July – September 2010

October 29, 2010

Whilst your individual returns are with you, I would like to share how we think about our performance at Jeetay.

1)   We look at a "representative" portfolio. Most of the older portfolios usually have performance numbers clinging around the numbers of the "representative" portfolio. Newer portfolios take time to build up and usually mask true performance and may even distort it. This "representative" portfolio is that of our oldest client.

2)   We benchmark our returns against the Sensex. We are size agnostic but usually find values in the mid-cap space. However we carry fairly large amounts of cash and so a mid-cap index may not be the right benchmark. We have chosen the Sensexto give you a sense of the "opportunity cost" of not being in the market and not as some sort of a competitor with whom we are in a quarterly rat race.

3)   Short-term underperformance does not bother us and short-term outperformance does not excite us. What should count are long-term figures. Our idea of the long-term is very long. We will be honest - we do not have performance figures for our definition of the long-term. So we have sliced the performance figures into various shorter-term horizons, to suit your perspective of what should be a sensible investment horizon.

4)   We usually measure the cheapness of our portfolio in relation to each security's historical valuations and not against the current market valuation i.e. we would like to have some sort of absolute cheapness and not relative cheapness.

5)   The figures cited are before taxes and fees. This is because the taxes are paid by you and vary depending on whether you have short-term capital losses and the quantum of short term gains. The fee structure varies due to 1) different plans 2) different entry points (high watermarks). These should shrink the magnitude of outperformance, although not eliminate it, except perhaps for the last exhibit.

6)   We do not only look at returns, but at risk-adjusted returns. We do not measure risk by simple volatility, but by downside volatility, drawdowns and portfolio cheapness. On a risk-adjusted basis, our returns, even after taxes and fees, should compare well with the Sensex. Since we believe that markets are unforecastable, we usually hedge our positions by carrying fairly large amounts of cash.

7)   We continue to use the "representative" account methodology so as to be consistent (Tables 1, 2 and 3).

8)   We are now however adding some more information on the performance of allthe accounts in the PMS. We have broken the accounts into two buckets - the older accounts with more than 60% equity and the newer accounts with less than 60% equity (Tables 4 and 5).

Table 1

Since Inception

    

Period

Portfolio Return (%)

Sensex Return (%)

% in cash

 

June 07, 2003 to June 07, 2004

80.80%

48.00%

Almost fully invested

Audited

July 05, 2004 to  June 30, 2005

31.45%

42.10%

Around 65%

Audited

July 01, 2005 to  March 31, 2006

30.32%

56.80%

Around 40%

Audited

April 01, 2006 to March 31, 2007

33.73%

15.62%

Around 20%

Audited

April 01, 2007 to March 31, 2008

7.41%

18.60%

Around 30%

Audited

April 01, 2008 to March 31, 2009

-22.26%

-37.94%

Around 35%

Audited

*April 01, 2009 to June 30, 2009

29.72%

49.28%

Around 37%

Audited

July 01, 2009 to September 30, 2009

20.29%

18.17%

Around 34%

Audited

October 01, 2009 to December 31, 2009

13.50%

1.97%

Around 24%

Audited

January 01, 2010 to March 31, 2010

4.55%

0.36%

Around 24%

Audited

April 01, 2010 to June 30, 2010

14.5%

0.99%

Around 29%

Audited

July 01, 2010 to September 30, 2010

13.64%

13.38%

Around 32.50%

Audited

Cumulative Return

729.85%

480.00%

  

Table 2

Since 2006

    

Period

Portfolio Return (%)

Sensex Return (%)

% in cash

 

April 01, 2006 to March 31, 2007

33.73%

15.62%

Around 20%

Audited

April 01, 2007 to March 31, 2008

7.41%

18.60%

Around 30%

Audited

April 01, 2008 to March 31, 2009

-22.26%

-37.94%

Around 35%

Audited

*April 01, 2009 to June 30, 2009

29.72%

49.28%

Around 37%

Audited

July 01, 2009 to September 30, 2009

20.29%

18.17%

Around 34%

Audited

October 01, 2009 to December 31, 2009

13.50%

1.97%

Around 24%

Audited

January 01, 2010 to March 31, 2010

4.55%

0.36%

Around 24%

Audited

April 01, 2010 to June 30, 2010

14.5%

0.99%

Around 29%

Audited

July 01, 2010 to September 30, 2010

13.64%

13.38%

Around 32.50%

Audited

Cumulative Return

169.00%

75.9%

  

