- 1. Portfolio Construction and Management Investment Management
Project Himanshu Gupta 12P138 Ishpreet Singh 12P139 Karan Jaidka
12P141 Shivendra 12P169 Vikas Jain 12P178 Investment Management
(IM) B Group 7 PGPM 2012-2014
2. Portfolio Construction and Management IM Section B Group 7
Project Report Page 1 Name of our Investment Management Fund
Greenback Capital Advisors Private Limited (Greenback Capital)
About the Fund Greenback Capital Advisors Private Limited
(Greenback Capital) was established in July, 2005 to address the
growing need of the different types of investors in the Indian
capital markets. We manage our investors capital with three
fundamental ethos: expertise, accountability and transparency.
Greenback Capitals portfolio managers (belonging to IM-B Group 7,
PGPM 2012-14, MDI Gurgaon) have a lot of experience in the capital
markets and this expertise has been developed over multiple
business cycles. While past performance is no guarantee of future
success, the funds managed by us have generally outperformed or,
during times of recession, performed at par with the markets.
Accountability to us means a deep commitment to do what is right
for our investors. We also believe that transparency leads to trust
which will create a long lasting fiduciary relationship between us
and our investors. We proactively invest in securities to further
propagate the three ethos. Greenback Capital aims to achieve a high
absolute rate of return over a business cycle while minimizing risk
of capital loss. We practice the established investment principles
espoused by the likes of Graham, and Warren Buffett. 3. Portfolio
Construction and Management IM Section B Group 7 Project Report
Page 2 Investment Strategy followed at Greenback Capital The
primary focus is to invest in undervalued companies from the
large-cap universe primarily of the publicly traded Indian
securities. The potential for aggressive expansion in large-cap
companies is small, but these stocks are relatively more stable.
They are much more likely to pay dividends and possess greater free
cash flows. Historically, large-cap companies are known to ride the
storm and are relatively more stable when the market is undergoing
a sustained bear run. They are also more suited for long term
investing, and since most of our investors stay invested in our
fund for many years, it aligns with our strategy of focusing on
large-cap stocks. These companies have businesses in multiple
geographical locations and hence, diversify the risk associated
with domestic problems. Also, the fundamentals and business models
of large- cap companies are believed to be better for investments
in the long run. Apart from investing in securities, we also invest
in riskless assets, which we keep changing from time to time. This
riskless asset, combined with the risky asset portfolio, makes up
our complete portfolio. The weights assigned to the risky assets
are fixed at a given point of time. These weights are assigned in
such a way that we offer the maximum return at the minimum possible
variance at that level of return, i.e. the highest possible Sharpe
Ratio in our portfolio at a given point of time. Our investors are
not given an option of changing the composition and/or weights of
our risky assets. This composition is evaluated from time to time
by our competent asset managers and the best possible combination
at that point of time is determined and frozen. After this step is
complete, different weights are assigned to the riskless asset and
the combined risky assets and are offered to our investors based on
their requirements risk appetite, expected returns, etc. 4.
Portfolio Construction and Management IM Section B Group 7 Project
Report Page 3 Current Composition of the Portfolio The current
offerings of Greenback Capital include a combination of risky
assets (equity) and riskless asset (bonds issued by Government of
India enterprises) as described below:- Risky Assets 10 Large-cap
stocks (blue-chip companies) listed on the S&P BSE Sensex
make-up Greenback Capitals risky asset portfolio. These stocks have
been selected from various sectors and they have historically been
good performers in their respective businesses and in the stock
market. Their fundamentals remain strong and our asset managers
expect them to continue offering good levels of returns in future
as well. The securities have been chosen from different sectors in
order to mitigate the industry-specific risks which a particular
industry may face from time to time. Details of the stocks
comprising our risky-asset portfolio are:- Company Name Sector
Rationale for including in the portfolio Mahindra and Mahindra Ltd.
Auto and Auto Ancillaries Market leadership in SUV segment, Fastest
growing in Vehicle industry ITC Ltd. FMCG and Retail Strong
presence in rural market (Fast growing) Godrej Consumer Products
Ltd. FMCG and Retail Revitalizing company with Focus on global
market HCL Technologies Information Technology Core strengths in
engineering and R&D services and infrastructure management
Reliance Industries Limited Oil and Gas Continuity of positive
results from Cauvery basin adding to long term profitability of the
company Axis Bank Banking and Financial Services Best Bank
(CNBC-TV18), Profitability Dr. Reddys Laboratories Pharmaceuticals
and Healthcare Focus on new markets, Developing new products
through partnership route Container Corporation of India Limited
Logistics and Transportation Market share of more than 75% 5.
