2020 - Letter to Clients

 

2020 is a year which all of us who have lived through it will remember for a very long time. At the start of the year, ‘pandemic’ was a term that to the vast majority of us was a word restricted to the dictionary. But by the end of the year, that changed drastically as it became a household syllable. All of us can righty claim to have lived through a pandemic now. The Covid19 pandemic affected every aspect of every one’s lives all around the world. This virus originated in Wuhan in China in late 2019 and just three months later it had spread around the entire world. So rapid was the spread of this virus that governments worldwide had to resort to complete lockdowns of various durations in order to stop it from spreading and multiplying further. City after city around the world started resembling ghost towns due to lockdowns, and entire economies worldwide came to a grinding halt. In this scenario, investors resorted to safety and flocked towards Gold. Consequently Gold became the star performer for the second year in a row. Here is how various asset classes performed during 2020 in India.

Asset class	2020 return
Gold	27.00
PPF	7.10
NSC	6.80
Debt ultra short	5.13
Post office 3-year deposit	6.90
Debt Liquid	3.96
Fixed deposit (1-3 years)	5.30
Nifty 50	14.90
Nifty Midcap 100	21.87
Nifty Smallcap 100	21.47
icAdvisor average	39.71

That Gold gave the best return amongst the above asset classes during the pandemic was not that much a surprise. The bigger surprise was that the Nifty managed to give a positive return at all. The pandemic had so scarred investor sentiment during March and April that the turnaround during the rest of the year was nothing short of sensational.  In the midst of all of this, I am happy to report that the average performance of all icAdvisor managed portfolios during the year clocked in at just short of 40%. This was almost thrice as much as the Nifty and about twice as much as the Midcap and Smallcap indices. Here is how many of our client portfolios outperformed these three indices in percentage terms during the year

Index	% folios outperforming the index
Nifty	88.46
Nifty Midcap 100	80.77
Nifty Smallcap 100	80.77

The Nifty saw two trends during the year – a big downtrend at the start of the year followed by an even bigger uptrend for the rest of the year. The quantum and duration of these trends were as follows:

Trend	Quantum%	Period
Downtrend	-38.6	Jan to Mar
Uptrend	80.4	Apr to Dec

These two trends can be easily seen in the daily chart of the Nifty during 2020 below.

Nifty ended the year at a PE of 38.45, very close to its lifetime high of 38.55 reached the very next day! At these dangerously high PE levels Nifty stocks have only two possibilities – either deliver increased earnings to justify the stratospheric PE or face a price correction. The December quarter results which are starting later this week will be interesting to watch from this point of view. 

On the economic front there was bad news all around. Annual GDP growth went into negative territory for the first time in decades. GDP growth slumped to -23.9% for the April-Jun quarter and then improved slightly to -7.5% for the July-September quarter. Two quarters of consecutive negative growth implies that technically we are in a recession. It is in this context that the GDP numbers for the October-December quarter are keenly awaited. Unemployment continued to be high and GST collections also slipped during the year. These and other indicators have put the Governments target of $5tn economy by 2024 at serious risk, to the point that no one is even talking about it anymore. The focus at the moment seems to be to stop the spread of the pandemic so that the economy can recover back to normal. The problem created by the pandemic was compounded by China’s military expansionist activities in the Ladakh region. This forced the Government to move military resources heavily into that region, putting further stress on the finances of the Government. The upcoming annual budget will be interesting from this context. 

What can be look forward to in 2021? Here is Nomura’s GDP forecast for leading economies in Asia for the next two years

Nomura predicts that India will be the best performing economy in Asia in 2021, growing at 9.9% which will be even faster than China’s 9.0%. The stock markets have run up already in anticipation of this forecast and Nifty has hit a lifetime high at the end of the year. Quality Midcap and Smallcap stocks have run up even more than the Nifty. Hence the entire market is very costly at the moment in anticipation of this high growth. The December quarter results will give us a glimpse of which stocks will be at the forefront of this growth.

