ENagar

These are the average returns of all the mutual funds vs their respective stock market indices over a long time frame

Taken from Lubos Pastor and Robert F. Stambaugh, “Mutual Fund Performance and Seemingly Unrelated Assets,” Journal of Financial Exonomics, 63 (2002).

If you get a chance, read this research paper. They analysed mutual funds from various countries in different periods to arrive at these results.

I am advertising this paper here because it goes well with my original stance 1 and 2

It has been decided to adopt the following eligibility criteria for inclusion of scrips in group ‘A’:

1. Company must have been listed for minimum period of 3 months.

Exceptions:

a. The Company can be directly listed in group ‘A’ provided the market capitalisation of a company being listed, based on its issue price, is higher than the average market capitalisation of 100th company in the existing group ‘A’ as per the ranking based on preceding 3 months data.

b. Any company permitted to be traded in F&O segment from date of its listing shall be directly listed in group ‘A’.

c. Companies listed subsequent to any corporate action involving merger/ demerger/ capital restructuring etc.

2. Companies traded for minimum 98% of the trading days in past 3 months shall be considered eligible.

3. Companies with minimum non-promoter holding of 10% as per the shareholding pattern of most recent quarter shall be considered eligible. The criteria of minimum 10% non-promoter holding shall not be applicable to public sector undertakings (PSUs).

4. The weightage of 75% and 25% shall be given to ranking on three monthly average market capitalisation and traded turnover respectively to arrive at the final ranks.

5. The list derived, based on final rank shall be screened for compliance and investigation. Based on this screening, the list of top 200 companies shall constitute group ‘A’.

6. The group re-classification shall be reviewed twice in a year i.e. February and August.

7. On inclusion of any new Company in group ‘A’ based on criteria 1(a) or 1(b) detailed above, the last company in the existing group ‘A’, based on its final rank calculated on data preceding three months shall be excluded.

8. All companies not included in group ‘A’, ‘S’ or ‘Z’ shall constitute group ‘B’. The division of group ‘B’ into group ‘B1’ and ‘B2’ is being discontinued.

9. In addition to these groups, scrips may be classified in group ‘T’ and ‘TS’ as part of the surveillance measures.

The revised list of ‘A’ group companies shall be announced through a separate circular on February 18, 2008 and it shall come into effect from March 3, 2008.

Sourced From: MoneyControl

This article is not relevant for Indian Stock market Investors.

In the US market, we often hear about Class A, Class B shares. Even wondered what they are? Let me give you an example.

Berkshire Hathaway Inc. has two classes of common stock designated Class A and Class B. A share of Class B common stock has the rights of 1/30th of a share of Class A common stock except that a Class B share has 1/200th of the voting rights of a Class A share (rather than 1/30th of the vote). Each share of a Class A common stock is convertible at any time, at the holder’s option, into 30 shares of Class B common stock. This conversion privilege does not extend in the opposite direction. That is, holders of Class B shares are not able to convert them into Class A shares.

Similarly at GOOGLE:

There is two classes of Google stock — one (Class B shares) with “super-voting” rights of 10 times those of the other (Class A) shares. This two-part equity capital structure ensures that power remains firmly in the founders’ hands. In addition, Class B shares will be convertible, whereas Class A shares will not.

What it means?
The founders use this tool to separate ownership and control of the company (i.e. they take the investor’s money without actually selling the company or giving any seat on the board.

eg: Ivar Kreuger (one of the biggest matchstick men) controlled his 600 Million Dollar empire (in 1920s) by owning just 1% of the company stocks.

Last week ICICI Bank lost 264 M$ in sub-prime lending.

Today L&T, posted over 50 M$ losses over Zinc futures.

A year ago Hexware software lost several millions on forex speculations?

Why are Indian companies taking the risky speculations. ICICI bank might be pardoned because it had taken huge quantities of US dollar bonds so it may have an intention of hedging it (but there are hundreds of analysts that are saying it was pure greed and not hedging). But what is L&T doing with Zinc futures.
Its main business is infrastructure (which requires concrete, steel), machine tools (which needs copper) and ship building ( which needs steel aluminum). But why Zinc??????

Indian CEO should realize that they should concentrate their attention in their core business and securities and trading are mere distractions. Most of the derivatives are zero sum game (i.e. losses = gain and no wealth is generated) but for them its a lose lose scenario. I.E. if their firm makes a loss, then the company stocks would be trashed, however if they make money then it won’t have any effect on the stock because stock market looks only at the future prospects of the company and these profits are not repeatable. Infact some analysts might downgrade the stock because speculative trades adds uncertainty to the company’s performance

Everybody has read the hype created by Anil Group and if the Grey Markets are to be believed, Anil might become the Richest Man of the Planet. But have you wondered how he has created this fortune?
Let me analyze the entities in his conglomerate.

* Reliance Power:
NTPC has 30 years of fabulous track record. It is the world’s 6th Largest Power producer, World’s 2nd Most efficient Power Utility Company. It has an impeccable project execution track record and is the lowest cost Producer (highest profit margins too) of the Nation. In spite of having 26,850MW capacity of fully owned plants and 27,904MW capacity of Jointly owned plants and several plans near to commissioning, this company has a market capitalization of just 169,567.98 cr INR or 43 Billion Dollars.

