Mutual Funds
Pramerica Power Sip: A new approach, but beware of the pitfalls

Pramerica’s variation of the traditional SIP may seem like a good strategy but investors should know that portfolio performance depends far more on selection, price paid and weightage of stocks in the portfolio

Under a Systematic Investment Plan (SIP), an investor invests a fixed amount of money every month. This has been touted as a great investment strategy but as our cover story (now on the stands) makes it clear, SIP cannot be used mindlessly. There are occasions when SIP can even lead to a capital loss.
Fund companies have SIPs of varying kinds to get over the performance problem of plain vanilla SIPs. Pramerica has now come out with what it calls "Power Sip". It is an investment plan under which the amount you invest each month is determined by the Sensex trailing P/E. This approach is based on the principle of mean reversion, which means, prices and returns eventually move back towards the mean or average. By popular belief, P/E ratio can be used to predict the future movement of stock prices.  Such arguments are based on the belief that P/E ratios are mean-reverting.

In theory, by comparing the P/E of the Sensex at the time of investing with the historical mean of the Sensex P/E, one can tell whether the Sensex is cheap or expensive depending whether it is below or above the mean. Thus if the PE of the Sensex is below the mean, it would be an opportune time to invest as prices may go up. But does this methodology work? It would if you are investing only in Sensex stocks.

Using the Sensex PE may be an error

Pramerica uses the Sensex PE as it is the general market indicator. Is that correct? We see several problems with this:

  • It is not Sensex but S&P Nifty which is the benchmark for the equity scheme. So why not use Nifty?
  • Better still the fund should have used the PE of the stocks in the scheme portfolio.
  • The PE of the Sensex is determined by 30 stocks some of which may or may not be in the portfolio of the equity scheme.

In sum, the actual PE of the stocks in the portfolio may be different. Whether the Sensex is cheap or undervalued, may not necessarily mean that the stocks in the portfolio have the same valuation level. Using Sensex PE was simpler but not quite the best option.

How does the Power SIP work?

In the Power SIP, your monthly investments would be routed through Pramerica Ultra Short Term Bond Fund, to either Pramerica Equity Fund or Pramerica Dynamic fund. The amount transferred to the equity scheme depends on the "Pramerica Multiplier Value" which is determined by the PE variation of the Sensex. This would range from 0 to 2 based on the level of variation of the Sensex PE from the mean. In the earlier version of the Power SIP launched in December 2011, the multiplier went up to four times. The reduction in the multiplier was done as per market feedback to reduce the frequency of capital calls to investors. According to the model developed by Pramerica if the PE falls 20% below the mean, twice the monthly instalment will be invested and so on, as per the table below.

Calculation of mean

One of the main issues in this approach, and one that has puzzled researchers all over is: How is the mean to be calculated? The mean of the trailing P/E of the Sensex from 2 January 1991 to 15 June 2012 works out to 20.80; the mean for the last 10 years works out to 18.36 and for the last five years works out to 18.82.

Mean reversion may be a good approach to start with but its implementation is not as simple. However, there are studies that show the P/E reverts to its long term average. Pramerica has calculated the mean taking a weighted average of the average PE of BSE Sensex since 1991 and the average PE over the last five years. This calculation has worked for them over different periods compared to the normal SIP strategy.

For the period from 2 January 2000 to 2 February 2012, the Power SIP has given a return of 16.26% compared to a basic SIP which gave an IRR of 15.03% in the same period. Even in one of the worst five-year period for SIP from September 1996 to September 1991, when the basic SIP gave an IRR of -5.29%, Power SIP returned -3.01%.

Should one go for it?

Though this approach has worked in the past, this is based on the return of the Sensex. The actual performance of the scheme depends on the performance of the equity schemes of Pramerica. However, both of the schemes were launched in December 2010 and do not have a sufficient track record. In the one-year period ended 15 June 2012, Pramerica Equity Fund returned -12.12% while its benchmark returned -5.64%, a huge underperformance. The Pramerica Dynamic Fund returned -4.76 in the same period.