At the end of this difficult year, it is a good idea to take a moment and review the fundamentals of long term investing. We enumerate them here for quick reference:

1. Asset allocation – Diversify your financial assets across Debt, Equity, Real Estate, gold, International Equity, etc. depending on your risk profile and age. Real Estate and Gold assets should ideally be used to satisfy consumption needs only. One simple rule of thumb to do this quickly is to subtract your age from 100. The number you get should be the percentage of your assets that you should allocate to equity - the rest should be allocated to Debt and other assets.
2. Financial planning - Identify your financial goals and classify them by time horizon – short term, medium term and long term. Use Debt assets to achieve short term goals, mix of Debt and Equity assets to achieve medium term goals and Equity assets for achieving long term goals. This will be the basis of your financial plan.
3. Reviewing your plan - Review your financial plan yourself or with the help of your advisor at least once a year and make adjustments to your asset allocation depending on the prevailing market situation.
4. Invest right - When it comes to equity, invest in quality businesses and then have the patience to allow markets to give you returns. This calls for having patience even in the face of volatility. Speak to your financial advisor whenever you are in doubt and need a second opinion.

I want to take this opportunity to thank you for putting your faith in our investment thesis and in our icAdvisor service with your hard earned money. Your continued trust makes us stay committed to the vision encapsulated in our tagline – ‘Growth through Knowledge’. I am available to address client queries at all times and am approachable via email or whatsapp. 

Finally 2021 will also be the year where the focus will shift from the pandemic to vaccinating the population. It is in this context that I wish you and your family a very healthy, happy and prosperous Happy New Year in the hope that our relationship will continue to strengthen and grow in the years ahead! 

Abhijit Talukdar

Founder, Attainix Consulting

SEBI Registered Investment Adviser - INA000006703

Investing lessons from the COVID pandemic

 2020 has been an eventful year for investors – one that they are unlikely to forget anytime soon in their lifetime. In many ways it has been similar to 2008, the only difference being that both the downside and upside in 2020 has been much more rapid than in 2008. Surely 2020 is one for the ages – tales about the pandemic and how investors first lost money and then made more money will be narrated to progeny on many a dinner table. So what investing lessons can we take from this pandemic? Here are some that I have put together in no particular order.

• Take volatility in your stride

Stock markets are volatile in the short term. That is because all kinds of people – from traders to Institutional Investors with different time horizons – are plugged into the markets every day, each one trying to work it for their own benefit. Consequently ups and downs are a natural attribute of the stock market. Hence do not be perturbed by volatility. Learn to ignore it or if possible even take advantage of it – to invest even more on every significant correction. 

• Invest for the long term

Remember that behind every stock that is trading in the market, there is a real business that is serving real Customers and generating real revenues. As long as the overall economy is growing (which it will, because this is a common objective of all Governments worldwide), many of these businesses will prosper and grow faster than the economy and will be rewarded by the stock markets. This takes time – months and even years. Always invest for the long term and have the patience to let the markets reward your conviction.

• Stay Diversified

In the past 20 years, not a single investment asset class — Large Cap Stocks, Small Cap Stocks, Real Estate, International Markets, Gold to name a few — had the best returns in back-to-back years. Each year the best investment category flip-flopped. Staying diversified, as per your recommended asset allocation, gives your portfolio the best chance to benefit from all asset classes in the long term

• Focus on Asset Allocation

Long term wealth is created not so much from superlative returns in the stock markets as much as from a judicious mix of asset categories in your portfolio. Assets such as Debt, Real Estate, Gold, etc. have their days in the sun and are also capable of generating superlative returns. Hence always focus on the asset category mix of your portfolio in order to generate wealth for the long term.

