BD4 Core Equity Fund 169545019177000 -A Report Submitted to

BD4 Core Equity Fund
-A Report
Submitted to: Mr Amit BathiaAuthor: Bhumika Pruthi, Dhiraj Jaisinghani, Disha Gupta, Divij Shah, Divy Kothari
Date: 14th September 2018
Bhumika Pruthi- B015 – 74021016478
Dhiraj Jaisinghani- B016 – 74102150262
Disha Gupta- B017 – 74021016225
Divij Shah- B018 – 74021016530
Divy Kothari- B019 – 74021016358
Sr. no. Title
Economy and Trends
Risk Factors
Fund Details
Investment Policy
Objective of Fund
Target Customers
Type of Fund
Investment Strategy
Investment Term
Investment Diversification
Finance and Audit Committee Approval
Investment Responsibilities
List of Assets/Asset Class
Justification for each Asset Class, Asset, Sector and Company Selected
9.1 Equity
Economic Analysis
Sector Analysis
Company Analysis
9.4.1 Page Industries
9.4.2 3M India
9.4.3 Kotak Mahindra Bank
9.4.4 Venkys The 1st Churn Out
9.4.5 HEG Venkys vs HEG The 2nd Churn Out
9.4.6 Gillette HEG vs Gillette
9.2 International indices
9.2.1 Economy wise analysis
9.2.2 Country wise analysis
9.2.3 Indices wise analysis Nasdaq composite FTSE 100 S&P 500 NIKKEI 225 1ST churn out Dow jones industrial average Dow jones vs FTSE 100 2ND churn out Russell 2000 Russell 2000 vs dow jones
Asset Allocation Process
Project Evaluation
Fund Manager Qualification
These are investment instruments where a pool of money is made by collecting capital from individual investors and this money is invested in a variety of investment instruments such as securities, bonds, money market instruments, indices .Advantages of mutual fund:
Professional management – professional fund managers are appointed by the companies by mutual fund companies for a certain management charge. Hence investors don’t need to have the required knowledge of financial markets and their funds are managed efficiently.
Diversification- mutual funds invest in a large number of companies, sectors and different types of asset classes which is difficult for a individual investor and hence overall risk is reduced.

Liquidity – highly liquid assets because there is a huge inflow and outflow from mutual funds on a daily basis.

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The BD4 CORE EQUITY FUND is an equity multi cap fund with investments in equity and equity related instruments with a long-term investment horizon.

Some proportion of the total investment is also made in international indices. The investor is a high net worth individual and so the focus of the fund will be to invest in risky assets that also assure of promising returns to the investor.
The portfolio is evaluated 3 times and churned each time to improve the returns while keeping risk at its minimum. The first evaluation is from march 2012-2017. Based on the returns and comparisons across asset classes, market returns and the volatility of each stock/index chosen, we will revise the portfolio and replace one/two securities with the other security offering better expected returns. Similarly, we will revise the portfolio for asset selection and allocation in September 2017 and finally in march 2018. At no point during the evaluation and revision of portfolio assets, can there be less than 8 securities to invest in with 4 investments in domestic stocks and 4 investments in international indices. This is done with a view to keep the overall risk diversified and minimized while trying to maximize returns and exposure for the high net worth individual. Also, the investment will be mostly in cyclical and high growth sectors than defensive sectors like FMCG to enhance the opportunity for HNI investors to earn higher returns while making sure to keep the sector investments diversified and not concentrated so some risk exposure is taken care of.
The following document gives detail about the type and nature of fund, investment style, risk exposure, risk adjusted return of the fund, allocations, selection and evaluations made in the fund.

Following are the economic trends that have been kept in account while deciding for allocation to different assets and asset classes in India and internationally.
YEAR 2017
As per UN report India will grow at a rate of 7.7% owing to its strong private consumption and also the domestic reforms brought in by the government.

Global economy is doing well overall. US stock markets are rallying, also we see strong consumer confidence in the country as the numbers show. Europe also has reduced its debt and is expected to perform well.

Domestic mutual fund industry much stronger and has a much larger share in the stock markets than FIIs which dominated the market movements till 2010. The numbers have been shifting with domestic mutual fund market now holding approx. 60-70% of the total share. Thus, the markets are much more stabilized now.

YEAR 2018
Even though, year 2017 has proved to be very profitable for investors with sensex closing 28% gain and small cap and mid cap index with gains of 60% and 48% respectively, the forecast for year 2018 is:
fiscal deficit is rising
government borrowings are high
revenues are falling
rally in crude prices
rising inflation
and the GST effect yet to stabilize, the earnings and profitability seems uncertain with a lot of volatility in the markets.


The riskometer is high as almost 95% of the investments are in equity and equity related instruments. Since equity is considered to be the riskiest asset class, the risk of HNI will be higher, also in order to ensure promising returns the fund will include volatile instruments while making sure of sufficient diversification to minimize the risk.
Following are the risks factors to which investor is exposed:
Market risk – one of the most significant risk is the market risk also called the systematic risk. It is basically the minimum amount of risk investor has to take as this risk cannot be diversified. The risk is related to the factors that can affect the entire market. Example economic recession, fluctuating interest rates, high inflation, low GDP growth.

Concentration risk- too much of investment in on e particular sector or asset class can be very risky for the investor as it has equally high chances of profit as well as losses. Since the fund is a pure equity type it can be risky as far as this type is concerned.

Liquidity risk- it basically refers to the risk related to the ease with which you can buy and sell securities in the market. The liquidity of the scheme is restricted by trading volumes and settlement period, where time taken for redemption may be significant. It may also lead to redemption at a lower price due lack of trades available at that price.

Country risk- it is risk due to investments in foreign country. It is mainly risk related to decline in value of investment due to political instability or economic downturns in the foreign country because of which the securities there are not performing well. The risk is generally higher in case of developing countries.

Currency risk- it is the risk related to exchange rate of a country’s currency in relation to the other country’s currency. With investments made in indices of different countries, exchange rate with the respective country will also influence the risk and return for the investor and the overall portfolio and this risk has to be hedged using a derivative contract.

