Discretionary
Advisory Discretionary1 Non-
Discretionary
Advisory2
Dec-10 67417 3685 8078 267433 6902 88611
Dec-11 68932 4742 9215 318433 15815 73167
Dec-12 56619 7996 11134 477939 26026 81220
Dec-13 43159 5098 9918 552721 37164 132348
Dec-14 38849 3207 4165 662464 45035 160885
Total No of clients AUM (in Rs. Crore)
Dec-15 53874 3598 2274 784496 56799 199788
Dec-16 65745 4695 2037 920092 70242 185133
Dec-17 102334 5278 1836 1115754 87858 215635
Oct-18 130337 6203 2574 1217134 98497 172422
1 Includes funds from EPFO/PFs
2Value of Assets for which Advisory Services are being given
1.5.4 Hedge funds in India
PERFORMANCE OF HEDGE FUNDS IN INDIA
Ashok Banerjee and Bobbur Abhilash Chowdary
http://indiafa.org/performance-hedge-funds-india/
Ashok Banerjee, Ph.D., is Professor, Finance and Control, Indian Institute of Management
Calcutta (IIM-C). Bobbur Abhilash Chowdary is a doctoral student in Finance and Control
Department of IIM, Calcutta.
Hedge fund industry is drawing media attention in India. Recently Avendus Capital has
reported as the first domestic hedge fund to have $1 billion asset under management.[1] A
hedge fund is an alternative investment fund (AIF), which employs diverse or complex
trading strategies and invests and trades in securities having diverse risks or complex
products including listed and unlisted derivatives.[2] AIFs are classified into three broad
categories. While category I AIF includes Angel, venture capital, social and infrastructure
funds, category II includes private equity, real estate, distressed and PIPE funds. Hedge funds
are classified as category III AIFs as per SEBI regulations. There are currently 346 AIFs
registered with SEBI. The Indian income tax law is not very supportive of AIFs; particularly
for hedge funds. Income accruing to category I and category II AIFs, registered with SEBI, is
taxed at the investor and not at the fund level. However, category III AIFs are not accorded
pass through status. In other words, any income or gain of category III AIFs is taxed at the
fund level. This is contrary to the taxation on mutual funds, where tax is charged at investors‘
level. This provision leads to increase in the operating costs of hedge funds. In fact, hedge
funds are not clearly defined in the income tax laws in India. If any AIF, irrespective of
category, suffers a loss, such loss has to be absorbed at the fund level and cannot be passed
on to the investors. This is quite a punitive provision and calls for review. Like income or
gains, losses should be given pass through status.
High net worth individuals and institutional investors are allowed to invest in risky AIFs.
Each scheme of AIF should have a minimum corpus of Rs. 200 million and the minimum
investment amount by any investor is pegged at Rs.10 million. Private equity (PE) and
venture capital (VC) are the most popular AIF followed by real estate funds; hedge funds
come as distant fourth.[3] Alternative Assets under management in India is very small
compared to USA ($2.8 trillion), UK ($495 billion and China ($265 billion). However, the
Indian market has huge growth potential- it grew by 55% in 2017.
There are several important differences between hedge funds and PE (and similarly VC)
funds. Managers of hedge funds have flexibility to buy or sell a wide range of assets. PEs can
hold long only portfolios. Hedge funds can take leverage positions, which PE cannot. Hedge
funds normally seek to make profits from market inefficiencies (mispricing), rather than
purely relying on economic growth to drive returns. While hedge funds have low holding
period (sometimes even intraday), PEs have much longer holding period (5-7 years).
Managers of hedge funds are pure financial investors, whereas PE investment comes with
some degree of operational control on the investee company. Since investment horizon for
hedge funds is relatively short, performance of such funds is estimated on monthly/quarterly
basis. PE funds see returns only after 5-7 years. Private equity investors simply cannot
withdraw capital before the end of a fund‘s life.
Investment Strategies
The returns of a hedge fund depend on the manager‘s skill, as well as on market conditions.
The source of returns (skill vs. market) varies significantly depending on the investment
strategies adopted by hedge funds. Broadly, investment strategies of hedge funds include
directional and market neutral strategies. Directional investment strategies aim to capture
market trend (going long during uptrend and short during downtrend) and market neutral
strategies seek to generate absolute returns independent of market conditions. Successful
hedge fund managers generate alternative beta and skill alpha. While the traditional sources
of beta are the stock market spreads (for equity assets), alternative sources of beta are
liquidity, volatility, beta of commodity markets etc. Similarly, structural alpha is driven by
regulatory advantage that hedge funds enjoy and the latitude offered by having no
benchmark. Alpha linked to the manager‘s skill (ability to pick right assets at the right time)
is known as skill alpha.
