How to evaluate your direct equity & equity mutual funds portfolio

OmniView — A Value Investor’s perspective

In the past year, 3-year or 5-year period, your equity investments, whether a direct equity portfolio or equity mutual funds have probably delivered good returns. However, you need to think about one thing. How to maintain the high returns of your portfolio in future?

The markets have been on an upswing for about 4 years. A bull-run of 4 years has been kind to most portfolios. It is time to evaluate whether your portfolio can continue performing.

One of the easiest ways to evaluate your portfolio is to compare it with the Scientific Alpha XLNT25 Portfolio. Here I share some fundamental ratios of the latest XLNT25 Portfolio. Scientific Alpha XLNT25 is a multi-cap strategy of 25 stocks created from all the companies with market cap larger than INR 1000 crores.

XLNT25 is a result of the Scientific Alpha Investment Engine. Scientific Alpha creates a SuperNormal Portfolio constituting SuperNormal Companies at SuperNormal Prices.

What is a SuperNormal Portfolio?

SuperNormal companies have the following characteristics:

· A Stable Business Model

· Strong Balance Sheet

· Value Creating Track Record

SuperNormal Prices means companies which are available at a “Discount to Intrinsic Value”.

Let us look at the latest XLNT25 portfolio of SuperNormal companies at SuperNormal Prices.

Is your portfolio a SuperNormal Company portfolio?

The following are the fundamentals of this portfolio:

XLNT25 & Markets Key Fundamentals

Compare your portfolio ratios to the numbers above. If your portfolio companies have ROE, ROCE, and other fundamental parameters superior to the Nifty 500 then you probably have companies that are superior to the typical market company.

Is the ROE of your companies higher than 10%? Then your companies are superior to the typical company in Nifty 500. The fundamental business performance of your portfolio companies could be better than the fundamental business performance of Nifty 500. (Of course, this is not necessary, but the likelihood is high. To have more confidence you have to make sure that they are superior on several important and critical fundamental parameters.)

If your portfolio companies have ROE (and other fundamental parameters listed above) better than that of XLNT25, then your companies are quite likely SuperNormal Companies!

Assuming your portfolio companies have an ROE more than 18%, have lower debt to equity (or are more cash rich), and have higher margins, they are more likely SuperNormal Companies.

However, while have SuperNormal Companies is necessary, you cannot stop your portfolio evaluation there! You also must look at the valuations.

SuperNormal Companies should be available at SuperNormal Prices!

Now look at the Valuations of your portfolio companies.

XLNT25 & Markets Key Valuation Metrics

Do your portfolio companies have PE ratios lower than the markets (Nifty 500), i.e. lower than 29? Then they are probably cheaper than the markets. Do they have higher dividend yields? Then they are probably cheaper than the markets.

However, do these companies have PE less than XLT25? If yes, then they are at SuperNormal prices.

If you have SuperNormal Companies with fundamentals better than XLNT25 in the first table and they are available at valuation ratios lower than XLNT25, i.e. they are available at SuperNormal Prices then you have a SuperNormal Portfolio. Congratulations!

Most likely you will make higher than market returns and probably even higher than XLNT25, if you keep vigilant and your portfolio construction is also risk managed.

However, if that is not the case and you only have SuperNormal companies but at high valuations or you have companies at SuperNormal prices but poor fundamentals, you are better off with XLNT25 as the investment strategy for the portfolio!

And remember, there is more to investment management than stock selection. Portfolio construction, risk management in terms of stock and sector diversification, monitoring your portfolio for fundamental changes and evaluating if it has become overvalued etc. are also important.

Disclaimer:

Past performance is not necessarily indicative of future results.

Omniscience Capital Advisors Private Limited (Omniscience Investment Advisers) is a Registered Investment Advisory firm with SEBI-registration no. INA000007623. Equity investments are subject to market risks. Please read all related documents carefully. An investor should consider the investment objectives, risks, and charges & expenses carefully before taking any investment decision. This is not an offer document. This material is intended for informational purposes only and is not an offer to sell any services or products or a solicitation to buy any securities. Any representation to the contrary is not permitted. Omniscience makes no warranties or representations, express or implied, on the products and services offered. It accepts no liability for any damages or losses, however caused, in connection with the use of, or on the reliance of its product or services. This document does not constitute an offer of services in jurisdictions where the company does not have the necessary licenses. This communication is confidential and is intended solely for the addressee. This document and any communication within it are void 30-days from the date of this presentation. It is not to be forwarded to any other person or copied without the permission of the sender. Please notify the sender in the event you have received this communication in error.

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