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Gram
THE IFA’s

Wealth

LA TRIBUNE MENSUELLE
DES MEMBRES DU GSCGI
wealthgram@gscgi.ch
www.gscgi.ch

Vol. II

N°23 - Decembre 2013

QUANTITATIVE FINANCE
INVEST IN MATHEMATICS

Groupement Suisse des Conseils en Gestion Indépendants • www.gscgi.ch
Gram
THE IFA’s

Wealth
	

LA TRIBUNE MENSUELLE DES MEMBRES DU GSCGI
wealthgram@gscgi.ch • www.gscgi.ch
Vol. II - N° 23 - Decembre 2013

2

SOMMAIRE

3

	
	
Editorial 				
	

La supervision prudentielle ... dans un système de co-régulation
Pierre Christodoulidis, Président d’Honneur du GSCGI

4-5
	

	
Sponsor de Décembre 2013		

Quantitative Finance: Invest in Mathematics
Meliora Capital SA, Membre du GSCGI

6-7
	

Les Membres du GSCGI 		
	

FECIF’s Chairman of the Board, Vincent J. Derudder, informs...

8-9
	

	
	
Placements & Techniques de Gestion	 Earning alpha at a passive cost!
	
Sourajit Aiyer, Mumbai, India

	

	

	

10-11
	

	
Juristes & Fiscalistes			
	

Le nouveau tournant de la place financière suisse... –
Conférence Academy & Finance, article de Cosima F. Barone

12-13
	

	
L’Avis de l’Analyste			
	

UNITY: The Free Will of the Egyptian People
Ron William, Director of SAMT, Geneva Chapter
various ...by Bern eXchange, Pierre Christodoulidis and Cosima F. Barone		

	

	
In Globo				
	
	
La Réunion Mensuelle du GSCGI	
	
	

	 18

Book Review

14-15
	
16-17
	

	

19

	
Clin d’Oeil à l’Histoire
	
Calendrier Réunions Mensuelles 	
La Parole est à Vous
	

20
	

	
Sponsor de Décembre 2013 		

	

	

	
	

	

Nov. 8/Geneva: The end of Quantitative Easing...
Eurofin Capital SA, article by Cosima F. Barone
Crise Financière. Pourquoi les gouvernments ne font rien
de Jean-Michel Naulot
A 1987-type meltdown in the spring/2014 horizon?
Cosima F. Barone - FINARC SA
MELIORA CAPITAL SA – www.melioracapital.ch

	

Editeur: G S C G I
Secrétariat Général:
3, Rue du Vieux-Collège
Case Postale 3255
CH - 1211 Genève 3
Tél. +41 (0) 22 317 11 22
secretariat@gscgi.ch

Zürich: sekretariat@svuf.ch
c/o Findling Grey AG - Tél. +41 (0) 43 819 4243
Bimenzältenstrasse 32 / Postfach 2255
CH - 8060 Zürich-Flughafen
Lugano: segreteria@gscgi.ch
c/o Camplani & Partners SA - Tél. +41 (0) 91 921 1414
Viale S. Franscini 16, CH - 6900 Lugano

Advisory Committee Director,
Maquette & Réalisation:
Cosima F. Barone
www.finarc.ch
c.barone@finarc.ch

Groupement Suisse des Conseils en Gestion Indépendants • www.gscgi.ch
Gram Gram
THE IFA’s

Wealth

LA TRIBUNE MENSUELLE DES MEMBRES DU GSCGI
wealthgram@gscgi.ch • www.gscgi.ch
	
Vol. II - N° 23 - Decembre 2013

1

PLACEMENTS & TECHNIQUES DE GESTION

Earning alpha at a passive cost!

An experiment in an emerging and a developed market (Canada
and India). Developing a concentrated portfolio idea on
a ‘Consistent Dividend Consistent Fundamentals’ (CDCF)

theme to outperform the benchmarks during volatile equity
environment…

Article’s Flow
We start with (1) Introduction of the portfolio idea (to discuss
the central idea, validation methods conducted, for whom is
it relevant and idea’s conception/history). (2) Key Motives
behind this idea. (3) What is the CDCF theme. (4) Screening
methodology and Assumptions of the stock screening process.
We have used 2 validation methods for testing. (5) Conduct
NAV Back-testing and Scrip-Unit calculation as per 1st method
for initial validation, using the latest fiscal as base year. (6) Also
test it as per 2nd method for additional validation to check
whether the idea would actually have run over a period of time,
using a historic base year and churning the portfolio annually
up till the recent fiscal year. (7) Compare Results Achieved
for India/Canada from NAV back-testing to see whether our
portfolio actually delivers. We conclude with (8) Rationale - 8
USPs of this theme and (9) Risk Factors involved.