Investments in mutual fund units are exposed to risks related to trading volumes, settlement, liquidity and default risk.
There is no assurance of returns. In fact, due to the market factors it is quite possible that NAV may fall instead of rising.

The returns and risks of the portfolio are subject to risks related to individual securities though diversification will be a priority.

Past performance of the stock does not guarantee that returns in the future will be equal to or above the returns earned in the past.

The name or the brand under which the scheme works has no influence on the surety of returns or its performance.

NAV of the scheme will fluctuate with the market prices and will be declared on a daily basis.

Name of the fund BD4 core equity fund
Type of asset class equity and equity related
Type of fund multi cap diversified fund
Strategy type open ended
Date of inception 1st march 2017
Benchmark Sensex for domestic stocks
MSCI world equity index for international indices
Investment horizon 5+ years
Minimum number of investors 20
Minimum amount of capital Rs 5 lakhs
Term of the fund Long term
Costs Entry costs- not applicable
The exit load policy is as follows:
If the investor redeems the investment before 18 months a 2% exit load applies.

If investment redeemed within 3 years of investment 1% exit load applies.

Beyond 3 years there is no exit load on redemption of units by the investor.

Investment style
-66250496large cap
0large cap

Since, the investor has a goal of capital appreciation, stocks with high growth will be the focus of the fund with a low dividend yield.

The scheme will be investing equity shares mostly in small cap, mid cap and large cap to diversify the risk. However, since it’s HNI so in order to ensure higher returns investment will be mostly in mid cap and small cap. Also, The Scheme may invest a part of its corpus in overseas markets in Global Depository Receipts (GDRs), ADRs, overseas equity, bonds and mutual funds and such other instruments as may be allowed under the Regulations from time to time.

The minimum investment by the HNI investor as per regulations is RS 5 lakhs.

The allocation and weights for different asset classes will be revised on a half yearly basis. The changes and performance after each revision will be presented retrospectively to reflect the actual impact and to later use it to draw conclusions if the investment decision was right or no.

NAVs will be declared on a daily basis after the market closing.

Almost 98% of investment will be allocated to equity and equity related instruments with 2% kept in cash and cash equivalents to maintain some liquidity as contingency.

The assets selection and allocation is finalized after due diligence and examination of the company’s fundamentals.

Technical charts and fundamental historic growth and performance of the company will be kept in consideration while evaluating and examining the stocks for selection in the portfolio.

Following are the allocations made to various asset classes:
Till march 2017
The domestic investments are as follows:
Company Sector Market- capitalization
3M India Diversified Mid cap
Venkys Miscellaneous Small cap
Kotak Mahindra bank Banking Large cap
Page industries Textile Mid cap
The international indices are as follows
Name of index Country
NASDAQ United states
FTSE 100 Europe
Nikkei 225 japan
S;P 500 United states
Till September 2017
The domestic investments are as follows
Company Sector Market- capitalization
3M India Diversified Mid cap
HEG Electrodes and graphite Small cap
Kotak Mahindra bank Banking Large cap
Page industries Textile Mid cap
The international indices are as follows
Name of index Country
NASDAQ United states
Dow jones industrial average United states
Nikkei 225 Japan
S;P 500 United states
March 2018
The domestic investments are as follows
Company Sector Market- capitalization
3M India Diversified Mid cap
Gillette India Personal care Mid cap
Kotak Mahindra bank Banking Large cap
Page industries Textile Mid cap
The international indices are as follows
Name of index Country
NASDAQ United states
Russell 2000 Europe
Nikkei 225 Japan
S;P 500 United states
To generate returns higher than market and capital appreciation of the investments through investment in equity and equity related instruments across large cap, mid cap and small cap stocks of various sectors and also to gain through exposure in international equity indices.

Our target customers would be high net worth individuals who have a significant risk appetite, less income needs, expect returns more in the form of capital appreciation and have a long-term investment horizon. These investors are risk seeking with objective of earning very high returns.

It’s a multi cap international equity fund with a diversified portfolio.

The strategy we are following is high risk high return strategy with optimal portfolio risk around 10-12%.

Out of the total investments 2-3% will be kept aside in cash and cash equivalents to maintain some liquidity.

Investment selection is done keeping in mind the objective as capital appreciation and not regular income in the form of dividends or interest. Also, the securities in which investment is made is done are selected with a view to remain invested in them for long time horizon to reap the benefits of capital appreciation in risky stocks.

Since focus is on capital appreciation, investment will be mostly in growth stocks and so the PE Ratio, the Price to book value ratio and the PEG is expected to be above the industrial average or above the standards. Also, dividend yield will be lower for such stocks. We are aiming at stocks with multi fold growth prospects which is identified based on the net profit trend of the company, revenue growth, its liabilities which form part of the quantitative assessment and the publicity or the media coverage of the company as an important aspect of its goodwill and shareholder sentiment.

The following are the basis to go about selecting and making investments for domestic stocks:
Follow the top down EIC approach.

We look at the macro economic trends as predicted for the future years. If the trends shows economy reaching a trough and moving towards an expansionary phase or if it indicates that company will continue to move in expansionary phase for foreseeable time then it indicates bullish market sentiment and we invest in high growth risky assets while if the economy seems to be at peak and approaching recession or is currently in recession and will continue for foreseeable time then that means the markets are bearish for future and we will invest in non-cyclic defensive stocks which are much more stable low beta stocks.

Once we decide whether to go for cyclical or non-cyclical sectors, we research for the specific sectors that have high growth opportunities and prospects. The following analysis has to be conducted further:
Ease of entry and exit
Level of competition- conduct comparative analysis with the other companies in the same industry based on their product leadership, market dominance and aggressive and proactive attitude.

Availability of substitutes- the closer substitutes that are available higher would be the competition and difficulties for the company to retain the customer.

Power of buyers- buyers influence on the quality standards and price of the product.

Power of suppliers- suppliers influence on prices and supply. It is a challenge if there are few suppliers and many buyers.

Search for companies with high historical returns within the sector chosen.

Research about the company’s profitability, products, product loyalty, market share, revenue growth, costs, working capital, proportion of debt and equity, promoter holding and any new updates related to launch of new products, any scams or negative/positive publicity.

Based on the aforementioned points we select the companies.