Common investment strategies followed by hedge funds are listed below:
Directional Strategy: This strategy seeks to take advantage of major market trends rather than
trends observed in individual stocks. Managed futures and global macro strategies are two
examples of directional investment strategies. Managed futures refers to taking a bet on the
forward curves of futures contract. If a near-month futures contract is over-priced compared
to a far-month futures contract on the same underlying asset, one may short the near-month
contract and go long the far month contract. Global macro strategies apply macroeconomic
views to global markets to decide entry/exit strategies. Instead of analysing macroeconomic
events affecting companies or assets, they view the world from a top-down perspective (e.g.,
a manager taking a pessimistic view on UK currency, GBP vis-à-vis US dollar weeks before
the referendum on Brexit and shorting GBP).
Long Bias and Short Bias: A fund with long bias strategy takes mostly long positions on the
market. On the other hand a fund with Short bias strategy takes mostly short positions. Long
(short) bias also includes net long (short) portfolios. Typically long (short) bias indicates
bullish (bearish) view about the underlying asset.
Arbitrage Relative Value: This strategy involves simultaneous buying and selling of two
closely related securities whose prices have diverged ―relative‖ to each other. Typically these
securities are very highly correlated. Both the securities could be from one asset class (e.g.
equity, debt, futures, options etc.) or multiple asset classes. This strategy has potential to
generate returns even when the market is moving sideways. One popular example of relative
value arbitrage strategy is pairs trading.
Fundamental: In this strategy a fund manager takes fundamental factors, which affect the
security returns, into consideration in making investment decisions.
Bottom Up: A strategy in which fund starts with analysis of specific securities and later on
move on to industry and other macro analysis.
Top Down/Macro: This is exact opposite of Bottom Up approach. In this strategy the fund
manager starts off with macro analysis and then slowly moves onto analysis of specific
securities.
Opportunistic: In this strategy a fund manager opportunistically employs one or more
strategies which he believes can generate the best return for that asset class
Systemic Quant: When a fund manager uses algorithms to evaluate the market, the fund is
said to follow Systemic Quant strategy. Managers typically use price, volume, volatility and
liquidity information to develop quant strategies.
Performance
The five-year (2013-2017) average performance of hedge funds in India was better than
performance in many other countries (table 1). Indian hedge funds reported an average
annualised return of 18%. The average monthly returns of hedge fund in India were even
higher in comparison to the performance of ETFs. ETFs generated lower return with greater
risk, thereby reporting a lower sharp ratio. It is important to note here that fund performance
should not be judged by returns alone- one should rather look at risk-adjusted returns. Indian
hedge funds have generated better returns at greater risk (standard deviation of returns) with
higher drawdowns. One may argue that hedge funds in India have still outperformed (on risk-
adjusted basis) Europe and USA. Within country, hedge fund has higher risk-adjusted return
(mean return divided by standard deviation) than ETFs. Since hedge funds normally generate
absolute returns, there is no need to compare their performance with any benchmark.
Table 1: Average Performance of Hedge Fund Industry
Asset Type Country
Mean
Monthly
Return
(%)
Standard
Deviation
of Monthly
Returns
(%)
Worst
Month
Performance
(%)
Best Month
Performance
(%)
Average
Performance
in Positive
Months (%)
Average
Performance
in Negative
Months (%)
Percentage
of Months
with
Positive
Return
Max
Draw
Down
(%)
Hedge Asia/Asia- 1.00 2.51 -4.75 8.19 2.06 -1.66 71.67 -9.11
Funds Pacific
Hedge
Funds Europe 0.59 2.28 -5.16 7.98 1.95 -1.30 58.33 -12.44
Hedge
Funds Global 0.51 1.88 -4.21 7.69 1.44 -1.36 66.67 -4.61
Hedge
Funds India 1.53 3.00 -8.24 9.74 2.71 -2.37 76.67 -13.39
Hedge
Funds USA 0.85 2.13 -3.72 8.41 1.88 -1.22 66.67 -4.18
ETFs SENSEX 1.12 3.74 -7.45 10.51 3.48 -2.43 60.00 -19.91
ETFs NIFTY 1.15 4.18 -7.76 11.37 4.15 -2.52 55.00 -20.70
Source: Thompson Reuters Lipper. Authors’ calculations
Different investment strategies provide mixed results. While the systematic quant strategy
reported highest average returns (table 2), it comes at a greater risk. The directional
strategies, on the other hand, have minimum downside risk and lower standard
deviation. Surprisingly, short bias has performed better than long bias strategy with positive
returns in seventy five per cent of months.