Table 3

Since 2009

    

Period

Portfolio Return (%)

Sensex Return (%)

% in cash

 

*April 01, 2009 to June 30, 2009

29.72%

49.28%

Around 37%

Audited

July 01, 2009 to September 30, 2009

20.29%

18.17%

Around 34%

Audited

October 01, 2009 to December 31, 2009

13.50%

1.97%

Around 24%

Audited

January 01, 2010 to March 31, 2010

4.55%

0.36%

Around 24%

Audited

April 01, 2010 to June 30, 2010

14.5%

0.99%

Around 29%

Audited

July 01, 2010 to September 30, 2010

13.64%

13.38%

Around 32.50%

Audited

Cumulative Return

140.9%

106.70%

  

Table 4

Performance for portfolios with more than 60% in equity

July1, 2010 to September 30, 2010

Weighted Average Return

12.04%

Weighted Average Cash Position

30.00%

Highest Return

17.64%

Lowest Return

9.46%

Table 5

Performance for portfolios with less than 60% in equity

July 1, 2010 to September 30, 2010

Weighted Average Return

7.85%

Weighted Average Cash Position

60.18%

Highest Return

17.78% (cash position 61.95%)

Lowest Return

1.26% (cash position 91.85%)

*A mistake we hope never to make again - at low levels of the market, do not wait for even lower prices. Ignore all the negatives, because they usually are already in the prices. Mark-to-market losses should not hurt, only permanent losses of capital.

--------------------*--------------------

I come across a wonderful anecdote of the Nobel Prize - winning physicist Eugene Wigner. In 1960, he had written a classic essay titled "The Unreasonable Effectiveness of Mathematics in the Natural Sciences." In this essay, Wigner told the story of a statistician showing a paper on the population trends to a friend who knew little mathematics. The friend pointed to the symbol ‘Pi' and said, "Surely the population has nothing to do with the circumstances of the circle."

Currently statistics are being mustered to explain stock market trends, as if there are natural laws that govern human conduct under the influence of crowd psychology. A few data points are being given the divine status of universality and immutability. The past, where inconvenient, is forgotten and the future, optimistically imagined, is paraded as inevitable. But illusions whilst undoubtedly contributing to the creation of the present reality are fallible, fragile and fickle. Paying too high a price for the dreams of tomorrow has seldom been the road to riches.

I have had questions raised about the levels of cash that Jeetay is carrying (and attempting to increase with every rise in the market). Quite rightly clients have not given us the job to allocate assets between equities and cash. But whilst we are not asset allocaters, we are risk-managers. Portfolio management is primarily about managing risk. And in the grip of a bull market, fueled with copious liquidity, the choice is always between relaxing the risk-reward ratio v/s living with the possibility of a severe drawdown. It is not an easy choice - cash is the tranquilizer when we pull the trigger and buy, knowing that we will have the firepower to buy more if prices move against us. I wish we could give sedatives to Mr. Market, but since we can't, we need to have some ourselves. Cash is the best sedative for the opportunistic investor.

I will not discuss individual stock selections in the letter but will give you the broad classifications that we use:

1)   Cash, net - working capital and asset bargains

2)   High earnings yield with/without ‘moats'

3)   High cash flow/Dividend yield

4)   Debt - capacity bargains

5)   Event - driven/Special situations

Sometimes an idea fits more than one classification - we are always looking at how many different ways we can make money as also lose it.

As you may be aware, SEBI has in a move which I heartily welcome, mandated that full disclosure of fees be made at the outset of any relationship. For existing relationships, the disclosure will have to be sent to the client, signed by him and appended to the original agreement. New clients will have to sign the annexure relating to fees after adding in their own handwriting that they have understood the fees/charge structure.

Jeetay has always followed best practices and hence we applaud this move by SEBI. We will be sending you this annexure shortly.