The following are the basis to select the international indices.

We will select equity indices of different countries which are easier to track and have previously seen high returns.

The investment would be based on the political, social, technological, legal, environmental and economic factors of the country.

Once the country is decided we then look for indices which have performed well over the years and have a high growth opportunity going forward based on the analysis of the economic growth, reforms, and other leading related statistics.

Investment domestically is diversified across market caps and sectors keeping in mind the sectors that have a long-term growth opportunity and are currently doing well looking at the overall economy. Most of the allocation has however been to mid-cap and small cap stocks as they represent high risk high return stocks which is in line with our investment objective. For the international indices we have selected 4 equity indices which are amongst the top 10 best performing equity indices. The agenda is to expose the portfolio to international markets and benefit from the huge returns these indices have made over the years while also keeping the risk factors in mind by diversifying across different countries and overall volatility of the index is minimized.
After every 6 months the portfolio will be revised and if needed we will replace stocks or index that is not performing well or has a possibility of not performing well in the future that is possibility of a downtrend and hence may pull down the entire portfolio return.
In order to make comparisons we calculate 3 ratios- Sharpe ratio, Treynor ratio and Jensen’s alpha.
Sharpe ratio – return of the portfolio over and above the risk-free rate measured at per unit of portfolio risk. Mainly we will be looking at Sharpe ratio to decide on the asset that should be replaced. Asset/ index with lower Sharpe ratio will be replaced by asset/index of a higher Sharpe ratio as that implies higher returns for the portfolio or minimized risk for the portfolio.
Treynor ratio- returns of the portfolio over and above the risk-free rate measured at beta or the systematic risk. Since, the non-systematic risk can be diversified, it makes more sense to compare stocks which are better in giving returns adjusted for systematic risk as in reality the return investors earns for bearing is the systematic risk and not really the total risk and hence it is a better indicator of risk premium earned.

Jensen’s alpha- the Jensen’s alpha is a risk adjusted measure that represents the average return on a portfolio above or below expected return.

After every 6 months we compare if the portfolio performed better or worse compared to portfolio before revision using the 3 ratios.

Investment term
We are looking at the investment with a long-term objective of 5-10 years for the stocks and indices.

since these stocks are mostly small cap-mid cap stocks which appreciate in value over a long term, also they are highly volatile securities which are mostly above or below their intrinsic value and it is believed and also empirically proven that in equity the stocks are expected to return/reach to their intrinsic value in long term.
Also, looking at the past performances of the indices for last 5-10 years we see a tremendous growth in the international indices which is why we plan to keep exposure to these indices also for a long term.
However, churning out will take place semi-annually to take care of the risk associated with each of the asset class and thus keep the overall portfolio risk to the optimal levels
Investment diversification
One of the objectives of the fund will also be to ensure maximum returns are coupled with minimum risk through diversification. Since most of the HNI investments are in risky assets with high expected returns the overall portfolio risk can be only minimized with diversification. Diversification can be across asset classes like debt, equity, money market, commodities and hedge funds. In this fund we invest mostly in equity with exposure to domestic equity stocks and international indices which are listed equity indices of different countries. Since fund is largely focused in equity, diversification is done: –
geographically with investments in indices of the US (NASDAQ Composite, S&P 500, Russell 2000 and dow jones industrial average), Europe (FTSE 100), Japan (NIKKEI 225).
For domestic stocks diversification is ensured through selecting stocks of different market caps (small cap, mid cap and large cap) and across different sectors (miscellaneous, financing, engineering).

Finance and audit committee approval
It is confirmed that:
The draft scheme information document forwarded to SEBI is in accordance with SEBI (mutual funds) regulation act 1996 and the guidelines and directives issued by SEBI from time to time.

All legal requirements concerned with the launch of this scheme ad the guidelines and instructions issued by the government and any other competent authority in this behalf, have been daily complied with.

The disclosures made in the scheme information document are true, fair and adequate to enable the investors to make a well-informed decision regarding investment in the proposed scheme.
The intermediaries named in the scheme information document and statement of additional information is registered with SEBI and their registration is valid as on date 25th September 2016. Our compliance officer has signed the diligence certificate and it has been submitted to SEBI.

Investment responsibilities
It is the responsibility of the fund manager to perform due diligence in keeping knowledge of the current economic trends, macro-economic fluctuations, industrial regulations, new guidelines from any of the concerned regulator bodies while making decisions for investment and also stay updated so as to make timely changes in allocation and replacement of assets.

Since investments are also made in international fund, fund manager is responsible to hedge the exchange rate risk if any, update and conduct PESTEL analysis from time to time, consider global macro-economic trends and also consider the relation the country shares with India and with other countries.

NAV should be calculated daily at closing prices and should be published on the website of the AMC ( and on the website of AMFI by 9:00 pm. The NAV will be published in two daily newspapers. The fund factsheet and the monthly statement will be e-mailed to the investor monthly. A complete statement of the scheme portfolio will be published as advertisement in two daily newspapers within one month from end of every half year (31st September and 31st march).

Adhering to the risk management guidelines.

Timely communication of sale and repurchase of securities.

Communicate investors about any matters that can significantly affect their interest.

Following contains the detailed list of asset class in which investment is made, the assets picked within the asset class and further the sectors and companies selected within the asset so correlation is slightly low and hence minimize risk.
Asset class Asset Sector Company Capitalization Benchmark Term of investment
Domestic equity Equity shares textile Page industries Mid cap Sensex March 2017-2018
Diversified 3M India Mid cap Sensex March 2017-2018
miscellaneous Venkys Small cap Sensex March 2017 (churned out)
Banking and finance Kotak Mahindra bank Large cap Sensex March 2017-2018
Electrodes and graphite HEG Small cap Sensex March 2017-september 2017
Personal care Gillette Mid cap Sensex September 2017-march 2018
International index Equity Nasdaq composite MSCI World equity index March 2017-2018
FTSE 100 MSCI World equity index March 2017 (churned out)
NIKKEI 225 MSCI World equity index March 2017-2018
S&P 500 MSCI World equity index March 2017-2018
Dow jones industrial average MSCI World equity index March 2017-september 2017
Russell 2000 MSCI World equity index September 2017-march 2018

Domestic stocks have performed really well over the past 8-10 years. From 1700 in 2004 the price of nifty increased and touched 9000 in 2017 while Sensex increased from 6500 in 2004 to 29000 approx. in 2017. Investors have generated returns approx. 20% and even higher (sometimes 100-200%) which is much above the fixed interest rate income of 9-10% (maximum) earned through fixed income instruments like bonds, savings and fixed deposits.

