Measuring Portfolio Performance: The NAV based approach

Measuring individual portfolio performance against the benchmark indices

Very often people are happy booking small time 15-20% profits in individual stocks and hold on to the laggards with losses in the hope that something good will happen.

It is essential to monitor and measure the portfolio against a set benchmark, in order to justify your own performance relative to the market. 

After all, if you are unable to beat the benchmark indices you are way better to invest in an index fund or Exchange traded fund (ETF) rather than investing in equities yourself.

Most retail investors are clueless when it comes to portfolio growth rate or performance. They buy so much, sell so much and received bonus/splits/dividends everything is lost in this mess.

So here’s a simple excel based approach which will help you to measure your portfolio performance vis-à-vis the chosen benchmark and give you a ready reckoner of your performance.

Part 1:

Let’s get started. You are all excited and you start your journey in the big bad world of stocks with a corpus of Rs 1 Lakh. Suppose the date is 31^st March, 2012. So you being the fund manager, you issued yourself 10,000 units of your fund (let’s call it stock_pf) at a NAV of Rs 10.

Date	31-Mar-12		Units	10000		NAV	10.00
Sl. No.	Name of Stock	Invested Value	Shares held	Cost per share	Current Price	Present Value	Dividend amount
1	Cash	100,000				100,000
2
	TOTAL	100,000				100,000

 

Part 2:

Now you are all geared up for your first purchase, so the very next day you go and purchase the bank where you have been banking for the last decade. Let’s say this is HDFC bank in your case. On 1^st April, 2012 HDFC Bank was quoting at Rs 520 per share. You went ahead and bought 100 shares at Rs 520 each. So here’s how your portfolio will look now.

Date	1-Apr-12		Units	10000		NAV	10.00
Sl. No.	Name of Stock	Invested Value	Shares held	Cost per share	Current Price	Present Value	Dividend amount
1	HDFC Bank	52,000	100	520	520	52,000
2	Cash	48,000				48,000
	TOTAL	100,000				100,000

So you used up Rs 52,000 cash in making a purchase and cash has been reduced by the same amount. For simplicity we are ignoring the transaction charges. Your invested value should be inclusive of all such charges (brokerage, service tax, STT, other charges). Invested value divided by No. of shares will give your cost per share.

 

Part 3:

So a couple of months have passed, markets are down and you decided it’s time to add another stock to your portfolio. Your visit to the local Tanishq shop left you highly impressed and you decided on buying Titan Industries for your portfolio. So on 5^th June, 2012 you bought some Titan for your portfolio. Titan was quoting at Rs 205, so you bought 230 shares. Here’s how your fund stock_pf looks now.

Date	5-Jun-12		Units	10000		NAV	9.81
Sl. No.	Name of Stock	Invested Value	Shares held	Cost per share	Current Price	Present Value	Dividend amount
1	HDFC Bank	52,000	100	520	501	50,100
2	Titan Indus	47,150	230	205	205	47,150
3	Cash	850				850
	TOTAL	100,000				98,100

Notice that the NAV has dipped below 10.00 meaning you are in a loss in tandem with the market. And after the two purchases you are left with only Rs 850 in cash.

Part 4:

On 28^th June, 2012 HDFC Bank paid dividends to its shareholders. So you too received some cash inflows. So the amount Rs 4.3 per share for 100 shares amounted to Rs 430 cash credit, this being a cash inflow gets added to the cash part.

Date	28-Jun-12		Units	10000		NAV	10.58
Sl. No.	Name of Stock	Invested Value	Shares held	Cost per share	Current Price	Present Value	Dividend amount
1	HDFC Bank	52,000	100	520	548	54,800	430
2	Titan Indus	47,150	230	205	216	49,680
3	Cash	1,280				1,280
	TOTAL	100,430				105,760

Part 5:

Similarly on 16^th July, 2012 you received some part profits from your other company Titan Industry which again contributes in boosting your NAV by adding on to the cash component of the portfolio. Here the payout is Rs 1.75 per share for 230 shares amounting to Rs 402.50

Date	16-Jul-12		Units	10000		NAV	11.07
Sl. No.	Name of Stock	Invested Value	Shares held	Cost per share	Current Price	Present Value	Dividend amount
1	HDFC Bank	52,000	100	520	582	58,200	430
2	Titan Indus	47,150	230	205	221	50,830	402.5
3	Cash	1,682.5				1,682.5
	TOTAL	100,832.5				110,712.5

Part 6:

Now that the markets are on a high you decided to take some profits of the table. So on 21^st September, 2012 you decided to sell some of your HDFC bank shares. HDFC Bank was quoting at around Rs 620 per share, much higher than your buy price. So you decided to sell 30 shares for a consideration of Rs 620 per share, resulting in Rs 18,600 of cash inflows.