• Rebalance your portfolio regularly

Business performance changes over time with changing market conditions. For instance, in 2020 Technology stocks have done very well due to the high demand for Work from Home whereas Airline stocks have languished due to the diminished travel demand. If you could have foreseen this change in March/April 2020 and rebalanced your portfolio accordingly, it would have performed very handsomely at the end of the year. At this time technology stocks have run up too much and further upside may be limited. This may create demand for value stocks once again. Hence rebalancing your portfolio for this change may help you in 2021.  

So there you have it – a mini capsule of investing lessons from 2020. These lessons are not revelations – they have been repeated ad nauseam by various investment experts using different words and sentences. Yet many of them remain in theory and rarely get implemented in their true spirit. This is where an Investment Adviser can help. If you are not able to implement these lessons on your own, then consider hiring an expert to advise you on your portfolio and be by your side to help you navigate the markets ups and downs. 

2017 - Letter to Clients

2017 has been a good year for Indian long term investors. The Nifty started the year at 8179 and ended it at 10,531, recording an impressive annual gain of 28.8% in the process. Equity remained the preferred asset class for investors this year, partly due to the continuing subdued mood in the real estate and bullion markets. 2017 has also been an impressive year for me and for all our Clients at Attainix Consulting. The average annual return of client portfolios under our advice clocked in at 53.6% this year. This is almost twice as much as the benchmark itself and is admirable by any yardstick. More importantly, all our client advised portfolios beat the benchmark Nifty by a significant margin. This is a matter of immense satisfaction for me, because it implies that our stock picking methodology generated healthy alpha (excess return above and beyond the benchmark) for the benefit of all our Clients, justifying our advisory fees! Further, it endorses our investment thesis that businesses with high degree of knowledge assets will always outperform the competition and continue to find favor with investors. The fact that we are the first and only firm that has quantified this investment thesis into programming logic that enables us to pick stocks free of human bias, only gives us an added edge!.

Which begs the question - what is the basis for our investment thesis anyway? Why do we believe in businesses with high Knowledge assets? And what are Knowledge assets? Why do businesses with high degree of Knowledge assets

have a competitive advantage in the marketplace? We will have to go back in time to answer these questions. Take a look at the graphic alongside. It shows that for the longest time in our history and until the turn of the last century agriculture was the main source of income for a majority of the population. Scale was achieved during this era simply by expanding into additional land. But land is a limited commodity and businesses had to find a way to get more from the land under their control. The invention of the steam engine and electricity enabled this need, ushering in the Industrial era. This era led to the creation of scale enabling businesses that achieved scale simply by replacing human and animal labor with machines. In this era the focus shifted from the production of agricultural produce to industrial products. This era lasted for the next 150 years or so which is when the Information era kicked in, with the invention of the computer. Just as machines in the Industrial era fastened the production of goods, computers in the Information era hastened the processing of Information. Thus in this era the focus shifted from the production of industrial goods to the processing of Information. Those businesses that could process Information quickly, efficiently and continuously were able to convert this information into Knowledge. And Knowledge is Power. This Knowledge gave such businesses a leg up over their rivals. It also gave them pricing power and enhanced their profitability beyond bounds. But it also attracted competitors who tried to replicate this process. Businesses that are able to encapsulate and institutionalize their information processing and knowledge generation process and shield it from their competitors have effectively developed an asset, which we classify as a Knowledge asset. Knowledge assets are intangible in nature – they are formed from a fluid combination of human knowledge and skills, business processes, databases, brands and supplier/customer relationships. Such is their beauty that Knowledge assets are hard to develop, maintain and replicate, but their impact is eminently visible and measurable! 

Having understood the nature of Knowledge assets, the only question left now is how do we discover such assets? That is where our icTracker software comes in – it calculates and reports the Knowledge assets (a.k.a. Intellectual Capital) of leading Indian and US businesses continuously. It provides us the basis for our simple three step stock picking process which, although described on our website, is worth repeating here.