However, with high returns comes high risk (possibility of a crash like that of 2008) and not every investor has the appetite to invest in risky assets or put their money to risk.
Thus, we selected equity stocks for HNI investors considering their risk appetite and financial goal of earning high returns over a long-term horizon.

Considering the economic trends and predictions for 2017 (discussed in introduction), we are bullish on the stock market growth over the years and so we will take a much riskier position with investment dominated in small cap and mid cap while balancing the portfolio with investments in large cap.

For year 2018
The predictions for the first half of the year is that earnings will reduce as both demonetization and GST have rippling effect on the income of consumer specially the middle class as these are the consumers who had most of their income in hard cash and also are mainly not very educated or maintain proper tax records. Thus, high GST on a lot of goods and fall in purchasing power of the consumers will overall have a negative effect on the growth atleast for short term. Thus, the markets are not expected to do well atleast in the short term. However, with government revising rates and bringing new policies to make the process easier and so the demand may again take a turn and increase by the mid-2018. Also, crude oil prices, weakening rupee and increasing inflation can hit stock markets and nifty can see a fall to 10000 also as per many analysts. However, we expect upsurge and by end of 2018 nifty is expected to shoot up to 11900 also. Thus, for beginning half year we plan to keep investments safer and so withdraw investment from small caps completely and only invest in mid cap and large caps.

For the sector analysis we plan to pick 4 different sectors as the investment corpus is huge and the caps are mostly risky so we plan to diversify the portfolio with investments in sectors with low correlation with one another and thus reduce the concentration risk.

The sectors as discussed in the investment strategy are based on competition, entry and exit, raw material availability, consumer bargain power and substitute availability.

Sectors selected are those:
High growth potential considering the current economic scenario.

Sectors gaining special attention from the government.

The sectors which make a good share of the consumption expenditure that is those sectors which have a inelastic demand.

Sectors less affected by macro-economic factors (market risk will be lower) i.e low beta stocks.

Sectors with high advance to decline ratio.

The sectors that we selected after researching based on the above points are:
Consumer non durable
Other industrial goods
Personal care
Following are the historical annual price charts for BSE sectoral indices selected based on the analysis of the sectors and forecasts for the future.

34678191719892S&P BSE FMCG



FMCG Sector has been selected keeping in mind the low beta of the sector compared to the overall market as even during significant economic and political downturns FMCG continues to be stable or falls only by a minor margin as compared to other sectors like consumer discretionary and capital goods. Thus, in order to reduce the overall risk of the portfolio FMCG sector has been taken into consideration.

Banking sector has been considered due to the pace at which banking and finance companies and sector has a whole growing in India. Mutual funds and insurance companies till now attract only 3% of the total Indian population. Today every bank is also offering mutual fund and insurance services as part of its core business which reflects the huge scope that this market has going forward. With growing awareness about mutual funds, savings and demonetization and structural reforms like GST we hope to see increasing revenues and profitability from this sector. Also, with the strict rules of NCLT in places for companies related to growing NPAs and RBI also coming up with much stricter norms related to the NPA problem in the country the focus has been growing to reduce these NPAs as it will be a great achievement and liability reduction not just for the sector but also for the entire economy. Most of the mutual funds have 20-30% of the pool invested in this sector which reflects strong bullish investor sentiment going forward in the future. Also, we see how every year the government is budgeting to put lakhs and crores of its money in public sector banks to improve their profitability and reduce their debts. The sector is booming and seems to have high future prospects and thus allocation to this sector becomes all the more important.

Consumer discretionary – as per a report in economic times, consumer durables market is expected to reach $20.6 billion by 2020. The reasons are many like increasing consumer purchasing power due to seventh pay commission, one rank one pension, easy and increasing financing options. The per capita income is expected t increase at a rate of 6.6% from $1500 in 2013 to $2200 in 2019. Most of the expenditure currently is made by urban market however it is probable that future growth will also be driven by rural market. As per consumer electronics and appliances manufacturers association and consultancy firm EY, India’s consumer durables market will be the 5th largest by 2020.
As per confederation of Indian industry,” With a total market size of US$ 92 billion and production valued at US$ 32 billion, Capital Goods sector today, contributes to 12% of India’s manufacturing output and 1.8% to GDP. “the sector has a potential to grow to 7 lakh crores but due to insufficient global and domestic demand offtake it is facing problems which is why we decide to churn out this sector by mid-2017.

Indian industrial sector is growing at a rapid pace. Manufacturing sector contributes approx. 14-15% to the total GDP thus being second largest contributor after services sector. Prime minster modi’s vision and effort to improve manufacturing operations with make in India has improved India’s rankings in ease of doing business from 116 to 100. India has attracted a lot of foreign companies also in the form of FDI which will improve employment and also manufacturing sector as a whole will get a big push. Indian manufacturing sector has grown at a CAGR of 4.34%. the wholesale price index also grew at a rate of 4.4% in 2016-2017. the government has been seen taking lot of initiatives to improve the manufacturing sector of the country which is visible in the IIP index numbers. However, the IIP index took a hit due to GST and slowing consumer demand because of which the manufacturing segment as a whole performed poorly. Thus, in September 2017 we will consider revision of this sector if required, however we expect long term benefits coming from GST with manufacturing eventually picking pace.
Given above is the chart showing growth of GAV yoy which makes us confident about the future potential profitability and growth of the manufacturing sector and thus expect the companies in industrial sector to see multi fold growth.

Once we decided the sector the next step was to research companies which have grown tremendously within these sectors and also which have future potential of growth and opportunities to look forward to.
The companies are selected after conducted competitive analysis, company analysis, shareholder sentiment, growth over the years and other factors discussed in the investment strategy.

Given below is a brief view of the company’s picked and their past performance.

