using etfs for strategic portfolio construction...using etfs for strategic portfolio construction ....

Using ETFs for strategic

portfolio construction

Indexing

Benchmark indices may outperform majority of actively

managed funds

S&P CRISIL SPIVA indices versus Active Funds Scorecard, India, December

2011:

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Percentage of funds outperformed by the benchmark

Fund category Benchmark index 1 - year 3 - year 5 - year

Large Cap S&P CNX NIFTY 35.29 59.26 52.63

Diversified S&P CNX 500 46.26 45.83 57.83

ELSS S&P CNX 500 27.78 48.48 59.26

Source: S&P CRISIL SPIVA Scorecard, India, December 2011

Why you should consider index investing?

Index investors believe that markets work and that these price securities „efficiently‟

Investing in an index makes no attempt at forecasts, analysis and timing markets… the objective is to

earn the market rate of return

Index investors take exposure to segments of markets and also entire markets via indexes

Asset allocation can be logically practiced with indexes as relative to buying individual stocks

Actions of large numbers of active investors set stock prices & index investors benefit from this at a low

cost

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Too many professional investors chase too few stocks

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1 - Source: NSE

2 - http://www.sebi.gov.in/cms/sebi_data/attachdocs/1317814385576.pdf

3 - http://www.irda.gov.in/ADMINCMS/cms/NormalData_Layout.aspx?page=PageNo129&mid=3.1.9

4 - http://www.sebi.gov.in/sebiweb/home/detail/4980/no/Registered-Stock-Brokers-in-equity-segment

5 - http://www.sebi.gov.in/sebiweb/home/detail/152/no/Registered-Portfolio-Managers

6 - http://www.sebi.gov.in/sebiweb/home/detail/4982/no/Registered-Foreign-Institutional-Investors

7 - http://www.sebi.gov.in/sebiweb/home/detail/4983/no/Registered-Sub-Accounts

Category Numbers

Mutual funds2 49

Life insurers3 24

Brokers (EQ)4 10,061

Portfolio managers5 247

FIIs6 1,750

FII‟s sub account7 6,056

Large numbers of professionals chase few

liquid stocks! OR

Is it a situation where too many people are

chasing very few stocks? Top 50 stocks

57.69%1

Top 100 stocks

69.90%1

Market Capitalization

http://www.sebi.gov.in/cms/sebi_data/attachdocs/1317814385576.pdf

Lower costs of Index funds

Lower management fees as the cost of

researching stocks, industries, sectors etc

is eliminated

Stocks in an index don‟t change often and

this leads to lower trading related costs

Lower portfolio turnover and higher liquidity

of index stocks incase of large cap indices

reduces market impact costs

Intangible costs – non-systemic stock

picking risks get eliminated

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Introduction to Exchange Traded Funds (ETFs)

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1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Mar-12

AUM* 1 1 2 5 8 18 40 74 105 142 212 310 417 574 797 711 1032 1311 1351 1537

No. of ETFs 1 1 2 19 19 29 30 92 202 280 282 336 453 732 1171 1590 1939 2459 3011 3169

0

400

800

1200

1600

2000

2400

2800

3200

0

200

400

600

800

1000

1200

1400

1600

No

. of E

TF

s

AU

M $

Bil

lio

n

Growth of International ETFs

Growth of International ETFs

•- AUM in USD Billion. Source: Blackrock ETF Landscape Q1 End 2012. This information discusses general market activity, industry or sector trends, or other broad-based economic,

market or political conditions and should not be construed as research or investment advice. Please see additional disclosures.

Growth of ETFs in India

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Source : Based on data collated from AMFI website i.e. www.amfiindia.com

* - Average AUM for the Quarter. (For other periods amount is Average AUM for Month)

Dec - 02 Dec - 03 Dec - 04 Dec - 05 Dec - 06 Dec - 07 Dec - 08 Dec - 09 Dec - 10*

Dec - 11*

Mar - 12*

7 168 568 2920 7811 7142 2671 2410 4981 10852 11146

No of ETFs 1 5 6 6 6 12 16 18 26 33 34

0

5

10

15

20

25

30

35

40

0

2000

4000

6000

8000

10000

12000

Familiar ground – best of both worlds

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Like a stock…

Trading flexibility intraday on the exchange

Real time price

Put limit orders

Minimum trading lot is just 1 unit

Delivery into your Demat account

Like an index fund…

Constructed to track the Index

Open ended mutual fund

Low expense ratio

Low turnover

Transparent

ETF

Index fund Stocks

Mechanism

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Primary market

Buy / sell

Market making /

arbitrage

Fund

Authorized

participants /

financial

institutions

Subscription

/redemption

in-kind

Secondary market

Seller

Buyer

NSE

*GS BeES Cash

Cash *GS BeES

* GS BeES = Goldman Sachs Exchange Traded Funds

Asset Allocation – Elimination of Portfolio Concentration

Risks

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Challenges to stock picking

„News‟ can move stock prices and „news‟ is inherently unpredictable

All information an analyst can learn about a company from annual reports, marketing material etc… is

already built into the stock price…

Because thousands of other analysts have similar information sources

What is unknown is the knowledge that will move the stock… e.g. a news event which is impossible to

forecast

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The importance of eliminating concentration risk in your

portfolio

What is concentration risk?

