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Ajit Dayal: On markets and investing - Views on News from Equitymaster
 
 
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  • Feb 21, 2006

    Ajit Dayal: On markets and investing

    At the recent Equitymaster Investor Empowerment Meet in Bangalore I was asked a lot of questions about:

    1. The market,

    2. Valuations,

    3. Global money flows, and

    4. Why Quantum Asset Management Company, of which I am a Director, is launching the Quantum Long Term Equity Fund at a time when the BSE-30 Index has crossed the 10,000 levels.

    I will address the last question about the launch of the Quantum Long Term Equity Fund first.

    As a Director of Quantum Asset Management Company Private Limited, it would be my endeavor to continue the tradition of catering to the long-term interest of investors: first initiated by Personalfn and Equitymaster (divisions of Quantum Information Services Limited, of which I am Chairman).

    I started my career in investments in 1984 - when the Index was about 400. Now it has crossed the 10,000 level. Mathematically, that translates into a +16% rate of appreciation each year over the past 22 years. But note that the +16% per annum is a compounded average and there have been years when the Index has been up over +80% or down -20%.

    If one were to use this similar mathematical formula and assume that the Index will appreciate by, say, 14% per annum over the next 20 years then an Index level of 135,000 is mathematically possible! Now, before you get excited and sell your houses to buy stocks remember the risks of being in equities and also recall the journey from 400 to 10,000 - there were years when the Index lost money. So there will be NO straight line to the sky but many bumps along the way although, as much research has shown, equities tend to outperform other assets like debentures/bonds and property over long periods of time. And they should because you take more "risk" by being in equities.

    So, in my humble opinion, it is not too late for Quantum AMC to have launched Quantum Long Term Equity Fund - an open-ended equity scheme that will invest primarily in listed shares with a view to achieving long-term capital appreciation.

    The website www.QuantumAMC.com also has an Invest Online feature that will allow you to apply online if you have an internet bank account with HDFC Bank, ICICI Bank, IDBI Bank, and UTI Bank. Copies of some of the articles that have been published in various newspapers (Business Standard, DNA, Economic Times, Hindu Business Line, Times of India) on our pioneering effort to build India's most respected investment management companies are also on www.QuantumAMC.com . Quantum AMC will offer investors simple products that will give you an opportunity to build on your wealth over time. No flood of products, no confusion as to how we invest your money, no massive ad campaigns and no chunky distribution fees - we will work in your best interest.

    Well, the The New Fund Offer (NFO) period (during which the units are offered at Rs 10/- per unit) will close on Saturday, February 25th. Over time, I expect that the disciplined research and investment process that the Fund will adopt will benefit us all (I am also investing my money in it for sure!)

    Now the more difficult questions on markets, valuations, and global liquidity flows.

    Markets are not "right" or "wrong" - they are what they are.

    If markets were right, they would never decline or they would never rise. Changes in the economy, operations of companies, future expectations and perceptions, and demand and supply for shares determine the current "market" price of any asset.

    Over the last decade the previous Chairman of the Federal Reserve, Alan Greenspan, has faced some pretty scary crises. The Asian crises started in July, 1997 and led to the Russian and Korean crises in October 1998 and the bankruptcy of LTCM - an event which caused the Fed to pump in money into the global financial system and "rescue" some of the largest financial groups in the world.

    By 1999 the technology bubble had begun but at the same time fears over Y2K forced all central bankers around the world to keep money in the system in case the Y2K bug shut down all ATMs and people would need cash to survive on a daily basis.

    By the time the internet bubble burst in March 2000, the Fed again kept pumping money into the system to keep the US economy from sliding into a deep recession. After the terrorist attacks of "9/11" the subsequent cracks in the European economy in July 2002 and fears of a global deflation forced the Fed to keep pumping more money into the system. By early 2003, the impending war in Iraq and the global fear over SARS forced the Fed to still cut interest rates and pump money into the global financial markets.

    The years of continuous pumping of money by the Fed resulted in record low interest rates. With cheap money floating around the world, the global appetite for risk has increased and this "cheap money" has now found its way into different asset classes (gold, oil, metals, real estate, stocks, and bonds) across the world (emerging markets including countries like India, Japan, Europe).

    In normal times, when one asset class does well, it is generally at the cost of the other. In these abnormal times, all asset classes are reaching new highs. When everything goes up at the same time (not to the same extent, though) that is known as "asset inflation".

