April - June 2012

July 26, 2012

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 in the past had 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 Sensex to 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.
  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 have found that the “representative” account, which has been that of our oldest account, now has a different portfolio composition from newer accounts and even some of the older accounts. It may thus in the future not properly track overall performance. We have included Table 4 in which four sets of figures are shown:
    1. The “representative” portfolio returns.
    2. The weighted average returns of all the discretionary portfolios in the Jeetay PMS.
    3. The weighted average returns of those portfolios with over 60% equity at any point since inception. These may be generically thought to be the “older” portfolios since “newer” portfolios take some time to build up and may not be representative of portfolio performance. They are of course included in the weighted average returns of all the portfolios.
    4. The Sensex returns.
  9. We will therefore be reporting “weighted average” returns along with those of the “representative” portfolio.
  10. Should you find all these numbers too intimidating but want to focus only on a few, just look at the second and fourth columns of Table 4. That summarizes the overall performance of Jeetay and the Sensex.

Table 1


Since Inception
    
PeriodPortfolio Returns (%)Sensex Returns (%)% in cash 
June 07, 2003 to June 07, 200480.80%48.00%Almost fully investedAudited
July 05, 2004 to  June 30, 200531.45%42.10%Around 65%Audited
July 01, 2005 to  March 31, 200630.32%56.80%Around 40%Audited
April 01, 2006 to March 31, 200733.73%15.62%Around 20%Audited
April 01, 2007 to March 31, 20087.41%18.60%Around 30%Audited
April 01, 2008 to March 31, 2009-22.26%-37.94%Around 35%Audited
*April 01, 2009 to March 31, 201085.16%80.50%Around 30%Audited
April 01, 2010 to March 31, 201129.09%10.93%Around 27%Audited
April 01, 2011 to June 30, 20116.26%-3.08%Around 20%Audited
July 01, 2011 to September 30, 2011-3.75%-12.69%Around 7%Audited
October 01, 2011 to December 31, 2011-11.14%-6.07%Around 7.5%Audited
January 01, 2012 to March 31, 201219.97%12.61%Around 7.5%Audited
April 01, 2012 to June 30, 2012-0.18%0.15%Around 8%Audited
Cumulative Return799.69%403.69%  

 

Table 2

Since 2006     
PeriodPortfolio Returns (%)Sensex Returns (%)% in cash 
April 01, 2006 to March 31, 200733.73%15.62%Around 20%Audited
April 01, 2007 to March 31, 20087.41%18.60%Around 30%Audited
April 01, 2008 to March 31, 2009-22.26%-37.94%Around 35%Audited
*April 01, 2009 to March 31, 201085.16%80.50%Around 30%Audited
April 01, 2010 to March 31, 201129.09%10.93%Around 27%Audited
April 01, 2011 to June 30, 20116.26%-3.08%Around 20%Audited
July 01, 2011 to September 30, 2011-3.75%-12.69%Around 7%Audited
October 01, 2011 to December 31, 2011-11.14%-6.07%Around 7.5%Audited
January 01, 2012 to March 31, 201219.97%12.61%Around 7.5%Audited
April 01, 2012 to June 30, 2012-0.18%0.15%Around 8%Audited
Cumulative Return190.49%52.74%  
    

Table 3

Since 2010     
PeriodPortfolio Returns (%)Sensex Returns (%)% in cash 
April 01, 2010 to March 31, 201129.09%10.93%Around 27%Audited
April 01, 2011 to June 30, 20116.26%-3.08%Around 20%Audited
July 01, 2011 to September 30, 2011-3.75%-12.69%Around 7%Audited
October 01, 2011 to December 31, 2011-11.14%-6.07%Around 7.5%Audited
January 01, 2012 to March 31, 201219.97%12.61%Around 7.5%Audited
April 01, 2012 to June 30, 2012-0.18%0.15%Around 8%Audited
Cumulative Return40.49%-0.56%  

*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.

Table 4

Jeetay Returns**

 “Representative” portfolioWeighted average returns of all discretionary portfoliosWeighted average returns of “older” portfoliosSensex Returns
2006-2007 33.73% 28.66% 30.11% 15.62%
2007-2008   7.41%   7.12%   8.68% 18.60%
2008-2009-22.26%-23.85%-23.85%-37.94%
2009-2010 85.16% 78.40% 79.00% 80.50%
2010-2011 29.09% 18.57% 18.40% 10.93%
2011-2012   9.03%   3.32%  3.07%-10.50%
2012-2013
(April 01, 2012 – June 30, 2012
-0.18%-0.53%-0.37%0.15%

**Returns are before fees but after all other expenses

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Here are two portfolios called portfolio A and portfolio B, which gave the following returns over a quarter. Notwithstanding the small sample size, the short-term time horizon and the absence of any other details, you were asked to judge which one was riskier. What would be your answer?

 Returns 
 Portfolio APortfolio B
April 121.45%-0.49%
May 12-5.26%-6.35%
June 123.49%7.47%
Cumulative Return-0.53%0.15%

Viewed from any measure of risk – volatility, drawdowns, downside volatility and possibly the one thing missing from Modern Portfolio Theory, common sense, most people would answer that portfolio A is less risky than portfolio B. Yet the returns do not reflect that fact. Any summary measure of returns, and especially with a difference in the signs, must consider its shadow, which is often hidden from view, namely risk.

These are real-life portfolios: Portfolio A is Jeetay’s weighted average return for the quarter, Portfolio B are the Sensex returns for the same period. Whilst the Sensex danced to the loud music of fear and greed, Jeetay dances to the slow music of rationality and fundamentals.