A portfolio with a large portion of its assets invested in a single stock

A portfolio comprised of several stocks concentrated in one market sector, for e.g. healthcare

A portfolio consisting of a single asset class, for e.g. Europe large cap

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This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions. It also refers to specific securities which pertains

to past performance or is the basis for previously made discretionary investment decisions. It should not be construed as research or investment advice, or recommendation to buy or sell

investments in the strategy or any other investments mentioned in this report or to follow any investment strategy. Please see additional disclosures. Diversification does not protect an

investor from market risk and does not ensure a profit.


portfolio (Contd.)

Why think about it?

Concentrating your portfolio in a particular stock, market sector or asset class can be risky. Markets are

cyclical: individual stocks, market sectors and asset classes perform differently over time, fluctuating in

value as economic conditions change.

Because no one can predict which will perform the most favorably at any given time, we believe it‟s

important to diversify stocks across a broad spectrum of sectors (e.g. healthcare, industrials, consumer

goods) and asset classes, for e.g. Europe and international equities, fixed income and real estate.

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portfolio (Contd.)

How can it happen?

You may think you are invested in a well-diversified portfolio, but if it is not monitored carefully you may

find yourself with a concentrated position.

Concentration could occur as a result of a gift or inheritance of a restricted stock, employer stock options

or contributions to a retirement plan, or a booming market.

For example, the bull market of the 1990‟s led investors to concentrate their portfolios with single stock

positions in sectors such as technology and telecommunications.

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portfolio (Contd.)

Single stock examples (For illustrative purpose only)

Those who invested solely in WorldCom (WCOM) or Enron (ENE) beginning January 1993 illustrate the

potentially negative effects that can result from concentrating a portfolio in a single stock:

A $10,000 WorldCom investment would have grown to $118,412 at the height of the stock‟s performance

in April 1999, versus $33,964 for an S&P 500 investor

A $10,000 Enron investment would have grown to $75,579 at the height of the stock‟s performance in

October 2000, while a more diversified S&P 500 investor would have held $33,964

But without having the benefit of a crystal ball, many investors decided to stay invested in Enron and

WorldCom well after they started to decline. Unfortunately, over a year later in 2001, Enron and WorldCom

both began a downward slide, and eventually left investors with a fraction of their original holdings.

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portfolio (Contd.)

$10,000 Hypothetical Investment (1/93 – 9/02): Enron, WorldCom and the S&P 500?

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Source: Yahoo. Enron and WorldCom examples above are for illustrative purposes only and do not represent any investment held in a Goldman Sachs Fund.

Source for all slides with the heading „The importance of eliminating concentration risk in your portfolio‟:

Goldman Sachs Asset Management - Advisor Series “The importance of eliminating concentration risk in your portfolios”





Benchmark Indexes

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Indices – facts

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Index Full Market Cap. (Rs. Crs.) P/E P/B Dividend Yield (%)

S&P CNX Nifty 3516862.6 18.71 3.01 1.5

CNX Nifty Junior 744302.88 15.87 2.33 1.48

CNX Bank Index 584358.96 15.25 2.32 1.31

CNX PSU Bank Index 292264.34 9.05 1.51 2.21

S&P CNX Nifty Shariah Index 2132671.48 17.95 3.47 1.66

CNX Infrastructure Index 761184.89 18.58 2.16 1.15

Source: www.nseindia.com

Index Full Market Cap. (Rs. Crs.) P/E Dividend Yield (%)

Hang Seng Index 7631565.52 10.51 3.46

Source: Hang Seng Indexes Company Limited

P/E – Price to Earning ratio

P/B – Price to Book ratio

Data as on 30th Mar 2012

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

This material is provided for educational purposes only and should not be construed as investment advice or an offer or

solicitation to buy or sell securities.

THIS MATERIAL DOES NOT CONSTITUTE AN OFFER OR SOLICITATION IN ANY JURISDICTION WHERE OR TO ANY

PERSON TO WHOM IT WOULD BE UNAUTHORIZED OR UNLAWFUL TO DO SO.

Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy,

completeness or fairness. We have relied upon and assumed without independent verification, the accuracy and completeness

of all information available from public sources.

The views and opinions expressed are those of the speaker, for informational purposes only and do not constitute any

investment advice or recommendation by Goldman Sachs. We have relied upon and assumed (without independent

verification) the accuracy and completeness of such information and neither agree nor disagree with the content herein.

This material is issued in or from India by Goldman Sachs Asset Management (India) Private Limited (GSAM India)

Confidentiality

No part of this material may, without GSAM‟s prior written consent, be (i) copied, photocopied or duplicated in any form, by any

means, or (ii) distributed to any person that is not an employee, officer, director, or authorized agent of the recipient.

© 2012 Goldman Sachs. All rights reserved.

75398.OSF.OTU

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Disclosures

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