Page industries
The company is in the textile business with manufacturing and retailing of garments. The company is into manufacturing, marketing and distribution of jockey products and holds license of speedo which is an international swim wear brand.

As is visible the company has been increasing at a tremendous speed. For the past 5 years it has only seen a downfall once and after that has continued to pace upwards. The share price has crossed its resistance several times and each time hit a new resistance level. With the amazing growth history and strong fundamentals few of which are mentioned below, the stock has been kept in the portfolio with the objective of long-term investment. Company’s EPS has increased at increasing rate over the past years, though net profit ratio has not risen much it has remained relatively stable. However, we see a tremendous increase in ROCE which is good news for the investors, as visible from the chart company has not only benefitted investors from capital appreciation but has given significant amount of dividends time to time. The price/book value has been falling but since the price of share has only been rising it implies book value of the company has improved that is more or less share is approaching its intrinsic value which means it’s a high growth proposition with not much overvalued ratios/fundamentals.

Ratio 2015 2016 2017 Company
Net profit ratio
Total debt/equity
Price/book value 175.75
39.6 208.59
26.85 238.74
24.53 Page industries (textile)
3M India
The company is into manufacturing of multiple products and thus comes under diversified sector. Some of its products are filtration, adhesives, tapes, scotchbrite, scotchguard, etc. below is the 5-year historic price chart for 3M India. As is visible from the chart the share has been growing at a fast pace since 2014. We expect the share price to further increase considering the strong fundamentals of the company. EPS of the company has been increasing at an increasing rate which means more value for the shareholder. The profitability of the company is also very high as can be seen from the rising EPS and the net profit ratio. Also, we see return on capital employed has seen a jump from approx. 12% to 19% in 1 year which means company is generating much higher returns now and also we see a stable return on capital employed of approx. 19% in march 2017. Debt of the company is almost negligible compared to its equity and large reserves and surplus and so as far as company’s liability and solvency is concerned it is doing quite well there. The price/book value ratio is also quite fair which means there is not a lot of disparity between market price and the intrinsic value and the share price will be comparatively less volatile. The investments are for a long time period and this stock will not be considered for churn out as despite the industrial sector facing headwinds and a downfall in IIP index the returns and revenues of 3M India seem unaffected or seem to be less affected. With the strong fundamentals we expect the company to remain strong on the pricing with slighter volatility and expect it to pass the phase of negative economic effects of GST only to see a much higher growth once the sector and the economy picks up and thus we maintain a long-term view of atleast 5 years on the stock.

Ratio 2015 2016 2017 Company
Net profit ratio
Total debt/equity
Price/book value 96.17
11.11 178.36
12.04 213.72
10.64 3M India (diversified)
Kotak Mahindra bank
The company is the first Non-banking financial institution to get converted into a commercial bank. It has also come up with innovative solutions like Jifi and Kaypay for digital and social media platforms, it is one of the most established and trusted banks of India which is not just limited to the core banking but just like other banking institutions has expanded to offer mutual fund, brokerage and insurance business also. The company has a long history and also has some strong fundamentals. It is the only large cap stock in the portfolio and is kept with the main objective of earning stable returns and reduce overall volatility of the portfolio. As can be seen from the company’s 5-year historical price chart the company has seen stable growth with constant annual dividends. Thus, it is a blue-chip stock for investors who are risk averse and prefer dividend income. EPS of the company has reduced in 2015 but picks up in 2016 and increases in 2017 as well. Thus, the net profit ratio is also following quite the same pattern. The reason being though the company reported higher profitability the net NPAs of the company rose by 24-25% approx. which is why the net profitability of the company was overall bad. Also, this is the year when Insolvency and bankruptcy code was introduced with stricter norms which is why more NPAs were declared which were earlier not a part of the books. However, considering the drastic improvements in march 2017 results and seeing the historical trend we see improvements and good growth potential in the company, with the long standing reputation it has and the trust people have on the bank it is a long run player with high growth prospects.

Ratio 2015 2016 2017 Company
Net profit ratio
ROE/ net worth
EV/net sales
Price/book value 24.20
7.17 11.42
5.21 18.57
5.81 Kotak Mahindra bank (banking and finance)
It is an Indian conglomerate and is the largest fully integrated poultry group in Asia. It caters to a wide range of products which are poultry and allied sectors. The company has seen a sharp increase in its profitability since mid-2016. Below is the historical price chart of venkys, the share was very stable till February 2016 but after that it picked up pace at a rapid rate making higher highs with every closing day. Following the momentum, we plan to invest in the security. The fundamentals of the company have improved tremendously by march 2017 with its EPS jumping from 27.14 to 88.55, profitability has increased by a huge percentage as visible from huge upsurge in EPS and net profit ratio. The company has also earned healthy returns for the investors which can be analyzed from its increasing ROCE and falling EV/EBITDA. The price/book value ratio was .85 which means by march 2015 the share was undervalued, however by march 2017 the ratio increased to approx. 2 which means though shareholders have identified this share its still very close to its intrinsic value and cannot be considered highly overvalued. Thus, we are considering this share to be invested for march 2017 portfolio scheme.

Ratio 2015 2016 2017 Company
Net profit ratio
Total debt/equity
Price/book value 19.91
.85 27.14
1.19 88.55
2.7 Venkys (miscellaneous)
Even though the fundamentals of venkys seem quite strong for the near future and price rise also seems probable and chances of promising returns are also high, when compared with all the other 4 stocks the sharpe ratio comes out to be very low for venkys only because it is a highly risky share with very high variance and so is pushing the overall risk to a much higher level. Thus, for the 1st revision of portfolio we decide to churn out venkys with a stock that has much higher sharpe ratio and if so higher treynor and jensen’s alpha so we are sure of the overall benefit to the portfolio from this switch.
Following are the details of security of the first switch:
The company is a capital goods manufacturing company and is the largest manufacturer and exporter of electodes and graphite in the country. These electodes are also used in standard steel companies. The graph by 2017 seems to be scaling up after seeing a heavy downfall. The capital goods and consumer discretionary sector in general saw a rapid downfall in 2016 due to demonetisation and this is quite visible in the IIP index which was a t its lowest since a year. Though the profitability of the company has worsen by march 2017 we remain strong on the company as it has reduced its debt, the price to book value ratio has also increased which means investor sentiment is improving. Also we expect the demand for electrodes to grow internationally and domestically. Also, with government planning to increase import duties on steel with macro economic tensions with US we can see a boost for the steel sector which also means increase in revenue for HEG as it is the largest supplier to the steel sector. However considering its historic performance we keep it aside for revision and evaluation in september 2017

Ratio 2015 2016 2017 Company
Net profit ratio
Total debt/equity
Price/book value 9.76
0.93 -1.92
0.6 -12.52
1.02 HEG
(Electrodes and graphite)
Venkys vs HEG
The decision to churn out venkys comes from comparison of the 3 ratios and portfolio measures as the non-systematic risk of HEG is diversifiable provided overall risk of the portfolio is less.