1. Introduction of the portfolio proposal
Equity investment exposure has long debated between aspects
like concentrated portfolios, diversified approach, beta, alpha,
fundamental or technical patterns to base decisions. Depending
on the market environment and investor’s risk-return appetite,
all approaches have their importance. But market factors are
ever-changing and impact companies’ financials and price trends,
more so during periods of volatility. During volatility, the high
fees paid for active management often eats into the potential
returns to the investor, posing a question on the rationale for
active management in the first place.
This experiment assimilates some of these concepts into a
concentrated portfolio idea based on a ‘Consistent Dividend
Consistent Fundamentals’ (CDCF) theme to see if it can
outperform benchmark indices during volatile equity environment,
without the need for high-level active management or the high
fee that it demands. In short, it attempts to earn alpha at a
comparatively lower cost of a passive product. This ‘Consistent
Dividend Consistent Fundamentals’ (CDCF) theme is based on
‘tracking the consistency in fundamental performance’. It uses

this consistency in financial and dividend performance of stocks
to develop criteria for a screening methodology which can beat
benchmark indices in volatile times, and thus become a lowcost substitute for what active managers would otherwise do to
generate alpha – research on individual companies by charging
a high cost.
The intention is to test whether a portfolio can generate only
alpha by paying that high cost for active managers, or whether a
portfolio can still earn alpha at a cost which is largely comparable
to passive products - by devising a screening criteria which is
defined and replicable, which aims to identify quality companies
whose price trends reflect the consistency in their fundamental
performance. Secondly, if this portfolio idea were to be converted
into a product, then this theme might be relevant to create a
differentiation in an otherwise crowded fund market. With
numerous funds in the market vying for investor dollars, why
would there be an interest for yet another product? In short, the
opportunity to gain alpha without paying the commensurate
high fee for active management through this ‘CDCF’ theme
might appeal to investors and readers alike.
Validation of the theme — 2 validation methods are used for the
screening/back-testing process. For initial validation, we test
using the latest fiscal year as base year - FY2013 for India and
CY2012 for Canada. For additional validation, the theme is
tested over a period of time to see if it would work had it been
operational. We assume the portfolio was incepted in FY2011/
CY2010 for India and Canada resp. (For India, FY2011 is the
initial base year and FY2012 and FY2013 are subsequent base
years after portfolio churning is done annually). Our idea uses
a developed and an emerging market (Toronto and Mumbai
exchanges) to test it across geographies.
For whom will it work and not work — This idea might be
a relevant for risk-averse investors who prefer dividend stocks
rather than growth stocks in volatile times, but still like to go for
alpha at minimal cost. It might be relevant for those willing to
invest in a theme that seeks alpha without undertaking research
into each stock separately (just for a satellite position in coresatellite portfolios), and for those unwilling to pay high fee for
active managers, hence prefer passive products. This idea might
not be relevant for risk-averse investors who do not want any
risk of downside that can come with an alpha objective. It may
not work for those who seek exposure into only large-cap stocks

Groupement Suisse des Conseils en Gestion Indépendants • www.gscgi.ch
Gram Gram
THE IFA’s

Wealth

LA TRIBUNE MENSUELLE DES MEMBRES DU GSCGI
wealthgram@gscgi.ch • www.gscgi.ch
	
Vol. II - N° 23 - Decembre 2013

2

PLACEMENTS & TECHNIQUES DE GESTION

Earning alpha at a passive cost!

of certain sectors, because this criteria includes the larger midcaps as well and is sector-agnostic in nature.

stocks. The screening criteria tracks consistent performers to
identify quality stocks.

Do investors need an AMC/institution to get this portfolio, or can
they do it themselves since it is really built on a screening model —
One needs an institution’s help since the free screening models
available for investors does not cover the extensive number of
data metrics and criteria used here. Financials of companies
of the entire stock exchange universe are not so easily/freely
available either.

