July – September 2012


October 26, 2012

 

 

Whilst your individual returns are with you, I would like to share how we think about on performance on the portfolios managed by me 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:

a)   The "representative" portfolio returns.

b)   The weighted average returns of all the discretionary portfolios managed by Mr. Chetan Parikh in the Jeetay PMS.

c)   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.

d)   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 portfolios managed by me at Jeetay and the Sensex.

Table 1

Since Inception

 

 

 

 

 

 

 

 

 

Period

Portfolio Returns (%)

Sensex Returns (%)

% 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 March 31, 2010

85.16%

80.50%

Around 30%

Audited

 

 

 

 

 

April 01, 2010 to March 31, 2011

29.09%

10.93%

Around 27%

Audited

 

 

 

 

 

April 01, 2011 to March 31, 2012

9.03%

-10.5%

Around 10%

Audited

 

 

 

 

 

April 01, 2012 to June 30, 2012

-0.18%

0.15%

Around 8%

Audited

 

 

 

 

 

July 01, 2012 to

Sept 30, 2012

4.59%

7.65%

Around 9%

Audited

 

 

 

 

 

Cumulative Return

840.98%

442.18%

 

 

 

 

Table 2

Since 2006

 

 

 

 

 

 

 

 

 

Period

Portfolio Returns (%)

Sensex Returns (%)

% 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 March 31, 2010

85.16%

80.50%

Around 30%

Audited

 

 

 

 

 

April 01, 2010 to March 31, 2011

29.09%

10.93%

Around 27%

Audited

 

 

 

 

 

April 01, 2011 to March 31, 2012

9.03%

-10.5%

Around 10%

Audited

 

 

 

 

 

April 01, 2012 to June 30, 2012

-0.18%

0.15%

Around 8%

Audited

 

 

 

 

 

July 01, 2012 to Sept 30, 2012

4.59%

7.65%

Around 9%

Audited

 

 

 

 

 

Cumulative Return

203.82%

64.42%

 

 

 

 

     Table 3

Since 2010

 

 

 

 

 

 

 

 

 

Period

Portfolio Returns (%)

Sensex Returns (%)

% in cash

 

 

 

 

 

 

April 01, 2010 to March 31, 2011

29.09%

10.93%

Around 27%

Audited

 

 

 

 

 

April 01, 2011 to March 31, 2012

9.03%

-10.5%

Around 10%

Audited

 

 

 

 

 

April 01, 2012 to June 30, 2012

-0.18%

0.15%

Around 8%

Audited

 

 

 

 

 

July 01, 2012 to Sept 30, 2012

4.59%

7.65%

Around 9%

Audited

 

 

 

 

 

Cumulative Return

46.94%

7.04%

 

 

 

*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** (Portfolios managed by Mr. Chetan Parikh)

 

"Representative" portfolio

Weighted average returns of all discretionary portfolios

Weighted average returns of "older" portfolios

Sensex 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 -Sep 30, 2012)

   4.40%   7.10%  7.27%  7.81%

**Returns are before fees but after all other expenses

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

In the last letter, I had compared Jeetay's monthly returns with the Sensex to demonstrate that purely on statistical measures, Jeetay's portfolios (those that are managed by me), could be viewed as less risky. I will repeat the exercise again for this quarter, partly because the number of observations increases and obviates some of the drawbacks of extremely small sample sizes. However it is still an extremely small data set.

Returns

                                      Jeetay                           Sensex

July 12                           0.29%                            -1.11%

 

August 12                       -0.55%                           1.12%

 

September 12                 7.96%                            7.65%

      --------                         ---------

                                      7.68%                            7.65%

                                      --------                         ---------

Whilst there is no meaningful difference between the returns achieved by Jeetay and the Sensex over the quarter, I would argue that on any statistical measure of risk - volatility, drawdowns or downside volatility, Jeetay's return stream is again less "risky".

Let me hasten to add that we do not view risk purely in statistical terms but measure it on more subjective factors like the quality of businesses in the portfolio, the degree to which we understand them, the prices we have paid for them and their current valuations.

At Jeetay, we believe that statistical measures of risk are the results of careful thought on the more subjective factors outlined above. In the end, what "Mr. Market" does is of little concern to us, except to the extent that it allows us to play our price bands - buying pieces of businesses at prices that are attractive and selling them when they are no longer so.

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I made a recent presentation titled "What I learnt after I invested in Nestle". I did not however talk about Nestle but used it and its ecosystem as the lens through which I presented my worldview. I warned my audience, however, at the outset, that I was not going to say anything that might even remotely help them to make money in the near future!

The ownership models based on the Industrial Age - casino finance, extreme short-termism, governance by capital markets with emphasis on profit maximization even at the cost of flouting environmental and social norms, are likely to undergo some large charges in the times ahead.

Ecological thinking based on the recognition of the limits to growth and focused on growing scarcity of natural resources and increasing pollution, where more production and consumption are not necessarily things to be maximized, needs to replace conventional economic thinking.

We measure progress by GNP increases. So if the Artic is melting, the rare earths found there would surely come into the GNP, but the irreversible damage to the beauty and to the environment would not. The cost to mitigate second-order environmental consequences would however find its way into the GNP calculation. This is perverse.

Positive - sum games, called "wealth creation" in economics, are actually zero-sum games when "nature" is factored into the equations. And when critical points are reached, then the structure of the game will itself change - a "game - changer" as management literature would call it - but for the worse!

The ownership models of the current age have forgotten community too. An unfair society has been the result. Extremes of greed have pushed financial systems to the points of collapse. Money printing of the sort we are seeing is not sustainable. "Forced redistribution" of debt and intergenerational obligations like pensions are going to result from negotiations, and possibly, revolt.

Capitalism, crony or otherwise, is concerned only with short-term allocative efficiency and corruption. When economic activity becomes "disembedded" from society, as historian and socialist, Karl Polanyi, wrote, capitalism finds itself in crises.

I talked about a future that probably has more perils than "rational optimism" would have us believe with its emphasis on the benefits to humanity from cultural, economic and technological changes that come about from market processes of exchange and specialization.

----------------------------X--------------------------

The discontinuities that I see ahead make me a lot more cautious in this liquidity driven rally. We will be raising cash levels if the market were to forge further ahead.

----------------------------X--------------------------

We have initiated a position in a 800 pound gorilla in the agri space with a vast distribution network and its fingers in many parts of the agri products ecosystem. There are strong tailwinds in this sector. We would have liked to buy it about 20% cheaper and we are hoping that Mr. Market gives us the opportunity.

----------------------------X--------------------------

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 or Prem!

 

Warm Regards,

 

 

Chetan Parikh