The following table includes the ratios used for analyzing whether a security is better than the other.

SHARPE RATIO 0.45312262 0.70288997
TREYNOR RATIO 0.20206318 0.29315124
JENSEN’S ALPHA 0.201232345 0.28811255
PORTFOLIO SHARPE 1.306832851 1.48377848
PORTFOLIO RISK 0.17548039 0.128442744
The sharpe ratio, treynor ratio and jensen’s alpha are quite higher than venkys for HEG which means we get much better returns for our portfolio from HEG than venkys considering total risk adjusted returns, market risk adjusted returns and returns over and above the expected returns.
Another reason for taking HEG in the portfolio instead of venkys is that the portfolio sharpe also increases which means the entire portfolio returns are higher as compared to the portfolio’s total risk. Also, portfolio’s risk is lower for HEG which means the risk is minimized. Thus, high return at minimized risk is the objective and so we select HEG.

The 2nd churn out
As discussed above, HEG was a high-risk proposition and so it was the first stock to be checked for revision. The ratio’s out of all the portfolio investments were lowest for HEG so we consider that for churn out, also there haven’t been any significant changes in the stock movement. Also, as speculations around stock market performance in builds for year 2018 we switch our portfolio to mid-cap stock from small cap and so we plan to analyze and examine Gillette.

Gillette India is one of the most well-known companies in the personal and oral care segment of the FMCG Sector. In mid-2017 the scheme has taken a FMCG stock as these are low beta stocks and provide some stability to the fund at the same time it is a mid cap providing the much needed exposure to the high return stocks. As the chart shows the share has been increasing since July 2014 and again picked up around may-June it looks going forward the stock has a good potential. Also, the revenues of such companies is not affected by macro economic trends and so the growth remains stable with not much volatility expected. The profitability ratios EPS and net profit ratio are also quite high and are improving yoy. The company has also generated double the returns in capital employed and also a reduced EV/EBITDA in 2017 which is a positive sign as far as shareholder investment is concerned. Return on assets is also very high, which means company is earning good profits over its total assets. Price to book value is quite high which can mean that share is over valued however going forward if the company continues to do well which is expected then the numbers are justified. It also indicates shareholders have a strong positive sentiment towards the stock.

Ratio 2015 2016 2017 Company
Net profit ratio
Return on assets
Price/book value 48.53
20.04 65.38
17.38 77.67
33.26 Gillette
(personal care)
Though we have received positive returns from HEG, the returns are not enough to compensate for the risk related with the stock. Also, it has the least Sharpe ratio out of all other securities which means it is contributing least to the portfolio returns and with the small caps turning over valued and a bearish sentiment building for these stocks we prefer to switch to slightly less riskier stocks with high growth potential and as from the past analysis and trend analysis of Gillette the probability of higher returns over a long period of time are high.

As, examined during the 1st churn we conducted a similar comparison for the 2nd revision as well. Following is a brief summary of the same.

SHARPE RATIO 0.70288997 0.905994012
TREYNOR RATIO 0.29315124 0.607406961
JENSEN’S ALPHA 0.28811255 0.17595109
PORTFOLIO SHARPE 1.48377848 1.647887585
PORTFOLIO RISK 0.128442744 0.135628184
The sharpe ratio and treynor ratio for Gillette is significantly higher than HEG. Though Jensen’s alpha is lower it implies that compared to expected return the extra returns Gillette offers is lower. However the portfolio Sharpe has increased which implies higher return. Also, notice that portfolio variance has increased with Gillette in portfolio which means the sharpe ratio increase comes not from a fall in the variance or risk of the stock but from the increase in returns which is a very good news as it implies that within the risk capacity of the investor we are able to generate much higher returns for the investor.

Economic analysis
As per a UN report world economic growth has been sluggish for 2016, its uncertain due to changes in international policy environment, unconventional monetary policy and volatile financial flows. The world economy grew at a rate of only 2.6% in 2016, which is the slowest since the great recession of 2009 and is expected to increase by 2.7% and 2.8% in 2017 and 2018 respectively. The deflationary pressure in developed economy is easing and the rising oil prices are expected to increase the headline inflation in many countries. World trade volumes have increased just by 1.2% which is the lowest since the past 30 years. The report also has suggested that the main drivers of growth are developing economies especially the east and south Asia contributing approx. 60% to the world gross domestic product in 2016-2018.

Country wise analysis
United states- the GDP increased by 1.6% against the expected 1.5%. there is a lot of uncertainty with the future considering the new reforms and policies that will be introduced by the new administration headed by president trump. The new administration has already shut the Obamacare healthcare, withdrew from trans-pacific partnership and renegotiated the north American free trade agreement which will affect not only investment decisions but also international trade volumes. Also, under the current fiscal policy, it is expected to see corporate tax cuts and infrastructure expenditure which can be a simulator for growth. However, it also indicates high fiscal deficit which means higher inflation and increase in interest rates by the FED.

Europe- the growth is expected to remain subdued, around 1.8% from 2016-2018. There is negative effect of Brexit, debt crisis in Greece which has constrained investments in several countries and policy uncertainty due to forthcoming elections in a number of countries. However, the demand has increased in a few countries due to lower inflation and lower unemployment rate and hence increased private expenditure.