Without much need for active management, it can be a low-fee/lowcost option – hence ‘alpha approach at a passive cost’ — High fees
of active managers are pinching investors in volatile markets, a
reason why passive products have risen in popularity now. The
CDCF theme attempts to show alpha might be possible without
paying the commensurate high fee that active managers demand.
Since it does not require a critical level of active management, it
can entail a low fee, which is comparable to passive products

Conception/history of the idea — The initial thought was
provoked by Raamdeo Agrawal, Joint MD of Motilal Oswal
Financial Services, in his 2011 Annual Wealth Creation Study
where he stressed the importance of investing in dividend stocks.
I thought on further aspects that might appeal to investors over
and above dividends, and what might create a differentiation for
investors if this portfolio were actually a fund product. I worked
on the idea of using consistency in financial performance as a
substitute for active managers, which might be a lower-cost
alternative and help create investor appeal. I made my own
criteria for consistency in dividend/financial performance. This
article is Version 2 of this theme. Version 1 was made for India
initially in 2012 and published in IFA’s Wealthgram magazine
of Switzerland in August 2013. In Version 2, I have made
several changes in the screening criteria, hence the difference
in shortlisted stocks. I believe Version 2 has much betterquality companies than Version 1 since the criteria is now more
stringent, hence it is a better criteria for the CDCF theme. In
Version 2, I have included the Canadian case as well, in order to
compare the theme across markets.
Why can this idea fail? — It is based on a specific theme and its
screening criteria are based on this. The theme will run as long
as the economic conditions supporting this theme exist - a risk
with all thematic products. (Further risks are detailed in Risks
section).

2. Key motives behind developing this portfolio theme/
idea
To bring in the term ‘consistent’ into portfolio approaches as
a substitute for high-cost active management — The term
‘consistent’ has a certain reassuring tone, especially in volatile
markets. Stock-screening methodology developed for this
experiment assumes stringent criteria based on the consistency in
fundamental and dividend performance. This acts as a potential
substitute for active managers’ work, i.e. research on individual

Screening criteria is defined and is easily replicable, hence
‘modified-variant of active’ — The screening criteria are defined
and replicable for each period of portfolio churning. This is
evidenced by the 2 validation methods when the portfolio was
tested as of recent fiscal and when tested over a period of time.
This screening methodology aims to substitute high-caliber
active management to identify stock picks, hence can be really
described as ‘modified-variant of active’
Identifies quality stocks to gain upside from dividends and capital
appreciation and beat benchmarks, at similar levels of risk —
Generating alpha is tough in volatile times. Passive approach
also has a flipside, as benchmarks can be range-bound, not
trend-bound. The CDCF screening criteria aims to identify
good-quality companies which have demonstrated consistent
performance in their fundamentals which would be reflective in
its price trends, and thus gain from opportunities from dividend
and capital appreciation
Concentrated nature of the portfolio enhances potential for upside,
given screening is tracking quality stocks — While diversification
is advisable, stressed markets often negate upside opportunities
as other stocks dip. Concentrated quality stocks can achieve
upside...
Helps create product differentiation in an otherwise crowded fund
product market — The fund universe is full of ‘me-too’ products,
which are duplicative. The attempt is to create a differentiation
which managers can use while pitching to clients, were this a
product.

3. What is the “CDCF” theme
What are the aspects that can be ‘consistent’ in stocks which can
enable substituting in-depth research with our screening criteria?
Despite the headwinds, some management teams have delivered

Groupement Suisse des Conseils en Gestion Indépendants • www.gscgi.ch
Gram Gram
THE IFA’s

Wealth

LA TRIBUNE MENSUELLE DES MEMBRES DU GSCGI
wealthgram@gscgi.ch • www.gscgi.ch
	
Vol. II - N° 23 - Decembre 2013

3

PLACEMENTS & TECHNIQUES DE GESTION

Earning alpha at a passive cost!

‘consistent’ growth in their financial metrics despite challenging
environments. They have grown their topline and bottomline
consistently and maintained ‘consistency’ in profit margins
earned. Secondly, volatile price trends may not always reward
shareholders by capital appreciation as investors may not always
liquidate at opportune times, missing opportunities to book
gains. But some stocks have paid out dividends ‘consistently’
to reward shareholders. Lastly, stocks with low leverage have
further headroom for expansion, if needed, to enhance growth
and maintain its ‘consistent’ fundamental track record. These
aspects are used to develop on the ‘consistent’ theme of the
screening criteria of our CDCF theme. Thus, this ‘Consistent
Dividend Consistent Fundamental’ portfolio idea is based on
the premise of investing in a concentrated portfolio of consistent
dividend paying stocks which achieved consistency in their
fundamental performance at low leverage in recent years. It
believes this can be a low-cost substitute for active managers
in volatile times when paying higher fund cost pinches. The
screening criteria seeks to identify good quality companies
who took good management decisions, without the need for
researching into each stock separately. It screens the universe
of listed Indian scrips from the Bombay Stock Exchange and
the universe of listed Canadian scrips from the Toronto Stock
Exchange for testing in Indian and Canadian contexts.