STEP 1 – EVA check: We start by first checking whether the business is generating more money than its cost of capital. This is done by calculating the EVA (Economic Value Added) of the business. Ideally, we want to select businesses that have a positive EVA. The rationale for this check is that if the business is not able to generate at the least even its cost of capital, then it is actually eroding shareholder value. Alternately, if the business is generating more than its cost of capital, it will be in a position to fund its future expansion from internal resources, which will further decrease its cost of capital. Note that, this check will eliminate startup and fledgling businesses by design. It does not mean that such businesses are not good investments. It only means that these businesses have to prove their business model before they can be considered worthy of investing for retail investors.

STEP 2 – Knowledge assets check: This is the asset quality test. Here, we check whether the business is generating profits from traditional assets (such as land, building, machinery, cash) or from Knowledge assets. We look for businesses that have at least 50% of their total assets in the form of Knowledge assets. The rationale for this check is our belief that businesses that are generating profits from traditional assets will come under competitive pressure sooner or later, simply because such assets are not defensible. Anyone with sufficient cash can buy land and machinery. Knowledge assets on the other hand take years to build and develop and once in place, they provide sustainable competitive advantage to the business. In other words, such businesses develop a moat, which is difficult to surmount.

STEP 3 – Affordability check: In the above two steps, we have shortlisted businesses that are generating value through the use of Knowledge assets. As investors, these are highly desirable businesses because in all probability they will continue to generate sustainable profits for years to come. All that remains to do now is to find whether the stock underlying the business is affordable. For that we compare the market value of the stock to the intrinsic value of the business. Those stocks that have a low ratio of market value to intrinsic value are the ones that have not yet been recognized by the stock markets and hence worthy of our attention as investors.

This simple three step stock pricking process has not only proved its mettle during our back-testing but also provided above-benchmark returns to real Clients. Our icAdvisor service uses this exact stock picking process. In addition, when designing Client portfolios using the icAdvisor service we strive to reduce risk for our Clients by the following three actions: 

• Taking risk profile of the Client into consideration. This ensures that the stocks that we recommend match the risk taking ability of our Client. For instance, a Client who has low risk appetite and interested primarily in capital preservation will benefit from investing in established mature businesses that have a high dividend yield than from investing in emerging smaller sized businesses, which are considerably riskier.
• Selecting stocks from different sectors. This ensures that we do not put all our eggs in one basket. Rather, we divest the portfolio into multiple sectors, picking no more than one or two stocks from each sector. Sectoral impact on the portfolio, if any, is thus limited to the specific stock.
• Striving to build a perfectly diversified portfolio. All our Client portfolios are designed at the efficient frontier – it means that the quantum of each stock in the portfolio is such that it has minimum correlation with any other stock in the portfolio. This gives each stock the chance to perform independently of each other in the portfolio.

Despite all the above steps, sometimes one or two stocks in the portfolio fail to perform due to the vagaries of the market. This is the reason why we provide a free rebalance option in our icAdvisor service. Many of our Clients opted for the free rebalance this year and saw the benefit of doing so. Others chose to skip it because of satisfactory performance of their portfolios. Remember, even though the rebalance is free from our side, there is still a cost that you have to incur in terms of brokerage fees, transaction fees and government taxes.

In passing, I want to take this opportunity to thank you for putting your faith in our investment thesis and in our icAdvisor service for generating above average returns for your hard earned money. Your continued trust makes us stay committed to the vision encapsulated in our tagline – ‘Growth through Knowledge’. I believe that we can grow only when you see value in our service and growth in your own portfolios. I am available to address client queries at all times and am approachable via email or whatsapp. I am also open to feedback and suggestions and welcome you to provide the same. I also hope that if you have benefitted from our service, you will spread the word to your own friends, family and colleagues and have them share the benefit as well. 

Finally, let me wish you and your family a very happy and prosperous Happy New Year and hope that the relationship that we have built this year will continue to grow for many years to come!

Abhijit Talukdar
Founder, Attainix Consulting
SEBI Registered Investment Adviser