Date	21-Sep-12		Units	10000		NAV	11.91
Sl. No.	Name of Stock	Invested Value	Shares held	Cost per share	Current Price	Present Value	Dividend amount
1	HDFC Bank	36,400	70	520	620	43,400	430
2	Titan Indus	47,150	230	205	241	55,430	402.5
3	Cash	20,282.5				20,282.5
	TOTAL	103,832.5				119,112.5

Note like in the buy case, your sale value should be exclusive of all sell charges (brokerage, service tax, STT, demat charges, others etc.). Total sale value net of these is realized and added to cash.

 

Part 7:

So finally amidst all this buy sell and dividends, 6 months have passed. So you finally decided to pit your portfolio against the benchmarks. Note down the latest portfolio on the given date (October 3^rd, 2012)

Date	3-Oct-12		Units	10000		NAV	12.33
Sl. No.	Name of Stock	Invested Value	Shares held	Cost per share	Current Price	Present Value	Dividend amount
1	HDFC Bank	36,400	70	520	620	43,400	430
2	Titan Indus	47,150	230	205	259	59,570	402.5
3	Cash	20,282.5				20,282.5
	TOTAL	103,832.5				123,252.5

So you have done quite well, in about 6 months your portfolio has returned 23% odd percent. But standalone returns are meaningless unless you compare them with the benchmark. So here’s the comparison.

	31-Mar-2012	3-Oct-2012	Growth
Sensex	17,404	18,870	8.42%
Nifty	5,296	5,731	8.21%
Portfolio NAV	10.00	12.33	23.25%

Voila! You were able to beat both the Sensex and Nifty hands down with your 2 stock portfolio and in the process generated 23.25% returns for yourself.

So in effect the NAV based measurement gives you a direction how you are performing vis-à-vis the market moves. It is critical that your overall portfolio is beating the benchmarks; a sudden gain in a couple of stocks and large losses in others is of no benefit to you at the end of the day.

Thus if one is unable to beat the benchmarks or average mutual fund returns over a period of time, then he would be better off leaving direct investments in equities and should choose diversified mutual funds for investing his hard earned cash.

Happy Investing!

Additional parts based on reader comments: 9th Oct 2012

 Part 8: Adding fresh funds to the portfolio

As readers pointed out this is of critical importance for salaried employees to know how to fit in fresh capital into the portfolio. So let us suppose you plan to put in additional Rs 50,000 into the portfolio on 3^rd Oct.

So since the current NAV for your portfolio is at 12.33 you are issued new units at this rate. Hence 50000/12.33 = 4055.15 units are issued over and above the existing 10,000 units. Also the fresh capital of Rs 50,000 is added on to the cash balance of the portfolio. 

Hence the portfolio looks like the following: 

Date	3-Oct-12		Units	14055.20		NAV	12.33
Sl. No.	Name of Stock	Invested Value	Shares held	Cost/ share	Current Price	Present Value	Dividend amount
1	HDFC Bank	36,400.0	70	520	620	43,400.0	430
2	Titan Indus	47,150.0	230	205	259	59,570.0	402.5
3	Cash	70,282.5				70,282.5
	TOTAL	153,832.5				173,252.5

 

Part 9: Withdrawing funds from the portfolio

 Similarly if one wants to withdraw any funds for other investments /consumptions   

 equivalent amount of units will be reduced from the portfolio.

Suppose you want to withdraw Rs 15,000 for making a tax saving fixed deposit as you realize bank rates are going to get reduced soon and you need to rush.

Thus what happens to the portfolio is that the units get reduced proportionately and so for Rs  15,000 you need to redeem 1217.04 units. Note that the cash balance as on 3rd Oct (refer Part 7 end) of Rs 20,282.5 gets reduced by Rs 15,000.

 Hence the portfolio looks like as follows.

Date	3-Oct-12		Units	8782.96		NAV	12.33
Sl. No.	Name of Stock	Invested Value	Shares held	Cost/ share	Current Price	Present Value	Dividend amount
1	HDFC Bank	36,400.0	70	520	620	43,400.0	430
2	Titan Indus	47,150.0	230	205	259	59,570.0	402.5
3	Cash	5,282.5				5,282.5
	TOTAL	88,832.5				108,252.5

So note that irrespective of any additional capital input/withdrawal the NAV won’t change on that given date. Only the total units and cash component will rise (additional capital) or fall (capital withdrawal). Also dividends payout is the case when your cash increases without an increase in units.