4. Stock screening methodology and assumptions used
The screening methodology seeks stocks which have delivered
growth over the past 3 rolling fiscal years in Revenues,
EBITDA, PAT; maintained consistency in Profit Margins;
have low Debt Equity ratios; and rewarded shareholders with
consistent Dividends. Month of fiscal year-end of companies
differ. Hence, all companies with year-end within a particular
fiscal year (FY) period are clubbed within that FY itself (Fiscal
Year is assumed to be Apr to Mar for India and on calendar year ‘CY’
basis for Canada).
• Annual financial data of the companies is taken till CY2012
for Canada and till FY2013 for India, since these are the latest
fiscal for which financials are available. The underlyings’ data
will remain as such till the next fiscal year’s financials are
available. That is when underlyings will change and portfolio
churn will happen. Databases used were Capitaline for India
and Bloomberg for Canada.
• Data is taken for screening purposes for last 3 rolling fiscal
years, i.e. if the base year is FY2013 in India, then we used

annual financial data from FY2011 onwards. If the base year
is CY2012 in Canada, then we used annual data from CY2010
onwards.
• Scrips with market cap of more than INR 1000 crores as of
Mar 2013/Jun 2013 (1 crore = 10 million or 100 crore = 1 billion)
for India and CAD 800 million as of Dec 2012/Jun 2013 for
Canada. This might be on the lower side, however it is still
within the acceptable limits of the mid/small-cap universe.
Market cap of some holdings of prominent small-cap funds are
at even lower levels.
• We select stocks which showed revenue growth in the last 3
rolling years of over the average inflation rate (in last 1, 2, 3
year CAGRs). We use inflation as the threshold for growth in
topline on the assumption that it may reflect, or at least give some
indication, of the growth of its actual business volumes within
its revenues. The reasoning is it might have been able to pass on
most of the effects of inflation from its suppliers on to its buyers,
in effect increasing revenues commensurately. Actual volume
is a truer indicator of fundamental growth of the company’s
inherent business, rather than just the price effect. Hence, the
screening methodology tracks those which achieved growth
over and above the average inflation. A critic may debate that
a company could have increased its prices higher than inflation
or many quality companies might not have been able to pass it
on fully to buyers, hence this assumption may not mean volume
growth always. While this argument might be true, we assume
such instances might be very few in number.
• This growth rate/inflation assumption is repeated for tracking the
consistency in growth in operating profits and net profits as well.
• The stress here is on profit margins, since profitability is a key
metric stressed on. Assuming profits to have grown at similar
rates to the top line, we believe that the company has successfully
achieved consistent margins during the previous 3 fiscals. Basic
threshold level for profitability for companies which achieved
profit margins of at least 10% in each of the previous 3 fiscals.
• We target dividend payout of over 20% and dividend yield of
over 1% consistently in each of the last 3 FYs. 1% yield seems
low, but Indian companies do not really have any clear dividend
policy and dividend payouts are very low. The average dividend
payout in India is comparatively lower. Though, our yardstick
selects the above-average ones, we have had to assume a lower
threshold for dividends. However, the stress here is really on the

Groupement Suisse des Conseils en Gestion Indépendants • www.gscgi.ch
Gram Gram
THE IFA’s

Wealth

LA TRIBUNE MENSUELLE DES MEMBRES DU GSCGI
wealthgram@gscgi.ch • www.gscgi.ch
	
Vol. II - N° 23 - Decembre 2013

4

PLACEMENTS & TECHNIQUES DE GESTION

Earning alpha at a passive cost!

consistency of paying dividends, rather than absolute threshold.
• We target debt:equity ratio of less than 2x, which allows them
headroom to raise future capitalization in case that is required
for enhancing top line growth and thus, maintain their overall
growth track record going forward.
• ROE (return on equity) track record consistently of at least
10% in recent years.

5. Scrip units and NAV back testing calculated for India/
Canada for intitial valuation (*Using FY2013 as base year for India

and CY2012 for Canada)
Weights and scrip units are calculated on a quarterly basis to
conduct NAV back-testing on every quarter-end from Dec
2008 onwards.
• Post stock-screening, weights are assigned as per equal-weight
method. The experiment is based on the consistency of their
performance, rather than their size. The basis for choosing
equal-weight rather than free-float weight is to give each of
these stocks equal chance to boost the overall NAV. Some of
the smaller underlyings might have performed just as well as
larger companies. Even using free-float weights would have
required a natural upper limit of upto its equal-weight since the