Country
Mean
Monthly
Return
(%)
Standard
Deviation
of Monthly
Returns
(%)
Worst Month
Performance
(%)
Best Month
Performance
(%)
Average
Performance
in Positive
Months (%)
Average
Performance
in Negative
Months (%)
Percentage
of Months
with
Positive
Return
Max Draw
Down (%)
Arbitrage
Relative Value 1.74 3.40 -11.26 9.39 3.00 -2.40 76.67 -17.40
Bottom Up 1.70 3.46 -8.65 12.02 3.16 -2.68 75.00 -13.42
Directional 1.31 2.87 -6.23 10.46 2.58 -2.17 73.33 -10.37
Fundamental 1.57 3.58 -8.68 13.30 3.37 -2.30 68.33 -13.31
Long Bias 1.65 3.71 -9.01 12.25 3.38 -2.75 71.67 -14.22
Opportunistic 1.33 4.08 -8.18 12.84 3.41 -3.15 68.33 -18.57
Short Bias 1.85 3.88 -10.55 13.09 3.48 -3.02 75.00 -15.20
Systematic Quant 1.91 4.02 -10.51 13.04 3.64 -3.26 75.00 -15.04
Table 2: Strategy-wise Performance
Source: Thompson Reuters Lipper. Authors’ calculations
There has been consistent decline in the number of strategies adopted by hedge fund
managers in India over the past five years (table 3). One can observe maximum decline in
relative value arbitrage strategies, followed by long bias strategies. It does not necessarily
mean that Indian financial markets have been bearish during the period 2013-17. One has to
look at the asset under management under each strategy to draw any conclusions about
investors‘ preferred strategies. Investment strategies based on fundamental information has
been consistent throughout the observed period.
Table 3: Investment Strategies during the year
Strategy 2013 2014 2015 2016 2017
Arbitrage Relative Value 124 73 56 48 48
Bottom Up 117 101 100 93 84
Directional 35 24 24 21 12
Fundamental 111 113 120 117 108
Long Bias 141 113 112 105 96
Opportunistic 24 29 36 36 36
Short Bias 25 12 12 12 12
Systematic Quant 13 12 12 12 12
Top Down Macro 26 24 24 21 12
Grand Total 618 501 496 465 420
Source: Thompson Reuters Lipper. Authors’ calculations. Each strategy is assumed to
liquidate at the end of the month.
Top Down
Macro 1.11 3.38 -8.85 11.87 2.97 -2.10 63.33 -12.28
The asset under management has increased over the past five years (table 4) with maximum
investment in long bias strategies in 2017. There has been a decline in investments under
relative value strategies. Investment exposure to fundamental strategies has doubled over the
past five years. When one compares fund performance with AUM, one may note that long
bias did continue to attract large funds despite not so noteworthy performance. It implies that
AUMs are not necessarily based on historical performance.
Table 4: Asset Under Management (AUM)
Strategy 2013 2015 2017
Arbitrage Relative
Value 7778.3 6498.2 6915.6
Bottom Up 1569.8 5075.7 8692.8
Directional 50.3 148.8 NA
Fundamental 4156.7 8014.9 8692.8
Long Bias 6103.6 11904.9 15351.3
Opportunistic 2587.0 3142.4 542.5
Short Bias NA NA NA
Systematic Quant NA NA NA
Top Down Macro 2545.8 3030.9 NA
Total 24791.3 37815.8 40195.1
Source: Thompson Reuters Lipper. Authors’ calculations (figs in INR million)
Hedge funds, as an alternative asset class, has potential to grow. However, activities of hedge
funds need to be carefully monitored without stifling its growth potential. Hedge funds do
indulge in proprietary trading at high frequency and this is an area presently under close
scrutiny of market regulators. Regulators believe that high frequency traders abuse their
advantage of ‗speed trade‘ and adversely affect market quality. However, empirical finds
about the role of high frequency traders is mixed.
