How we invest at Capitalmind Wealth — Long Term Portfolio

Risks

Known Unknowns and Unknown Unknowns: Risk is a complicated thing. In effect, it’s what you don’t know that’s going to hurt you. If you knew, you’d avoid it. Like crossing a road. You know when you’re crossing the road that something might hit you, so you’re careful.

If you know what you don’t know, that’s a good thing. But most of the times, you aren’t aware of what is likely to happen, or how crazily things can go wrong — and that’s the most difficult sort of risk. That you don’t know what you don’t know.

It’s like a car swerving from a road and hitting you sitting inside a coffee shop. The “known” risk of sitting inside a coffee shop starts with “bad coffee” and probably ends with “My boss saw me when I took sick leave”. The known risk doesn’t include getting hit by a car. It’s what you don’t know that you don’t know.

All stocks are risky — Large cap, mid cap, any cap. We’ve seen this in most stock down turns, and even the best of breed stocks can see themselves beaten up considerably.

Even “safe” high dividend stocks can be down over 50% in a deep down turn.
We manage risk by increasing our allocations to debt when the markets are elevated in terms of valuations. Also, we keep debt high when it matters to you (our algorithm tweak levels based on your overall wealth, risk preference and financial requirements). This way you don’t have to tell your kids to delay college by 1 year because, well, the stock market is down 30%.

When markets fall, we move money from debt to equity.

In theory this is what a balanced mutual fund does, fortunately, we are both allowed and we actually do tailor the debt to equity ratio in a personalised way through your inputs to our algorithm.

Debt

We invest debt mutual funds instead of direct bonds because they are more tax efficient and work for smaller investment sizes — so even your SIPs (if you have any) can be invested in debt.

As of Oct 2018 we have chosen ultra short term debt funds or liquid funds from three fund houses. This is not to maximize returns — it is a parking place for cash, and we believe this will generate returns that should match or only marginally beat inflation.

We look for funds with meaningful diversification (100+ holdings sounds great), respected fund managers and a good track record.

These have served us *extremely* well in the last two quarters (we’re writing this in end October 2018 and about half our assets are still in debt).

Stocks

We are focused on long term growth. We walk the talk on this. We don’t pad our portfolio with index heavyweights so that we track the benchmarks closer (we will launch another product for that and price it even lower).

We like stocks that meet a particular criterion — can this stock return 10x in 10 years?

Of the large caps today, only Maruti in the Nifty has given us 10x in the past 10 years. But many mid- and small-caps have done that and more.

A 10x number can come from many sources:

• The company itself being a phenomenal out-performer. Many companies have managed to grow profits or revenues 10x in 10 years, and as they grow bigger they can scale into new and bigger opportunities too.
• A sector or industry supportive of such growth. A company may want to grow but the market itself may not be that large. So we like companies in markets where the entire market itself has huge potential to grow.
• Valuation changes: An earnings multiple of 5 can grow 2x if the earnings multiple grows to 10.

For this to happen, there needs to be a trigger to scale, or simple that growth itself is at a scorching pace already. The triggers we’ve identified could take a few years to take hold, so in many cases we spread allocations over time to get average prices as stock prices shift up and down in time.

Portfolio

We look for the great companies that aren’t too big already. Our search has led us to portfolio that has a reasonably large concentration of companies with valuations of over 10,000 cr. (mid and large caps) and about 25% in smaller cap stocks.

We anticipate growth that comes in the form of earnings growth, P/E appreciation or market expansion. It may take some time (years) for one of these growth factors to really play out. That’s why a longer term (5 year) horizon increases the likelihood that more of picks get their due recognition from the market.

Here’s the current sector split of our portfolio:

Infrastructure 12%
Pharmaceuticals 15%
Services 3%
Finance 20%
Basic Materials 12%
Auto 17%
Consumer Discretionary 3%
Oil& Gas 3%
Technology 12%
Media 3%

Diversification

We found no evidence that owning a smaller number of stocks (‘concentrated portfolio”) versus a larger number (“diversified”) gives you any long term advantage.

We have, therefore kept our stock count to around 35 stocks. We will increase or decrease that as we feel fit, but we don’t want to restrict ourselves to a very small number of stocks.

Initial Deployment

If you invest today, we don’t buy up the entire set of stocks for you in one day. We will stagger entries over a few months, and will buy stocks only if they meet our price ranges.

The staggering helps average the stock purchase. Also, we buy a little every day so that you get a bit more of each stock on a regular basis.

There’s no extra transaction cost to doing this, for you. And we have algorithms that help us determine how much more to buy for each person, every day.

What’s new?

In the year since its launch, the Capitalmind Wealth portfolio has got us about 173 customers and 64 crores in AUM. However, we realise this portfolio isn’t for everyone and we have launched two more portfolios in May’2019 :

Momentum Portfolio — The much loved Momentum portfolio is launched after 3 years of Capitalmind Premium portfolio and 1 year of testing on our personal accounts.

Monthly rebalancing | Up to 30 stocks | 1 % annual fee

Market Portfolio — If your horizon is less than 5 years or just aren’t keen on taking on more risk, the market portfolio aims to be one you never have to worry about. It will track fairly closely to large Indian and US indices.

Almost no holding changes | 0.25% annual fee