Relaince Power on the other hand was valued at 30 Billion dollars at the time of IPO and looking at the hype should reach 60 Billion Dollars at the day of listing. So much hype in spite of the Group having ZERO experience in electricity production and the fact that the first revenue will come only after 18-20 months.

* Reliance Communications:
Bharti telecom (last quarter) had a revenue of 6059.89cr and Profit of 1619.15Cr.
While Reliance Communications had a revenue of 3328.39cr and a profit of 801.24cr. So how is it that a company that has half the profits of Bharti, lesser profit margins is valued almost the same as the giant? (PS: both companies are growing at almost the same rate) If I compare the results with BSNL or some International Giant, then the valuation is more screwed up.

* Reliance Energy:
Although reliance Energy and Tata Power have the same revenue (tata has higher profits), Why is it that this company is worth Twice?
They raised money for the power projects, then transferred all the contracts to Reliance Power and again raised the money. So its like selling the same asset twice.

* Reliance Capital
Same story.
A banking company with a sales of 1,400 Cr (profit is even lower) is valued at 53,000cr.

* Reliance Natural Resources
If you visit its website, it describes the company as:

Reliance Natural Resources Limited (the “Gas Based Energy Resulting Company”) was originally incorporated on the March 24, 2000, under the Companies Act, 1956 as Reliance Platforms Communications.Com Private Limited. The status of the Company changed from private limited to public limited on July 25, 2005. The name has since been changed to its present name, viz. Reliance Natural Resources Limited under Fresh Certificate of Incorporation consequent on change of name dated January 9, 2006.

In terms of the Scheme of Arrangement (”Scheme”) with Reliance Industries Limited, as sanctioned by the Hon’ble High Court of Judicature at Bombay by its Order dated December 9, 2005 and which has became effective from December 21, 2005 the Company is vested with the Gas Based Energy Undertaking of Reliance Industries Limited as defined in the Scheme.

Does it make any sense??????
Let me know if it does. The company has no assets, all it owns is exploration rights to 4 Coal Based Methane beds.
No wonder a company with an annual sales of 40Cr INR is valued at 30,000 Cr.

Call me skeptical, but what I am unable to understand is why a guy with no track record, prior experience, without any significant sales/revenue is valued at 2-3 times the peers which have shown repeatedly stellar performance.

BTW, I feel the primary reason for today’s market crash was Reliance Power issue. Usually when the market falls (significantly) the investors pump in a lot of money to build up a portfolio (and arrest the fall) while the speculators short sell in the hope that it will go down further.

Future group got over-subscribed 100 times, the Power issue got bids worth 7.52 trillion rupees (191 billion dollars), which sucked up all liquidity from the retail/HNI, and mutual funds making it impossible for people to buy any further shares. hence the bears were having a field day (which lasted for more than a week) The biggest proof of this theory is that usually when the market fluctuates a lots, the volumes increase dramatically. (because of increased intra-day activity and the fresh infusion of capital from the long term investors) However today in spite of the fact that the market fell sharply, the volumes were low… indicating a serious liquidity crisis.

It will take another 10 days before the refunds will start coming. And I do not know what will happen by then.

Basic stock market info which advanced readers can skip.

Ever wondered why your portfolio goes up while the Sensex/NIFTY are flat? Or why your portfolio does not rise in sync with the market? It might be because you are comparing it with the wrong basket/index.

BSE Sensex: represents a basket of 30 Large cap shares
S&P CNX NIFTY: represents a basket of 50 large cap shares. (about 41% of the market volume and 56% of the total market capitalization
CNX Nifty Junior: 50 most liquid stock in the market (which are not part of the NIFTY) They represent about 9% of the market capitalization and 14% of the trading volumes.
CNX IT Index: index for 20 IT stocks (96% of the market capitalization and 91% of the transaction value)
CNX Bank Index: 12 top banks (74% of the trades, 79% of the market cap)
CNX 100: top 100 stocks(66% of the market cap and 56% of the trades) for all practical purposes you can consider it as a sum of NIFTY + Nifty Junior.
S&P CNX Defty: (used only by FII) it accounts for dollar fluctuations and the nifty fluctuations… basically the value of NIFTY stocks in USD.
S&P CNX 500: top 500 companies (90% of the stock market capitalization and 80% of all trades)
CNX Midcap: 100 midcap companies. (market capitalization of the range of 1000 to 5000 cr INR)
Nifty Midcap 50: 50 midcap companies.

Now the question arises how to choose the appropriate index:
1) See if your stock is a part of any index. If so, then that index is the best choice.
2) In case of the stock being in multiple index, then choose BSE over NIFTY and NIFTY over Bank/IT index.
3) If it does not belong to any index, then see which is the core area of business and fit it accordingly.
4) otherwise check its market capitalization. i.e.
a. if it is more than 5000 cr, then its best to put it with Nifty/Sensex.
b. if between 1k to 5k crore, then choose the midcap index.

5) If it is a small cap (<1000 cr) and does not fit in any sector index too, then as a rule of thumb expect the stock to give twice the return of Sensex/NIFTY. If it does not, then you are probably taking too much risk for no additional returns.