*************
[1] Times of India, 25 January 2018
[2] SEBI (Alternative Investment Funds) Regulations 2012
[3] As of December 2016 Asset under management (AUM) of PE and VC funds was $23.6bn, followed by real
estate funds $10.2 bn; and hedge funds comes fourth with AUM of $1.4 bn. (Source: Preqin Insight Report,
November 2017)
1.5.5 National Pension Scheme National Pension System Trust (NPST) was established by PFRDA as per the provisions of
the Indian Trusts Act of 1882 for taking care of the assets and funds under the NPS in the
best interest of the subscribers. The powers, functions and duties of NPS Trust are laid down
under the PFRDA (National Pension System Trust) Regulations 2015, besides the provisions
of the Trust deed dated 27.02.2008.
NPS Trust is the registered owner of all assets under the NPS architecture which is held for
the benefit of the subscribers under NPS. The securities are purchased by Pension Funds on
behalf of, and in the name of the Trustees, however individual NPS subscriber remain
beneficial owner of the securities, assets and funds. NPS Trust, under the NPS Trust
regulations, is responsible for monitoring the operational and functional activities of NPS
intermediaries‘ viz. custodian, Pension Funds, Trustee Bank, Central Recordkeeping Agency,
Point of Presence, Aggregators and that of IRDAI registered Annuity Service Providers
(empanelled with PFRDA) and also for providing directions/advisory to PF(s) for protecting
the interest of subscribers, ensuring compliance through audit by Independent Auditors, and
Performance review of Pension Funds etc.
NPS Performance
Fund NAV Returns(%) Worth of R5000
monthly
contribution
(R lakhs)
Assets
(R cr)
6-Month 1-Year 3-Year 5-Year 3-Year 5-Year
Central Government Plans
LIC Pension Fund 26.77 5.78 5.88 8.97 10.43
2.00 3.69 30,842
SBI Pension Fund 27.52 5.72 6.17 9.05 10.64
2.00 3.71 34,915
UTI Retirement 26.66 5.48 5.60 9.13 10.51
2.00 3.71 33,061
Fund NAV Returns(%) Worth of R5000
monthly
contribution
(R lakhs)
Assets
(R cr)
6-Month 1-Year 3-Year 5-Year 3-Year 5-Year
Solutions
State Government Plans
LIC Pension Fund 23.89 5.76 5.76 8.91 10.48
2.00 3.69 45,981
SBI Pension Fund 23.63 5.75 6.04 9.03 10.71
2.00 3.71 47,547
UTI Retirement
Solutions 23.72 5.46 5.56 9.02 10.50
2.00 3.70 46,533
NPS Lite (Swavalamban) Plans
Kotak Pension
Fund 19.29 4.94 4.82 8.71 10.45
1.99 3.67 50
LIC Pension Fund 22.13 6.16 6.32 9.27 10.67
2.01 3.72 922
SBI Pension Fund 22.33 5.61 6.12 9.18 10.69
2.00 3.72 1,332
UTI Retirement
Solutions 22.16 5.62 5.83 9.21 10.63
2.00 3.71 907
Corporate CG
LIC Pension Fund 17.58 6.12 5.78 9.00 10.54
1.99 3.69 3,142
SBI Pension Fund 17.54 5.77 6.21 9.14 10.76
2.00 3.72 15,038
Atal Pension Yojna
LIC Pension Fund
- NPS 13.53 5.92 5.63 8.86 -
1.99 - 1,855
SBI Pension Fund
- NPS 13.29 5.94 6.34 9.31 -
2.01 - 1,922
UTI Retirement
Solutions - NPS 13.60 5.50 5.75 9.10 -
2.00 - 1,858
TIER I: Equity Plans
Birla Sun Life
Pension Scheme 11.42 -2.27 -1.07 - -
- - 33
HDFC Pension
Fund 20.62 -0.72 0.49 12.78 13.17
2.07 3.82 1,457
ICICI Prudential
Pension Fund 27.60 -0.93 -0.35 11.37 12.28
2.03 3.71 1,076
Fund NAV Returns(%) Worth of R5000
monthly
contribution
(R lakhs)
Assets
(R cr)
6-Month 1-Year 3-Year 5-Year 3-Year 5-Year
Kotak Pension
Fund 25.29 -0.28 -3.63 11.22 12.25
2.01 3.69 213
LIC Pension
Fund #
18.14 0.83 -1.71 10.75 11.02