    We are not macro-forecasters, as such, but it would be difficult to believe that this unusual event of excess global liquidity will continue. We do not know when it will end, but, as we methodically proceed with our internal research to pick stocks for the client portfolios, we assume that this liquidity party will end and the world will work in a more "normal" environment.

    Is a "normal environment" bad for Indian stock markets? Well, any asset class is based on a combination of 2 broad valuation metrics - it's real intrinsic value (the "value" philosophy that Quantum Long Term Equity Fund will follow) and what others are willing to pay for it (the "greater fool theory" of momentum and liquidity driven markets). India has evolved a lot since the time I returned to India in 1984 and began my career in research and investments. We can see the benefits around us. But, at the same time, the demand for Indian shares from Foreign Institutional Investors (FIIs) has been very rapid and when demand rises rapidly and supply cannot keep pace (large IPO's that add new floating stock are not common) the price of any product will increase. As value investors, we have been holding larger amount of cash for the clients of Quantum Advisors (the "Sponsor" of Quantum AMC). So, in some sense, we are not that confident of finding stocks that are attractively priced, in our opinion, at these Index levels. But we may be wrong and the Index may remain here or go higher - but as of now we cannot find a lot of value, we need to wait patiently. And we translate this patience by having a judicious mix of stocks and cash.

    People who expect to see a repeat of this recent 3-year impressive gain in the BSE-30 Index over the near term will be sorely disappointed, in my opinion.

    As always, an honest disclosure: If you prefer investing for the long-term and are not looking to make short term capital gains, then the Quantum Long-Term Equity Fund, given its longer term investment horizon, is probably an investment you should consider.

    Over the years, I have been touched by your support and affection for Personalfn and Equitymaster and I sleep well every night knowing that you are being given informed and honest advice. I hope that you will carry on this faith you have in companies that I am associated with and make an investment in the Quantum Long Term Equity Fund.

    I look forward to your support.

    With regards,
    Ajit Dayal
    Ajit@QASL.com
    Chairman, Quantum Information Services Limited
    Director, Quantum Asset Management Company Private Limited
    CEO & CIO, Quantum Advisors Private Limited.

    Scheme Features, Statuatory Details and Risk Factors Investment Objective: The scheme's investment objective is to achieve long-term capital appreciation. Asset Allocation: The scheme will primarily invest in Equity and Equity related securities, but may invest in money market instruments to meet liquidity needs. Terms of Issue: The scheme is an open-ended Equity Scheme offering Growth and Dividend Plans. The units are available at face value of Rs. 10/- during the New Fund Offer(NFO) and after the NFO can be subscribed /redeemed at the applicable NAV, subject to applicable load, on all business days during the continuous offer. Entry Load: Nil. Exit Load: On redemption/switchout within 6 months of allotment-4%, after 6 months but within 12 months -3%, after 12 months but within 18 months - 2%, after 18 months but within 24 months - 1%, after 24 months -Nil Statutory Details: Quantum Mutual Fund (the Fund) has been constituted as a Trust under the Indian Trusts Act, 1882. Sponsors: Quantum Advisors Private Limited. (liability of Sponsor limited to Rs. 1,00,000/-) Trustee: Quantum Trustee Company Private Limited. Investment Manager: Quantum Asset Management Company Private Limited (AMC). The Sponsor, Trustee and the Investment Manager are incorporated under the Companies Act, 1956. Risk Factors: Investments in mutual funds are subject to market risks including uncertainity of dividend distributions and the NAV of the schemes may go up or down depending upon the factors and forces affecting the securities markets and there is no assurance or guarantee that the objectives of the scheme will be achieved. The past performance of the Sponsor has no bearing on the expected performance of the scheme. Quantum Long Term Equity Fund is the name of the scheme and does not in any manner indicate either the quality of the Scheme, its future prospects or returns. Scheme specific risk: The scheme is the first equity scheme being launched by the AMC. The AMC has no previous experience in managing equity schemes. Equity and Equity-related instruments are by nature volatile and prone to price fluctuations due to both macro and micro factors. Trading volumes, settlement periods, transfer procedures and investments in unlisted securities may restrict liquidity of these investments. Please read the Offer Document before investing. Offer Document/Key Information Memorandum/Application Form available at the Quantum AMC Office at 107, Regent Chambers, Nariman Point, Mumbai-400021.

     

     

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