In our recent cover story "SIP Smartly" (Issue dated: 28 June 2012) we have explained the facts and myths about SIPs and when it works and when it doesn't. We have mentioned that one should not be committed to an unnecessarily rigid SIP strategy and there should be some approach to timing the market. Pramerica has followed a valuation-based approach to timing, which is good to start with, but the performance of the schemes will finally tell what investors get. And while the performance of a portfolio can be influenced by some amount of broad market-timing, it can be grossly negated by the choice of stocks, price paid, and weights. After all, if you had bought various Reliance stocks in a portfolio three years ago when the Sensex valuation was cheap, your performance would have been dragged down badly.




5 years ago

Would it work if the strategy is used to invest in a Sensex based Index Fund ?


Jason Monteiro

In Reply to Ajay 5 years ago

The strategy has worked on investing in the Sensex in the past as shown by Pramerica. And as it is based on the PE of the Sensex, an index fund of the same would seem a better option if it successfully tracks the index.

SEBI DGM denied bail in graft case by CBI court

When our country is fighting against the menace of corruption, if a high ranking official of SEBI is granted bail that will send wrong signals to the society

Ahmedabad: A special court of the Central Bureau of Investigation (CBI) has rejected bail application of Averjeet Singh, the deputy general manager of the Securities and Exchange Board of India (SEBI) and his aide arrested by the agency in a bribery case, reports PTI.

Special CBI judge, KB Gujarati, while refusing to grant bail to Singh and his accomplice Ashok Mehta, observed that CBI has prima facie made out a case against the accused.

"Moreover, when our country is fighting against the menace of corruption, if a high ranking official of SEBI is granted bail, that will send wrong signals to the society," Judge further observed in his order.

CBI had arrested Averjeet Singh and Ashok Mehta on 2nd June following a complaint by a city-based trader for demanding and accepting bribe of Rs10 lakh to clear his name in a case of market manipulation.

Singh was initially sent for three-day remand by the CBI court. The agency later sought further remand but the court refused.

The investigating agency then approached the High Court elaborating the need for five more days of interrogation in the case. Justice RH Shukla, on 15th June, granted further four days' custodial interrogation of Singh.




5 years ago

I pray to GOD that this should not turn out to be the biggest joke of the year. Good Luck. Apart from auditing parties, IT was always free to investigate the individuals, and can do it now too. Do you need a microscope to see the gold chains, luxury cars, spending in very very costly hotels, multiple properties etc and not to forget the multiple PANs.

Alstom T&D gets Rs176 crore orders from PowerGrid

Alstom T&D will supply, erect, test and commission 80 MVAR and 110 MVAR reactors for 765 kV substations in Bihar, Jharkhand, Chhattisgarh and Uttar Pradesh

Mumbai: Power generation and transmission company Alstom T&D on Wednesday said it has received two contracts worth Rs176 crore from Power Grid Corporation, reports PTI.

The first contract worth Rs105 crore is for the supply, erection, testing and commissioning of 80 MVAR and 110 MVAR reactors for 765 kV substations located at Gaya (Bihar), Ranchi (Jharkhand), Dharamjaygarh (Chhattisgarh) and Varanasi (Uttar Pradesh), the company said in a statement.

The scope of the second order, worth Rs71 crore comprises supply, erection, testing and commissioning of 80 MVAR 765 kV reactors including complete civil work, for the GIS substation at Padghe and the 765 kV substation at Aurangabad in Maharashtra.

"We are delighted to partner with Power Grid for these 765 kV substations to enhance the power transmission network in the states. Since the commissioning of India's first 765 kV substation in 2007, Alstom T&D India continues to maintain its leadership in the extra high voltage segment and looks forward to enhance energy supply in cost-efficient manner," company's Managing Director Rathin Basu said.

Alstom Grid has a vast knowledge and experience in the field of shunt reactors with air-gap cores and magnetic shield, to ensure low vibration and minimal noise levels, he said.

"Our state-of-the-art design regulations for shunt reactors allows for optimised design for safe and reliable operation. The reactors will be delivered from our Vadodara unit," Basu said.

He further said the reactors, once installed in the grid, will strengthen power transmission network in eastern, northern and western regions of the country and mitigate the gap between demand and supply of power, accelerating infrastructural development.


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