2.01 3.65 416
Reliance Capital
Pension Fund 25.59 0.78 -2.11 10.70 11.94
2.01 3.67 88
SBI Pension Fund 23.93 -0.13 1.29 12.25 12.74
2.05 3.78 1,922
UTI Retirement
Solutions 27.94 -0.05 0.25 12.57 13.07
2.06 3.81 285
TIER I: Government Bond Plans
Birla Sun Life
Pension Scheme 11.10 7.77 7.78 - -
- - 18
HDFC Pension
Fund 16.58 8.08 8.34 8.96 10.57
2.00 3.71 1,256
ICICI Prudential
Pension Fund 22.38 7.80 8.19 9.00 10.78
2.00 3.72 873
Kotak Pension
Fund 22.21 8.18 8.00 9.16 10.70
2.00 3.72 191
LIC Pension
Fund #
17.70 8.92 9.92 10.19 11.60
2.05 3.82 423
Reliance Capital
Pension Fund 21.69 7.65 7.92 9.05 10.71
2.00 3.72 90
SBI Pension Fund 24.14 7.96 8.15 9.16 10.89
2.01 3.73 2,322
UTI Retirement
Solutions 21.62 7.37 7.21 8.28 10.29
1.98 3.67 259
TIER I: Corporate Debt Plans
Birla Sun Life
Pension Scheme 11.38 5.14 5.66 - -
- - 18
HDFC Pension
Fund 16.73 4.93 5.50 8.30 9.82
1.99 3.68 900
ICICI Prudential
Pension Fund 25.85 5.22 6.15 8.55 10.20
1.99 3.71 690
Kotak Pension 25.42 4.01 4.77 8.11 9.77
1.97 3.65 142
Fund NAV Returns(%) Worth of R5000
monthly
contribution
(R lakhs)
Assets
(R cr)
6-Month 1-Year 3-Year 5-Year 3-Year 5-Year
Fund
LIC Pension Fund 16.64 4.99 5.11 7.86 9.63
1.97 3.65 286
Reliance Capital
Pension Fund 23.19 4.94 5.46 8.31 9.83
1.99 3.68 56
SBI Pension Fund 25.87 5.22 5.90 8.34 9.82
1.99 3.68 1,279
UTI Retirement
Solutions 23.23 4.49 5.08 8.02 9.57
1.97 3.65 170
TIER I: Alternative Investments
Birla Sun Life
Pension Scheme 11.19 3.77 7.48 - -
- - 0.45
HDFC Pension
Fund 11.75 4.75 6.69 - -
- - 4
ICICI Prudential
Pension Fund 11.42 4.39 5.90 - -
- - 2
Kotak Pension
Fund 11.37 5.07 6.76 - -
- - 0.70
LIC Pension
Fund #
11.60 4.10 7.78 - -
- - 0.61
Reliance Capital
Pension Fund 11.52 3.78 7.51 - -
- - 0.15
SBI Pension Fund 11.62 3.34 5.36 - -
- - 3
UTI Retirement
Solutions 11.61 3.78 7.51 - -
- - 0.66
TIER II: Equity Plans
Birla Sun Life
Pension Scheme 11.36 -2.51 -1.48 - -
- - 4
HDFC Pension
Fund 17.82 -0.87 0.29 13.02 11.35
2.07 3.80 57
ICICI Prudential
Pension Fund 21.79 -0.84 -0.17 11.42 12.32
2.03 3.71 70
Kotak Pension
Fund 22.39 -0.14 -3.57 11.12 12.19
2.01 3.69 213
Fund NAV Returns(%) Worth of R5000
monthly
contribution
(R lakhs)
Assets
(R cr)
6-Month 1-Year 3-Year 5-Year 3-Year 5-Year
LIC Pension
Fund #
15.20 1.69 -1.89 10.36 9.12
2.01 3.61 11
Reliance Capital
Pension Fund 21.89 0.53 -2.02 10.92 12.04
2.02 3.68 7
SBI Pension Fund 22.07 -0.16 1.31 12.22 12.80
2.06 3.78 87
UTI Retirement
Solutions 22.77 0.17 1.27 12.52 13.35
2.07 3.83 19
TIER II: Government Bond Plans
Birla Sun Life
Pension Scheme 10.72 7.79 7.57 - -
- - 2
HDFC Pension
Fund 16.94 8.05 8.30 8.93 10.39
2.00 3.71 35
ICICI Prudential
Pension Fund 21.46 7.76 8.19 9.00 10.75
2.00 3.72 54
Kotak Pension
Fund 20.76 7.51 7.49 8.83 10.61
1.99 3.70 14
LIC Pension
Fund #
17.85 9.40 11.40 10.25 11.44
2.06 3.83 11
Reliance Capital
Pension Fund 20.91 6.78 7.13 8.75 10.57
1.99 3.69 4
SBI Pension Fund 23.00 7.73 7.83 9.03 10.82
2.00 3.72 79
UTI Retirement
Solutions 22.25 7.58 7.66 8.59 10.52
1.99 3.69 14
TIER II: Corporate Debt Plans
Birla Sun Life
Pension Scheme 11.07 4.97 5.26 - -
- - 2
HDFC Pension
Fund 15.83 5.14 5.86 8.53 8.74
1.99 3.66 33
ICICI Prudential
Pension Fund 24.05 5.16 5.96 8.45 10.10
1.99 3.70 55
Kotak Pension
Fund 21.94 4.53 5.09 8.08 9.59
1.98 3.65 11
LIC Pension 15.56 4.78 4.74 7.92 8.69
