A portfolio is not merely a list of names of
companies. If it were so, then fund managers will not be such a well paid lot.
There are three vital ingredients that need careful consideration before inclusion to a
portfolio:
- Justification behind inclusion of the names of the candidates themselves.
- The fair price that can be paid to purchase the particular share.
- Regular monitoring the performance and need to take necessary action.
Let us examine the three elements in detail.
The constituents of the portfolio:
I do not agree with the view that the top held
companies of a mutual fund are naturally good names that merit inclusion in a
portfolio. Generally fund managers included the market leaders in the industry
segment (based on too general criteria like turnover, market share and market
capitalisation) in the portfolio irrespective of the real balance sheet
strength. Let me give you an example. Please see the three picture below:
We can see that even though NTPC ranks number one in turnover
and market capitalisation it is a laggard in EBT%, Current Ratio, Quick Ratio
and Dividend Yield Similarly, Reliance Infrastructure’s EBT% is too low and
unacceptable. Hence both these companies do not merit inclusion in a good
portfolio, but I have no doubt that both will appear in the portfolios of many
mutual funds. On the other hand SJVN Ltd., though small and ranking lowest in
terms of turnover and market capitalisation is a brilliant performer in all
parameters and rightfully occupies a pride of place in our ‘Portfolio 2K15’.
Price at which an Investment can be made:
Secondly we cannot simply include the top held shares of mutual
fund in our portfolio because we do not know at what price the mutual fund had
made the investment and what is the prevailing price today. In the year 2009,
Infosys Ltd. share price was in the range of Rs.280, today its price is
Rs.1031.85. Perhaps the mutual bund had acquired a major chunk of its holding
in 2009 and it does not make sense to buy the scrip today at Rs.103.85, without
deeper analysis, does it?
A value investor writes next to the name of the selected
candidates the price beyond which the share shall not be purchased. For
example, even though SJVN Ltd., is a great company, worth including in our
portfolio, it cannot be bought at a price over Rs.34 a piece (10 times the EPS
of 3.4).
Regular monitoring the performance:
Generally if a good company is included in the portfolio, you
should be able to simply forget about it for ten years. Having said this,
companies can make grave mistakes and jeopardize the interests of investors.
Therefore one needs to continuously monitor and ensure the shares are worth
holding even after making the investment. When this is the case for shares
selected by us after careful evaluation, how can we merely
include companies selected by a third party, howsoever reputed a mutual fund
that institution could be?
In
summary, it is not advisable to include in our portfolio top held shares from
the portfolio of a mutual fund. Every inclusion purchase shall be made based on
a fresh evaluation taking guidance from points highlighted above.
