Avoiding portfolio panic

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: It is not funny when the market tanks more than 20% in the first quarter. The 20% number seems an interesting number when splashed in the media, but it means real losses for a large part of India's fast-growing affluent community. Being lured by 'wealth management' service providers, many have now learnt the real rules of the game. And now, many are panicking and pulling out of these services.

And why not? Sources within the industry reveal that investors have lost anywhere between the range of 18-45% in the last two months. Since there is no official number to this trade, estimated to be in excess of Rs 15,000 crore, trade experts reveal that major foreign players have lost almost 18-30% of their PMS portfolios and domestic brokerages have lost 25-35% for their clients.

The panic

So while panic is inevitable, it might not be the best solution. "Most of the errors investors commit in times like this, is to sell out in panic, whether is it direct stock holdings, mutual funds or a product under PMS," says Dhiraj Agarwal, CEO - portfolio management at Motilal Oswal Securities. And this is because it just kills the entire effort of building a portfolio based on long-term goals.

Most of the panic has been noticed in the short-end of the market, where investors were lured into the game by service providers, who did not have the wherewithal to service them. "Losses faced by so-called portfolios, are nothing but speculation monies collected by scrupulous brokers and financial advisors, who lured investors to play the rising market," says Jayant Bhatia, a financial advisor.

And this could be corroborated by the fact that trades carried out by high-networth clients during the last quarter of 2007 had peaked to Rs 6,000 crore a day levels. The average trading on such accounts was about Rs 2,000 crore six months before. "I had at least ten brokers calling me up everyday wanting to invest my funds fruitfully and even promised me 100% returns on my portfolio commitment," says Pankaj Nikam, a senior executive with a media firm in Mumbai. "The kept repeating the great India story and threw all sorts of valuation jargon at me, and I got impressed," Nikam admits.

"When the numbers started to roll in, I got more confident and upped my commitment," he adds. And like most credulous investors, he did not question the valuation parameters discussed earlier. The broker's representatives also hinted at borrowing money to take extended exposures. After all, the cost of borrowing at 35% per annum in the grey market was much lesser than the gains from stock market investing.

So when the markets tanked, there was bound to be panic, says a portfolio manager with a multinational service provider. However, the panic was more at the short-end, where investors had committed around Rs 10 to Rs 15 lakh with portfolio managers. The bigger clients have not shown any panic. He further adds, "Bigger clients, with investments in excess of Rs 50 lakh to a crore have actually seen a portfolio gain of 5-9% even in this year, and going ahead, their gains will be stronger."

Old hat

And this is because of the good old maxim: diversification and long-term investing hold good. It was abundantly clear that remaining focussed on equities was not going to be as rewarding as it was in the earlier years. Rising oil prices, threat of an economic slowdown in the US, and its implications on India were being spoken of since the previous year. So it was imperative that a savvy portfolio manager took note of this and reacted accordingly.

Smart portfolio managers shifted a sizeable chunk to cash, by booking profit, which many did not. "We changed the asset allocation in favour of large-caps during January and February, and also raised about 20% cash that time, which has helped the portfolio" says Agarwal. Others diversified into commodities, especially into gold exchange traded funds. These funds have returned around 9-12% since the beginning of the year.

Then there are others who have also diversified overseas and made use of the opportunity offered by the government to remit around $200,000 overseas. "For a family of five, if the individual remittance amount is utilised, it creates a million-dollar fund, and this can be invested in strong portfolios overseas," says Bhatia. Devoting 10% of the portfolio to overseas investments might actually be a smart idea, he reckons.

Old lessons

When euphoria subsides, old lessons often come to the fore; quite the same with portfolio management services. One of these has been about being diligent. "I did not know that my money was being channelised into day trading activities," says Nikam. He would not have allowed this at all.

But when the returns were staggering, he did not want to question his service provider. And this is the biggest mistake people make, says Manish Thakur, an analyst. "You got to know how you are making money and understand the reason why," says Thakur. "If you know this, you will know when to quit and book profits and not be blinded by success," he concludes. Getting accurate reports and questioning variances in service levels and also returns, is something that you will have to carry out, reckon advisors.

Going ahead, turbulent times are expected to continue. This year might even see a negative return clogged by the major indices. But this does not mean that there will be gloom all around. In fact, it is for days such as this, that the portfolio management concept was devised.

In fact, this could well be the time to re-build a strong portfolio. The markets are taking a breather and several strong prospects in the equity market would start looking very attractive, especially after a strong beating. Picking them up at regular intervals in a disciplined manner is what most managers suggest. "Set aside an amount to be invested in the market, every quarter," says Amit Sarup head of wealth management at Religare Securities.

Also, at this point in time, do review your agreement with the portfolio manager. There could be a case to change the fee structure, surmise experts. A fixed fee component might not be advisable. A clean profit-sharing structure, after being clear of desired results, could actually be what the doctor advised. This keeps the manager aware of the need to deliver returns on the parameters upon which you have agreed. Also, be aware of no-fee schemes. Such service providers gain from selling products that get them maximum commissions, and your interest takes a backseat.