1.97 3.62 7
Fund NAV Returns(%) Worth of R5000
monthly
contribution
(R lakhs)
Assets
(R cr)
6-Month 1-Year 3-Year 5-Year 3-Year 5-Year
Fund #
Reliance Capital
Pension Fund 21.59 4.89 5.50 8.26 9.73
1.99 3.68 4
SBI Pension Fund 23.65 5.09 5.73 8.23 9.75
1.99 3.67 61
UTI Retirement
Solutions 22.27 4.67 5.42 8.02 9.58
1.98 3.65 11
Fund NAV Returns(%) Worth of R5000
monthly
contribution
(R lakhs)
Assets
(R cr)
6-Month 1-Year 3-Year 5-Year 3-Year 5-Year
Returns as on Jan 04, 2019
Assets as on Nov 30, 2018
# Assets as on Oct 31, 2018
What is NAV? How is it calculated?
1.6 The various players and institutions in the Financial Markets
Regulators – SEBI, RBI, IRDA
Industry associations – AMFI,
Banks
Investment banks
Firms
Government
Local Bodies
PSUs
Asset managers – Mutual funds, PMS, Alternate investment funds, Insurance
companies
Brokers
Intermediaries
Proprietary funds – hedge funds, High frequency traders, algorithmic traders
Depositories
Clearing houses
Warehousing
1.7 How does the investor measure his success?
RETURNS
Holding period returns for any investment period
In other words the holding period returns is equal to the sum of the capital gains plus the
dividend yield (dividends/Beginning price).
HPR is an effective concept for a single period return. For comparing multiple period returns
one needs to use one of the following concepts along with HPR.
Arithmetic average of the single period returns: Sum of returns divided by number of periods.
It does not do any compounding.
∑
Geometric average of the single period returns : It involves compounding from period to
period. That is it gives a single return for the whole period that is equivalent to the effect of
the single period returns in the interim period. This is also known as time-weighted returns
and helps managers calculate returns when the asset under management may have been
different in different periods.
∏
Dollar (Rupee) weighted returns is similar to the IRR problem in corporate finance. So you
start with the cash flows in the investment. The IRR is the interest rate that sets the present
value of the cash flows realized on the portfolio (including the corpus at the end of period for
which the portfolio can be liquidated at the end of period ) equal to the initial cost of
establishing the portfolio.
Conventions that exist to annualize rate of returns. This is required when your computation
period straddles greater than a single year.
Returns of assets with a cash flows are quoted like an Annualised per period rate using simple
interest without compounding.
The effective annual rate gives the equivalent of a single rate that can sum the performance.
If we consider continuous compounding:
RISK
The uncertainty about returns from future is the risk. These may be specific to a security, an
asset class, an economy or a portfolio. In this course we do not consider the specific origin
and other factors of the risk. We start from the problem where the risk is given or known.
An investor can do a scenario analysis : the possible economic scenarios in the future and the
likelihood of each one of the scenarios and the returns realized under the scenario. This set of
possible outcomes with the associated probabilities gives the probability distribution of the
holding period returns. The mean of this distribution is the expected return.