Put in your queries/comments if you need additional clarifications on any part.

Multi Commodity Exchange (MCX) of India: A great business to own

MCX as the name suggests is an electronics commodities exchange where users can trade on future contracts of 49 commodities as present. The main volumes are derived from 4 major commodities – Gold, Silver, Copper and Crude. Deriving technological edge from the use of trading platforms (primarily ODIN) provided by the promoters – Financial Technologies, MCX has gained sustained monopoly in commodity trading in India.

It commanded a premium 86% market share in commodities (FY12) with more than 2,170 registered members operating through over 346,000 trading terminals (more than 150k terminals have been added in the last one year which would mature in terms of trading volume with a lag), spread over 1,577 cities and towns across India.

MCX is the exchange with 3rd largest global volumes in commodities in terms of contracts traded with record highest volumes in Silver, second highest volumes in Gold and natural gas and third highest in Crude.

It has been certified to three ISO standards, including ISO 9001:2008 Quality Management System standard, ISO 14001:2004 Environmental Management System standard, and ISO 27001:2005 Information Security Management System standard.

 

Huge growth potential ahead

The Indian market is at a nascent stage with only 2 million entities trading in commodities as compared to around 20million in equities. Also global futures commodities volumes vis-à-vis physical trades are much higher than they are in India. For example: futures gold volumes are 70-80x that of physical trade v/s 17-18x times in India

Commodity exchanges were authorized in India only in April 2003, and the industry is far from mature. Hence continued demand for underlying commodities in a growing economy and expansion in the mix of hedgers and speculators will facilitate continued growth in traded volumes.

The market is at a relatively nascent stage with Gold, silver, crude oil and copper being the four largest commodities traded on the Indian exchanges, constituting 70%+ of the total traded value in FY11 and 80%+ of the total traded value in FY12.

The increase in physical market volumes consequently increases the hedging requirements for industry players, influencing derivative trading volumes. Growth in trading volumes of any commodity on the exchanges has been a function of price volatility. As long as there is volatility in the prices of a particular commodity, it will act as a volume growth driver for the exchange.

Though the total volume, an annual value traded of US$3.7 trillion appears substantial, the underlying capital invested is not substantial, given the leverage implicit from use of very low margins in the futures instrument. Currently, the average daily value traded is ~US$12bn. Assuming a margin requirement of 10%, the underlying margin money of ~US$1.2bn (Rs 6,300 Cr) is only 0.1% of India’s deposit base. Hence there are huge opportunities to growth ahead.

 

Understanding the ‘MCX’ advantage: Entry barrier and Moat

It is important to understand what forces equip an exchange to gain leadership and sustainability of that leadership going ahead.

The growth in industry has been driven mainly by the top 4 commodities (Gold, Silver, Copper and Crude) which accounted for highest majority of turnover. MCX has created deep pools of liquidity in these commodities, thereby creating high entry barriers for new participants.

Furthermore, and more relevant, is the impact cost (spread between highest bid and lowest offer) for which MCX has a relative advantage as it can offer a narrower bid-offer spread than other exchanges can because it offers access to large pools of liquidity.

From an end-client’s perspective, the benefit derived from a lower exchange fee at other exchanges is negligible when compared with the advantage gained from a better transaction price by trading at MCX.

Note: It is this deep pool of liquidity that made NSE a lethal force and garner majority market share from incumbent BSE in equities market. 

 

Leadership in new technologies from parent Financial Technologies

MCX is provided with technology platform by its parent, Financial Technologies India, who are one of the leading developers of exchange related software and technology. This gives MCX a competitive edge that is difficult to replicate.

Exchanges require constant technology upgrades and support, necessitated by regulatory regime and market forces. MCX is able to obtain speedy and efficient technology solutions from FTECH. MCX’s current technology infrastructure is sufficient to handle daily trading volumes of up to 10 million transactions. So far, it has handled a high of 1.8 million trades in a day.

MCX will have a much shorter lead time to introduce newer products like Options, as and when they are permitted. This market readiness leads MCX much ahead of the competition.

 

Operating Leverage

Since a large portion of MCX’s costs are fixed ones so any upside triggers in volumes and hence the topline can significantly boost the profitability. The only significant variable cost in its expenses is the fees paid as a percentage of transaction revenues towards technical services agreement to its parent Fin Tech.