Portfolio Construction and Management IM Section B Group 7 Project
Report Page 4 ACC Limited Metals and Cement Super brand status,
nationwide presence Coal India Limited Metals and Cement Largest
coal producer in world, Majority owned by Govt. Riskless Asset In
order to mitigate the overall market and systematic risk and to
cater to the varying risk appetites of our investors, we have
currently included the tax-free secured bond issued by Rural
Electrification Corporation Limited (a Government of India
enterprise). Some important details of the bond are as follows:-
Issue Size ` 1,000 crore with an option to retain oversubscription
up to the shelf limit of ` 4,500 crore Instrument Tax Free Secured
Redeemable Non-Convertible Bonds of face value of ` 1,000 each in
the nature of Debentures having tax benefits under the Section
10(15)(iv)(h) of the Income Tax Act, 1961 Credit Rating CRISIL
AAA/Stable by CRISIL, CARE AAA by CARE, IND AAA by IRRPL &
*ICRA+ AAA by ICRA Face Value ` 1,000/- per bond Minimum
Subscription Minimum Subscription - 5 Bonds (` 5,000) across both
the series Coupon Rate 7.22% p.a for Category I, II and III
Applicants Weights assigned to Stocks in the Risky Portfolio As
mentioned above, the weights assigned to individual stocks were
determined by our asset managers based on historical data. The
current weights assigned are as follows:- ACC Axis Bank Coal India
CONCOR Dr. Reddy's GCPL 0.0934 0.0000 0.0000 0.0000 0.1438 0.0000
HCL Tech. ITC M&M RIL Mean Variance Standard Deviation Sharpe
Ratio 0.0797 0.6667 0.0162 0.0000 0.0520 0.0019 0.0443 1.1713 6.
Portfolio Construction and Management IM Section B Group 7 Project
Report Page 5 Investor Profile Client Name Mr. Ajay Chauhan Age 36
years Place of Residence Mumbai Investment Start Date 1st July,
2011 The clients family consists of four members his wife who is
working as an event manager in a company and two children of ages 5
and 7. The client works as a project manager in Microsoft. His
annual compensation is INR 32 Lakhs. Financial Goals The client has
planned to have a family trip to Europe once his children attain an
age of around 10 years. He has some savings whose value he does not
want to erode in the meantime. So, he was looking out for a good
investment opportunity which could give him good returns over and
above market risk. His aim is to have at least annual inflation
adjusted, after-tax cash flow of around INR 14-15 lakh Investment
Objective To get at least 10% inflation adjusted returns on a
highly diversified portfolio so that the risk can be minimized. He
wants to invest money both in risk-free assets and risky assets
since his risk appetite does not allow him to have full exposure to
equity market. The client wants to invest 20% of his portfolio in
risk free assets. Volatility Tolerance The clients financial
position is quite sound. He also has a good knowledge about
securities and he understands the risks associated with them. Due
to his financial capacity and future prospects, he is quite
tolerant towards interim fluctuations in portfolio market value and
rates of returns. 7. Portfolio Construction and Management IM
Section B Group 7 Project Report Page 6 Investment Time Horizon
Investment horizon is 5 years. Afterwards, it would depend on the
client if he wants to continue or not. The client does not have
short term need for liquidity. Portfolio Performance in 2 Years
(1st July, 2013 16th August, 2013) The point at which the Sharpe
Ratio is maximum is mentioned in the graph above. By investing 20%
of the total investment in riskless assets, our investor has slid
slightly lower along the Capital Allocation Line (CAL) to the point
mentioned in the graph. He has effectively lowered his risk, but at
the same time, his expected return has also reduced from 5.2%
quarterly to 4.521% quarterly. 8. Portfolio Construction and
Management IM Section B Group 7 Project Report Page 7 Expected
Quarterly Returns Standard Deviation Weight of risk-less asset 0.2
0.01805 0.0 Weight of risky asset 0.8 0.05200 0.044 Total Return
0.04521 0.0352 Expected quarterly return of portfolio 4.521 (in %
terms) Total Standard Deviation of portfolio 0.03520 Hence, by
investing 20% of the total invested amount in the riskless REC Bond
and 80% in the risky equity portfolio our investors portfolio has
provided him with 4.521% quarterly returns and with a risk of
0.0352. He expects the same return-risk relationship in future as
well. In the 2 years (approximately 8 quarters) which the investor
has remained invested, he has unrealized gains of INR 4,24,388
(without inflation) (assuming the gains are re-invested). If we
take inflation into account, the gain reduces to INR 2,21,827 (CPI
in 2011 = 6.4% and CPI in 2012 = 11.17%). Effective Annual Rate
(EAR) for quarterly returns of 4.521% = 19.347% Year CPI (in %) EAR
CPI (in %) Investment at the end of period 2011 6.4 12.947 1129470
2012 11.17 8.177 1221827 Total inflation adjusted value of
portfolio at the end of two years = INR 12,21,827 Total inflation
adjusted return at the end of two years = 10.53% Conclusion When
the client viewed his portfolio over the past 2 years and observed
that he is getting returns of 10.53% after adjusting for inflation,
he was quite happy with the performance and decided to remain
invested.