Let there be a total of n scenarios and we have the associated probabilities. The expected
returns is given by the following:
∑
Since any of the scenarios could manifest, there is an uncertainty related to this expected
return for any particular instance / future period. This uncertainty is captured by the variance
(the second moment) of the returns. Variance is the sum of the squares of the deviation of the
returns from the mean.
∑
Thus squared deviations does not allow negative deviations to cancel positive deviations. But
it exaggerates larger deviations over smaller deviations. To reduce the dimension of variance
from percent squared to percent (same as returns) we take the standard deviation, defined as
square root of the variance.
The standard theory of investments is based on the Normal Distribution, which is a
symmetric distribution with the familiar bell-shaped plot.
Assume that you have a normally distributed return for your assets; you can then get
standardized returns by normalizing the deviation of returns with the standard deviation. Such
a standardized return distribution has mean 0 and standard deviation as 1.
Notice the figure (from KBM) below:
Since the central limit theorem applies to such normal distributions of returns, we have the
following simplification of the investment process.
1. The return on a portfolio comprising two or more assets whose returns are normally
distributed also will be normally distributed.
2. The normal distribution is completely described by its mean and standard deviation. No
other statistic is needed to learn about the behavior of normally distributed returns.
The above two properties lead us to following conclusion:
3. The standard deviation is the appropriate measure of risk for a portfolio of assets with
normally distributed returns. In this case, no other statistic can improve the risk assessment
conveyed by the standard deviation of a portfolio.
To evaluate large losses or worst case scenarios we could use the Value at risk (VaR). For
example a VaR of 5% means that your returns will be lower than this value only 5 % of the
time. This is equal to the fifth percentile of a normal distribution with mean 0 and SD 1.
This is calculated from excel function NORMSINV (0.05) or NORMINV (0.05, E(r), sigma).
Some important facts:
If returns are continuously compounded, then normality in any time period can be extended
to normality in any other time period. Else the extension is limited to nearby time periods.
Note that variance is proportional to the time while SD is proportional to square root of time.
For non-normal distributions, the statistics of kurtosis and skewness additionally indicate
information regarding potential extreme values. Kurtosis compares the frequency of extreme
values to that of the normal distribution. The kurtosis of the normal distribution is zero, so
positive values indicate higher frequency of extreme values than this benchmark. A negative
value suggests that extreme values are less frequent than with the normal distribution.
Kurtosis is also called ―fat tail risk‖.
The skew measures the asymmetry of the distribution. Skew takes on a value of zero if, like
the normal, the distribution is symmetric. Negative skew suggests that extreme negative
values are more frequent than extreme positive ones.
When using time series of returns
When we use a small sample of observations to calculate the mean and standard deviation of
returns, we use the sample average of returns in place of the expected mean (true mean).
Hence, while calculating the variance we divide the no. of observations as (n-1) and not n.
Risk free Rate: Expected return that can be earned with certainty. Usually the T-bills or
government bond for the period under consideration.
Risk premium of any asset or stock: Expected excess return of the asset over expected
return from an index
Excess return: In any period the excess of returns of the asset over the index.
Risk Aversion
Investors always ask for a higher return in case there is a higher risk. Now, individual assets
do matter in security analysis. But for investor portfolio, his attitude towards risk becomes
important. How much risk he is willing to take. This is demonstrated by how much of his
funds he is willing to allocate to the risky asset. This concept is known as risk aversion. The
degree of risk aversion of an investor can be evaluated comparing the risk premium of his
wealth (portfolio) with the variance of the portfolio. This is also known as the price of risk.
( )
Such measures can be calculated assuming the index as a portfolio too.
The Sharpe Ratio
This is calculated using the standard deviation as a measure of the risk.
( )
The Sharpe ratio of a risky portfolio quantifies the incremental reward (the increase in risk
premium) for each increase of 1% in the portfolio standard deviation.
Portfolio analysis in terms of mean and standard deviation (or variance) of excess returns is
called mean-variance analysis.
Inflation: The rate at which prices are rising.
Real rate of return: Returns adjusted for inflation or the decreasing value of money.
Nominal interest rate —the growth rate of money versus Real interest rate —the growth rate
of purchasing power. Fund managers like to show the former, investor should evaluate the
later.
Equilibrium Nominal interest rate and Fishers equation
Irvine Fisher argued in 1930 that the nominal interest rate should increase as per the expected
inflation. If the expectation of inflation for the period is E (i).
Nominal rate=Real rate+E (i)