Fixed costs are 60-70% of the overall expenditure at MCX hence potential growth in volumes implies better profitability going forward.

 

Newer revenue potentials: Data Services

Being the largest commodity exchange in India MCX is the key source of data on commodity trends. This provides MCX the opportunity to benefit from market data product and information offerings, as is the case for various leading exchanges in India and the rest of the world.

Internationally, revenues from selling market data products, analytical tools and price-feeds constitute 5-15% of exchanges’ revenues, on average. As the market for commodities trading grows, algorithmic trading systems, sophisticated quantitative approaches to risk management, will create demand for trading-related data and analytics.

The company currently has such arrangements with the following entities:

• Bloomberg Finance L.P.
• NewsWire 18 Private Limited
• IQN Data Solutions Private Limited
• Reuters India Private Limited
• Interactive Data (Europe) Limited
• TickerPlant Limited

Cash and Investments: Stakes in subsidiaries

MCX’s residual stake is now 5% in Dubai Gold and Commodities Exchange (DGCX) with a book value of Rs2.18 Cr and it has a direct equity stake of 5% in MCX-SX plus 634.17 million warrants (each warrant entitles the holder to subscribe for one equity share of Rs1 each of MCX-SX).

The company has negative net debt with huge investments in liquid mutual funds. This contributes to around Rs 170 of cash per share. The holding of 5% in DGCX is currently valued at 100 Cr+ which is marked at book value of ~2 Cr under investments.  So effectively we have 190 Rs cash sitting on per share.

The new MCX exchanges are mostly in areas with negligible competition (Bahrain, Botswana, Mauritius) and replication of the India story can generate good returns.

 

Shareholding pattern: distributed ownership

The promoters Financial Technologies (India) Ltd holds 26% as they are stipulated by SEBI norms to hold max 26%. 

	Jun-12	Mar-12	(IPO)7-Mar-12
Promoters (Fin Tech)	26.00%	26.00%	26.00%
Public	74.00%	74.00%	74.00%
FII	31.44%	33.27%	7.81%
DII	23.54%	22.41%	26.27%
Bodies Corporate	8.80%	8.89%	7.46%
Retail	10.22%	9.43%	32.46%

What is significant is that retail has sold off its stake to more long term mature holders (FIIs and DIIs) who have steadily accumulated. Going forward this will be a low liquidity thinly traded stock as most investors will simply hold this for long term.

The major point to note here is that no individual investor (barring promoters) can hold more than 5% in MCX, which leads to distributed ownership. MCX’s top 10 non promoter shareholders (as on 30-06-2012)

Sl No.	Investor Name	%age Stake
1	Fid Funds (Mauritius) Ltd	5.00%
2	Passport Capital LLC	4.90%
3	Merrill Lynch Holding (Mauritius)	4.79%
4	Aginyx Enterprices Ltd	4.79%
5	Euronext N V	4.79%
6	IFCI Ltd	4.79%
7	NABARD	3.06%
8	Corporation Bank	3.00%
9	NSE India	2.45%
10	Bennett Coleman (Times Group)	2.24%

 Major future triggers: FC(R)A bill approval

The Forward Contracts Regulation Act [FC(R)A] bill if passed can potentially unlock huge opportunities in terms of

• Introduction of commodity options trading
• Introduction of trading in intangibles (e.g., freight, rainfall and commodity indices) which are not permitted in India at present. Trading in commodity indices, in particular, if allowed, could provide a boost to turnover.
• Allowing participation from banks, mutual funds and institutional investors in the Indian commodity futures market.

These are huge triggers and introduction of any or all may see huge sudden upside in the stock. Under the current pro-reform mood, it is this anticipation that is fueling the short term rally in MCX. 

 

Major future triggers: Value unlocking from stake sale in subsidiaries

The second trigger and value unlocking potentially arises from stake sale in MCX-SX which currently offers trading in currency futures and options and has been permitted to start operations in equity future and options by SEBI. The approval is subject to the condition that the combined voting rights of FTECH and MCX in MCX-SX will not exceed 5%. This paring down needs to happen within next 18 months.

Earlier, FTECH held 31% and MCX held 38% in MCX-SX. Then, to comply with SEBI guidelines for starting equity trading, they reduced their stake in MCX-SX to 5% each through conversion of excess equity stake (beyond 10%) to warrants. The warrants will be sold to banks and financial institutions. This stake reduction contributes to a one-time gain of around Rs 110-120 per share for MCX shareholders.