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Whilst Zeno of Citium, a Greek philosopher, founded the Stoic school of philosophy, it was the Roman Stoics – Seneca, Epictetus and Marcus Aurelius – that emphasized its unique psychological component, the methods to attain tranquility.

Some of their techniques are vital for investors too and we attempt to practice them at Jeetay.

  1. Negative visualization: Translated into simpler language, it means always asking the question – “What’s the worst that can happen?” The Stoics believed that all we have is “on loan” from Fortune, which can be taken without our permission or advance notice. Profitability, margins and growth depend much more on a company’s ecosystem and the forces shaping it than on management. Ecosystems are fragile. Much as managements with a “halo” may dispute this, a company’s good fortune is also “on loan”. The Stoics argued that “flux and change” are part of the world.

    Many company valuations depend on “speculative” developments, and I use this term in a Grahamian sense. Rather than wanting the things that the company already has (earnings, assets and proven and sustainable growth) as the Stoics would, Mr. Market often asks a price for things that a company desires and promises – but currently does not have – and many investors pay this price. In financial markets, as in life, this is bound to lead to unhappiness in the long term.
    Negative visualization can be aided by what Frank Partnoy in his wonderful new book “Wait – the art and science of delay” calls “pre-mortems”. Many investors do post-mortems, or learnings from decision made, but a “pre-mortem” assumes that a decision has failed and asks why.

    Let me hasten to add that we do not spend all our time thinking negatively or worrying about it obsessively because we always build a sufficient “margin of safety” in the price we are willing to pay, but we do think of gloom and doom periodically. A honest confession – when we are sitting on large amount of cash with just a few ideas, we (perversely) wish that it comes to pass. In the words of Marcus Aurelius, a real philosopher-king (a Stoic philosopher and a Roman emperor), we take care to be “the user, but not the slave, of the gifts of Fortune.”
     
  2. The dichotomy of control: Epictetus’s “dichotomy of control” comes from his statement that “some things are up to us and some things are not up to us”, some things over which we have complete control and some things over which we do not have complete control.

    As Ben Graham pointed out that an investor has complete control only over the price he chooses to pay. If he is not a “control investor”, he has no say in managerial decisions reflecting corporate strategy and capital allocation. He has also no control over his exit price.

    This one decision and the only thing over which the investor has complete control – the price to be paid – should be thought of with rationality, rigor and facts, but it often surrendered to fads, fashions and rumors.
     
  3. Fatalism: Again in simpler language, it means letting go of the past. This means not being hostage to “if only” thoughts stemming largely from what behavioral finance calls “hindsight bias” – the past looks far more predictable because it has happened.

These are elements of the Stoic way of thinking that have helped us at Jeetay.

We have tried to find our “safety margin” by looking at sectors where the immediate outlook is the worst – currently the auto sector, the capital goods sector and the large capitalization IT sector. We have welcomed gloomy headlines in the media because the pessimism may be warranted but overdone. You are more likely to find Mr. Market’s ex-favorites rather than his current favorites in our portfolios, for Mr. Market’s castaways are our heartthrobs. Fifty-two week highs make us nervous, whilst fifty-two week lows excite us.

Whilst we prefer large-caps over mid-caps, other things being equal, we do not hesitate to swing the bat when good opportunities present themselves in the mid-cap space.

One of the companies in the mid-cap space that Jeetay has invested in has some wonderful economics and a profitable niche. It operating margins have almost doubled over the last five years, it does not require large investments in fixed or working capital for growth (being largely in the service industry), it enjoys some obvious and not-so-obvious moats (repairs and maintenance, its main service, is a small part of the total cost of equipments handled; strong domain knowledge due to about forty years of operating experience; large selling infrastructure which would be costly to maintain by small players without scale; organizational focus, because the group’s product arm is a separate company – its large competitors have not unbundled their organization in this manner) which result in increasing returns on operating capital employed. The obvious negatives are the stingy payout ratio, the growing cash mountain which runs the risk of poor capital allocation in the future, modest growth and its unavailability currently at bargain valuations in relation to its valuation history. Even assuming unheroic growth rates, Jeetay estimates that it trades at less than one time earnings, net of cash, five years out.

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I would encourage you to visit our new website www.jeetay.com. We have a lot of talent. Research at Jeetay is a shared resource. However portfolio decisions are taken not by a committee, but by the portfolio manager looking after the plan. In the case of your portfolio, the decisions are taken by me alone, although I have some fine minds in the investment management team against whom I debate ideas. This is true for the other Jeetay plans too.

A concern that many of you have voiced is I hope satisfactory resolved. Should I become incapacitated for any reason, you will get to hear about it promptly and furthermore an experienced member of the investment management team will be assigned to manage your portfolio after you give your concurrence. This is just a contingency plan and I do not think that you should have any worries on this score. I’m at the wheel and hope to remain so for a long time.

A longer term aspiration, as the size of the firm and the assets under management grows, is to make Jeetay the first port of call for value investing talent.

There is just one thing better than having a great team and that is to have a great set of clients (we use the word “partners” at Jeetay), that I have had the privilege to have. You have demonstrated the sort of patience that a fund manager who follows value investing principles would want. Let me sincerely thank you for your support.

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Should there be any queries, I’m always available. Please do not hesitate to contact me or members of the Jeetay team who look after the administration at the office – Divya, Rashmi, Shakir or Prem!.

Warm Regards,
Chetan Parikh