Japan – the short-term view of the Japanese economy seems bright due to the fiscal and monetary easing measures taken up in 2016 however from the long-term perspective japan still faces issues related to ageing population, slowing growth in productivity, expected deflation and large government debt. However, the government is expected to make significant investments which will contribute to approximately 0.4% to the country’s GDP. Another challenge that Japan faces is with a strong yen and global trade war tensions the export sector seems tensed.

Indices selected for investment
Nasdaq composite -It is an index composed of related stocks listed on the Nasdaq stock exchange and is one of the three most followed stock market indices in the U.S markets. Even though the world economy looks bearish and with uncertainties growing under the new administration, the business investments, growth and overall momentum for the U.S markets looks positive, the Nasdaq graph shows a constant increase over the years with a sharp fall last seen in 2009 recession. However, going forward, we expect the markets to perform well and the index to grow.

FTSE 100- Financial times stock exchange 100 index is an index composed of top 100 companies by market capitalization listed on London stock exchange. The Europeans though seem sluggish we have kept for analysis and examination as the growth is expected to improve over the long run as can be seen from the graph.

S&P 500- The index includes top 500 companies listed at NYSE or NASDAQ by market capitalization. It is also the oldest index which has also generated huge returns for the investors. Since the index is composed of large cap companies it is expected to be a safe investment with high growth prospects over a long term.

Nikkei – it is a price weighted index that includes top 225 blue chip companies trading on the Tokyo stock exchange. Though there are fears of deflation, ageing population and private investments, investments from government and the strong yen are expected to provide stability to the overall risk and give higher returns.

The 1st churn out in indices
In march 2017, after examining the 4 indices we see a negative sharpe ratio for FTSE 100 which means returns are even lesser than the risk-free rate and so we have to definitely replace the index with another which is dow jones industrial average.
Dow jones industrial average- it is one of the 3 top performing indices of the U.S Stock markets. The index consists of top 30 public sector companies in the U.S. with government planning to make investments and the historic growth of the index we are considering investments in this index instead of FTSE 100.

Dow jones v/s FTSE 100
SHARPE RATIO -0.147937691 0.42308372
TREYNOR RATIO 0.021248865 0.04731103
JENSEN’S ALPHA -0.020265479 0.00142128
PORTFOLIO SHARPE 1.306832851 1.48377848
PORTFOLIO RISK 0.17548039 0.128442744
From the above ratios and portfolio measures we can see how sharpe ratio is much higher and positive for dow jones than FTSE. Also, other ratios like treynor and jensen’s are also higher. The portfolio sharpe increases which means the overall risk adjusted returns improve for the portfolio and the improvement comes not just from an increase in returns but also reduction in risk as the portfolio risk also reduces.
Thus, with introduction of HEG and dow jones industrial average in the portfolio the revised portfolio matches the returns and risk expectations better. Thus the 1st churn out has been successful in giving expected return and optimal risk which was targeted at around 10-12%.

The 2nd churn out in indices
While revising the portfolio in September 2017 we see the ratios are lower for dow jones industrial average compared to other stocks and so we research for indices which have a better prospect of performing better than index to improve the returns for the investor.

Russell 2000 – it is a small cap market index of bottom 2000 stocks of the Russell 3000, which is made up of 3000 biggest U.S stocks. The Russell 2000 index has been increasing at a rapid pace and to ensure higher returns than the dow jones industrial average we picked Russell to offer higher returns with large companies tracked in the index and thus expect higher returns.

Russell 2000 v/s dow jones industrial average
SHARPE RATIO 0.42308372 0.276076481
TREYNOR RATIO 0.04731103 0.040055648
JENSEN’S ALPHA 0.00142128 -0.01377
PORTFOLIO SHARPE 1.48377848 1.647887585
PORTFOLIO RISK 0.128442744 0.135628184
Except for the overall portfolio sharpe, none of the ratios have shown better performance for Russell 2000 than dow jones industrial average. However, we keep it for the next 6 months and then check for revision in march 2018 as the overall risk adjusted returns for the portfolio is higher.

The weights to be allotted to each of the security in the portfolio is calculated using solver function in excel where our main objective is to minimize risk with constraint as returns of atleast 20-30% and a minimum allocation of 1% to each asset class such that the sum total of weights allotted to all the 8 securities shall be 1.

Following table contains weight allocation to the 8 securities
Company/ index March 2017 September 2018 March 2018
Page industries 0.284508735 0.21420875 0.202454628
3M India 0.166428265 0.189723258 0.193824835
Venkys 0.0726102 Removed Removed
Kotak Mahindra bank 0.215321022 0.16202496 0.211689525
HEG – 0.06816894 removed
Gillette – – 0.130831018
Nasdaq composite 0.201641804 0.169095168 0.201709991
FTSE 100 0.01983 Removed Removed
NIKKEI 0.01983 0.15711893 0.01983
S;P 500 0.215321022 0.01983 0.01983
Dow jones industrial average – 0.01983 removed
Russell 2000 – – 0.01983
The allocations to the 8 securities are made using the efficient frontier.

We find various combinations of weights for the 8 stocks to get different risk-return combinations which will be used to construct the efficient frontier curve. The following combinations are found using solver function by putting different return constraints while objective of minimized risk remains constant.

For march 2017

We then construct the efficient frontier curve using different risk return combinations found in the 1st step.

Tangent is then drawn from the y-axis towards the efficient frontier curve. On the y-axis the tangent begins from the risk-free rate. The point where the tangent lies on the curve is the optimal combination of risk and return. Thus, we will consider the weights which are giving the returns of the optimal portfolio found in the curve. The yellow highlight in the above table thus highlights the optimal portfolio combination for the fund.

In a similar manner weights are calculated for each half year that is every time there is a change in portfolio or there is a change in the market trend that requires changes in constraints and allocations.

For September 2017
we see weights are highest for page industries, 3M India, nasdaq and NIKKEI..For march 2018

kotak, page industries and Nasdaq have been allotted highest weights.

Project evaluation
The portfolio risk and return for 3 different models have been calculated to examine the overall performance of the fund and is used to calculate ratios for evaluation of the model. Based on the ratios and the returns we take further decision to revise the portfolio and also interpret whether the investment should be in previous portfolio.