MCX-SX is expected to go live in the equities segment by November 2012.It has successfully launched currency options in the recent past and has a market leadership in currency futures (market share of ~44% in FY12).

Key risks

Higher regulatory risks due to speculative nature of trades

The commodity futures exchange industry is highly regulated. The key regulatory body, the FMC, has in the past prohibited trading in certain commodities.

For example, in May 2009 it ruled that no new sugar contracts could be launched. Similar suspensions have taken place for commodities such as wheat and rice. 

Recently, the FMC banned all futures trading in guar and launched an investigation into potential price manipulation of other farm commodities, as per an article in the Business Standard dated March 29, 2012. These risks may not have a significant effect on MCX, in particular, given that trading in agricultural commodities is a relatively small component of its trading volumes.

However, similar bans on any of the top traded commodities – Gold, Silver, Crude and Copper may pose significant risk on volumes and hence revenues.

 

High proportion of costs incurred towards parent and group companies

Over 40% of MCX’s operating costs are towards various fees paid to the parent, Financial Technologies (Fin Tech) and promoter group companies. Its agreement with Fin tech for IT infrastructure and software services, costs MCX 12.5% of its transaction fees in addition to a fixed charge of INR12 Cr per annum, constituting a major portion of operating costs.

What is alarming is that costs incurred towards Fin Tech have gone up from ~19% of operating expenses in FY08 to ~47% in FY12. Also, the variable fee was revised upwards to 12.5% of transaction fees in FY11, from 10% in FY11 and will come up for revision again in October 2012. This overhang of increase in technical services fee (as a % of transaction fee) could be potential threat to MCX’s profitability.

 

Significant dependence on a few commodities

The aggregate value of commodity futures traded at MCX has been concentrated mainly in four commodities – gold, silver, copper and crude oil. During FY12, over 90% of volume contribution comes from the top 4 - Gold (27%), Silver (37%), Crude Oil (16%) and Copper (10%).

During FY12, 94% of the total traded value has been from these four commodities. Any period of low volumes in any of these 4 would impact overall volumes adversely.

Revenues tied to value traded fee and commodity price volatility.

As seen in April 2012, a downward spiral in Gold volumes in physical markets significantly affected the volumes in gold futures thereby affecting revenues for MCX. Spurt in trading volumes in the recent past (50% CAGR over FY09-12) was mainly attributed to an increased volatility and rise in commodity prices coupled with launch of mini futures and a ramp up in customer base. All these has effectively set a higher base in FY12.

Repeating the earlier success and surpassing it on the higher base of FY12 may prove to be quite challenging.

 

Sharp fall in commodity prices : Double Impact

With a lower volatility in leading commodities and a visible pressure in prices of leading commodities (gold, silver, crude oil), growth in trading volume may moderate to low double-digit over FY12-14E.

Trading volumes are highly dependent on volatility in commodity prices, which may be dictated by overall price trend in key commodities across the world. Growth in quantity traded correlates with the increase in volatility. Furthermore, in the case of precious metals, growth in quantity traded also correlates with price rises.

Rising prices usually drive higher volatility because a sustained price increase in a commodity potentially attracts higher participation and hence potentially higher volatility. Changes in commodity prices have a two-fold impact for MCX: they influence both the quantity traded and the value traded (as value traded = quantity traded x value per unit of quantity traded).

As MCX charges a transaction fee on value traded, as prices fall, quantity traded growth will also be lower, resulting in a lower turnover and hence lower transaction fees. The impact of price movements on turnover growth and hence transaction fees is thus amplified.

Lock-in period for pre-offer shareholdings

MCX completed its IPO in Feb, 2012. The pre-offer shareholding is subject to a lock-in of one year from the date of allotment (February 27, 2012) in the offer with the exception of

1. Shareholdings of current employees of the company who were allotted shares pursuant to ESOP schemes     
2. Venture capital funds/venture capital investors who have held shares for at least one year as on the date of the red herring prospectus (Feb 10, 2012) 
3. 20% of the promoters’ shareholding which is subject to a three-year lock-in period.

Based on the above, ~60% of the shareholding is subject to such a one-year lock-in (till Feb 27, 2013). Hence there may be additional selling pressure on and after the lock-in expires.
 

Cannibalization of Future volumes from introduction of Options trading

If Options trading is introduced with the approval of FC(R)A bill part of options growth could cannibalize futures trading (similar to what happened at NSE which introduced equity options trading in June 2001).


Disclosures:  No current positions, have invested in the IPO and during subsequent downward spiral. Have booked profits and currently have no open positions in the stock.