A review on how the portfolio has performed by Jason Monteiro and the new suggested portfolio

Last  year (Moneylife, 17 November 2011), we did a study of the top holdings of the best performing mutual fund schemes; we selected 10 stocks from among those, based on their fundamentals, future prospects and management quality. This was not an ideal portfolio suggested by Moneylife but was merely a collection of better stocks from whatever fund managers had already chosen as their top picks. The top picks of mutual fund schemes are usually concentrated in just a few stocks, which are common across funds. Going by the top 10 holdings in the portfolio of equity diversified schemes, out of the 210 schemes, 122 have ICICI Bank among their top 10 holdings. Other well-known highly-picked stocks are: Infosys, HDFC Bank, Reliance Industries, ITC and State Bank of India. Some of these stocks feature in the top 10 holdings of small-and mid-cap schemes as well.

We had created a portfolio (refer to table) of these top picks and had mentioned that we would do a quarterly review of the top 10 holdings of the top performing funds. The top 10 holdings of mutual fund houses hardly change over a quarter. In fact, even over a period of six months, on an average, more than 75% of a scheme’s top 10 holding remain the same; this does not give us much to choose from. The only change is in the weightage of each stock in the portfolio of these schemes. Schemes like Fidelity Equity Fund and HDFC Growth Fund have just a single change in the top 10 holdings.
 

Stocks in the new portfolio have been ranked on the basis of three parameters: 3 qtr average sales growth, market-cap to operating profit and return on networth based on the net profit for the past four quarters.

Over six months have gone by since our last study; how has the portfolio, we selected, performed? Between November 2011 and April 2012, when the Sensex fell by 2.19%, our portfolio did a tad better —it declined 2.14%. Considering that just 10 stocks were selected compared to the 30 stocks of the Sensex, we did comparatively well but not good enough. The top schemes that we selected, which have anywhere between 30-60 stocks in their portfolio, gave an average return of 0.68% compared to the average return of their benchmarks which delivered -1%. The stocks we selected are still present in the portfolio of the schemes and five stocks are still among the top 10 holdings of the schemes we had selected. These are: Tata Consultancy Services (TCS), Divi’s Laboratories, Bank of Baroda, Bosch and Petronet LNG.

Which are the stocks that have made a difference to the performance? Three of the stocks we selected provided returns of over 10%. Bosch and TCS hit their all-time high in May; and the other, Divi’s Laboratories, hit its 52-week high just recently. Bosch was around Rs7,000 at the time we had suggested this stock. In the recent quarter, the company posted a better-than-expected operating profit margin. Its net profit grew by 22.4% y-o-y and the stock hit its all-time high of Rs9,264 this May.

TCS is another stock which hit its all-time high. Its price was around Rs1,100 when we suggested the stock; it is now trading around Rs1,200. TCS has been a top pick from the IT sector and the company has reported good all-round growth. TCS won six large deals in the fourth quarter of 2012; three orders were bagged in the banking, financial services and insurance (BFSI) sector, two in retail and one in telecom.

Divi’s Laboratories just recently hit its 52-week high of Rs949.90, about 25% up from its trading price of around Rs750 six months back. The company has reported an excellent 41% sales growth in the past three quarters.

Gujarat Mineral Development Corporation (GMDC) hit its 52-week high of Rs212.60 in February this year, 16% up from its price of Rs175 at the beginning of November last year. The stock has been on a downtrend ever since. The coal ministry issued a show-cause notice to the company for inordinate delay in development of the Naini coal block. The ministry also said it could not allocate a new block to GMDC as per the new guidelines.

Bank of Baroda has been highly volatile in the past six months. It went from around Rs800 at the start of November 2011 to around Rs650 towards the end of December. It then rallied to hit a high of Rs881 in mid-February 2012. The bank has posted a slight increase in gross NPAs to 1.53% in FY11-12 compared to 1.36% a year ago. By mid-May, the stock was trading around Rs650.

Oil & gas stocks, like Petronet LNG and Gujarat State Petronet, tumbled after a directive was issued by the Petrol and Natural Gas Regulatory Board on 9 April 2012 to Indraprashtha Gas to refund the network tariff and compression charge, with retroactive effect from 1 April 2008. Reacting to this, and expecting similar orders, oil & gas stocks, like Petronet LNG and

Gujarat State Petronet, fell to their 52-week lows.
Gujarat State Flurochemicals (GFL) swung wildly; starting at around Rs530 per share, it went down to around Rs350, was back up again and remained flat at around Rs500 per share. By the end of April, it came down to Rs450. The key attraction of this company is that it trades in certified emission reduction or carbon credits. However, the demand for carbon credits has gone down; hence, it would affect the company negatively.

SRF continuously declined due to deteriorating profits over the previous two quarters. Mahindra and Mahindra faced an array of issues starting with the hike in excise and customs duty, leading to slower sales. And just recently a fire broke out in their Nashik plant; the first shift operations of the plant had to be suspended,  resulting production loss. This did not help the stock price and it declined further.

Following the exclusion from the top 10 holding and deterioration in the prospects of SRF, Mahindra and Mahindra, GFL, GMDC and Gujarat State Petronet Ltd, we would suggest a revamped portfolio, as it appears in the table above. We have also increased the number of stocks in the list to offer higher diversification.

To the new portfolio which will now be of 15 stocks we have added two more banks, Karur Vysya Bank and HDFC Bank. We have added Ipca Laboratories to go along with Divi’s Laboratories, from the pharma sector. From the financial services we have added HDFC. Consumer product companies Bata India, GSK Consumer Healthcare and Asian Paints have also been added to the list. FAG Bearings, the second largest player in the bearings industry and Solar Industries, one of India’s largest manufacturers and exporters of explosives, have been included on the list as well. Fertilizer manufacturer, Coromandel International also finds a spot. The list looks fairly diversified now and hopefully, should do as well as the best funds.