Year Portfolio return Portfolio risk
March 2017 27% 0.153806969
September 2017 27% 0.13816079
March 2018 29% 0.135628184
The weights taken for the portfolio return and risk calculation are found through the efficient frontier discussed above which gives the optimal asset allocation portfolio out of the various iterations taken to form the efficient frontier. The portfolio return though has been stable for entire 2017, by march 2018, we see an increase in the total portfolio return while the risk of the portfolio has reduced with every revision in model portfolio. Thus, we see by march 2018 the objective of the fund to invest in high return high risk stocks and indices in order to earn capital appreciation on investment in the long run has been achieved as per the current position.

In order to further evaluate the type of risk that the fund is exposed to and the extra returns it is earning, we calculate ratios so each ratio will give a view of the kind of risks and returns to which the portfolio is exposed.

6667501190625Note: For calculation of Treynor ratio, weighted beta has been calculated and used.

For calculation of Jensen’s alpha, the benchmark is only MSCI World equity index.

00Note: For calculation of Treynor ratio, weighted beta has been calculated and used.

For calculation of Jensen’s alpha, the benchmark is only MSCI World equity index.

Thus, in order to evaluate the performance of the portfolio we have calculated 3 ratios which are sharpe, treynor and jensen’s alpha.

Year Sharpe Treynor Jensen’s alpha
March 2017 1.306832851 0.260585479 0.236554253
September 2017 1.48377848 0.19389196 0.1965707
March 2018 1.647887585 0.304569722 0.232197466
The portfolio has done well as far as sharpe ratio comparisons are concerned with sharpe ratio increasing with each revision date. However, the treynor ratio reduced in September 2017 which means that beta of the portfolio that is the market risk is very high for the portfolio. The market risk is later reduced and returns are also higher as the treynor ratio sees a sharp increase in the numbers. Jensen’s alpha has not improved overall that means the ability of the fund to generate returns over and above the expected returns has not been very high.. Thus, based on the sharpe and treynor ratio we can conclude that the risk adjusted returns have improved on an annual basis both compared to the total risk and systematic risk.
If we conduct a security wise selection. Then keeping HEG in portfolio would have increased the overall portfolio beta as the beta of HEG is highest amongst the 8 securities thus pushing the weighted beta of the portfolio upwards. Also, the beta of dow jones industrial average is higher than FTSE 100 which is also why the overall beta of the portfolio increases and hence the treynor ratio reduces.
While for march 2018 portfolio we keep Gillette, which has lowest beta in the portfolio which replaces HEG. Since Gillette belongs to a FMCG sector it has a low beta and thus reduces the overall market risk of the portfolio which improves the treynor ratio while a shift from dow jones to Russell 2000 doesn’t really have much impact on the beta.

However, with 3 indices (S;P 500, Dow jones industrial average for September 2017, NASDAQ Composite) belonging to one country united states of America it increases the country risk and concentration risk of the fund. Along with that, most indices include top performing U.S companies which means a higher correlation between these indices. Also, by the end of 2017 we are investing in 3 mid cap stocks which means risk is higher to that extent as well. However, US is a developed market and generally high volatility and uncertainty is experienced in developing countries, also, the mid cap stocks include one of FMCG sector which is a low risk high growth stock and thus diversifies risk to some extent. The correlation between stocks and indices is quite low and even negative for 3M India with NIKKEI and Russell 2000. This well help in diversification of risk and help generate better and higher returns for the investor.

However, looking at current performance of the stocks and indices churned out, HEG did really well for the September- march period as global demand for electrode exploded and prices skyrocketed thus shooting up profitability and revenue growth of the company. Also, with import duties on steel, domestic demand increased which also increased the demand for electrodes. Similarly, dow jones has performed much better and given better returns than Russell 2000 and could be retained in the portfolio. Also, venky has given amazing multifold return and thus beyond 2018 we can re-revise the portfolio to include one of the securities with high future potential.
Bhumika Tripathi
Age: 39
Mumbai University (1996-2000)B. E, Mechanical EngineeringS.P. Jain Institute of Management ; Research (2003-2005)
PGDM, Finance
Design EngineerBOSCH India (October 2000 – June 2003)
ConsultantWipro (May 2005 – May 2008)
Senior Fund ManagerBD4 Core Equity Fund (June 2008- Present)
Dhiraj Jaisinghani
Age: 42
Birla College (1998 – 2002)
Bachelor of Engineering (B.E.)
Indian Institute of Management, Lucknow (2003-2005)
Financial AnalystKotak Mahindra Focus Fund (Jan 2006 – August 2008)
Senior Fund ManagerBD4 Core Equity Fund (October 2008 to Present)
Disha Gupta
Age: 40
Education: Institute of Chartered Accountants of India (ICAI) (1995-1999)ACA
Indian Institute of Management, Ahmedabad (2000-2002)PGDMCFA Institute (2002-2004)CFA
Internal Auditor Wipro Ltd (1999 – 2000)
Financial AnalystGoldman Sachs (March 2002 – April 2005)
Vice PresidentBD4 Core Equity Fund (May 2005 – Present)
Divij Shah Age: 35Education: Indian School of Business (2011-2012)MBA, Finance and Strategy
NYU Stern School of Business (Jan 2012 – May 2012)MBA, Finance – Student Exchange Program
Senior Analyst
VCK Share and Stock Broking Services Ltd (2001 to 2003)
Senior Vice President Motilal Oswal Securities Ltd (Jan 2005 – March 2011)
Senior Fund Manager
BD4 Core Equity Fund (May 2011 – Present)
Divy Kothari
Age 36 : Education :
Christ University (2001 – 2004)Bachelors in Business AdministrationLondon School of Business (2006 – 2008)
Msc Finance
JP Morgan Chase
Sr. Team Member – Global Real Assets (June 2009 – July 2010)
CBRE South Asia Pvt LtdSenior Consultation (Sr Manager) – Real Estate Consultation ; Valuation (August 2010 – December 2011)
Senior Fund ManagerBD4 Core Equity Fund (Jan 2012 – Present)
charts and ratios from
price data from BSE
Axis mutual fund scheme document
Reliance mutual fund scheme document
Icici prudential scheme document