number of stocks in this concentrated basket is less. Hence,
even free-float weights would have ultimately ended very close
to equal-weights only.
• We start the back-testing phase from Dec 2008 onwards using
the Starting NAV as 100.
• Scrip units as of any quarter-end are rebalanced based on the
weights as of that quarter-end, current prices of the underlyings
and the NAV that was calculated for that quarter-end. This
NAV was calculated based on scrip units rebalanced as of the
previous quarter-end. Following the rebalancing of the scrip
units as of the current quarter-end, it will be factored with next
quarter-end’s prices to calculate next quarter-end’s NAV. Scrip
units and NAV calculations are based assuming 1 unit of the
portfolio basket (hence the scrip units per individual underlying
might be in Sub-1 decimal levels).
• These NAVs calculated are the ‘Price-based NAVs’ as they are
based only on price factor. Adding dividends to this gives us
Gross NAV.
• All dividends paid on the scrips are assumed to be done in
final quarter only (Mar for India and Dec for Canada), hence the
impact of dividends received will be seen in last quarter’s NAV
only (relevant only for QoQ NAVs).

Groupement Suisse des Conseils en Gestion Indépendants • www.gscgi.ch
Gram Gram
THE IFA’s

Wealth

LA TRIBUNE MENSUELLE DES MEMBRES DU GSCGI
wealthgram@gscgi.ch • www.gscgi.ch
	
Vol. II - N° 23 - Decembre 2013

5

PLACEMENTS & TECHNIQUES DE GESTION

Earning alpha at a passive cost!

• Price-based NAVs are used to compare to normal values of
indices, not Total Return values, since we are assuming in this
experiment that dividends are distributed off and not retained to
purchase further units. Price-based NAV of Canadian CDCF
basket is compared to normal values of TSX indices. Price NAV
of Indian CDCF basket is compared with price-based values of
NSE indices.
• We have also included ‘Equal-Weighted Indices’ of TSX and
NSE in our comparison in line with our method of using equalweights in scrip-unit calculation, apart from large-cap, small-

cap and composites. (*That is why we used NSE indices in India,
not BSE indices).

6. Scrip units and NAV back testing for additional valuation, to test the theme over a period of time had it been
an operating portfolio ((*Using FY2011/CY2010 as initial base years
for India/Canada, and subsequently using FY2012/CY2011 and FY2013/
CY2012 as base years after portfolio churning is done annually)
• Methodology for screening, scrip units and NAV back-testing
remains same as seen in the earlier section.

Groupement Suisse des Conseils en Gestion Indépendants • www.gscgi.ch
Gram Gram
THE IFA’s

Wealth

LA TRIBUNE MENSUELLE DES MEMBRES DU GSCGI
wealthgram@gscgi.ch • www.gscgi.ch
	
Vol. II - N° 23 - Decembre 2013

6

PLACEMENTS & TECHNIQUES DE GESTION

Earning alpha at a passive cost!
• What changes is the initial base year used and rolling years for
back-testing. Two validation methods are used for the screening/back-testing process. For initial validation in the previous
section, we had used FY2013 as base year for India and CY2012
for Canada. In this section, the theme is now tested over a period of time for additional validation, to see if it would actually
work over a longer period of time had it already been an operational portfolio
• For India’s case, we assume the portfolio was incepted in
FY2011. Thus, we start with FY2011 as the initial base year
and screen financial data for previous 3 rolling years, i.e. from
FY2008 onwards. Thereafter, we use FY2012 and FY2013 as
subsequent base years once portfolio churning is done each year
using the new set of annual financial data (Methodology section churning as per annual financial data). Underlyings change during each churn to comprise those which meet the criteria as of
that specific base year. We test with this new set of underlyings
for the 3 rolling years accordingly.
• As per India’s chart, 20 stocks were selected when the portfolio was incepted in FY2011 (Dabur to Sun TV Network). In
FY2012, only 10 companies were retained (Dabur to Engineers)
and also 5 new were added (HCL to Oil India). In FY2013,
only 5 were retained from the original FY2011 basket (Dabur to
eClerx). Also, 6 new were added (Crisil to Torrent) for FY2013.
• For Canada’s case, we assume the portfolio was incepted in
CY2010. So, CY2010 is the initial base year and screens data
from CY2007 onwards. Subsequently, CY2011 and CY2012
are used as base years once portfolio churn is effected with the
new set of annual financial data.
• As per Canada’s chart, 4 stocks were selected when the portfolio was incepted in CY2010 (Morguard to RioCan). In CY2011,
4 new stocks came in the list and none retained from CY2010
(Allied to Canadian Nat Railway). In CY2012, a total of 9 stocks
were shortlisted. This included all the 4 stocks from CY2011,
1 from CY2010 (Morguard), as well as 4 new stocks (Canadian
Utilities to BCE).
• Interesting observation here – The number of shortlisted
stocks is reducing each year in India while it is increasing in
Canada. This is because the stringent screening criteria are kept
fixed across all base years, while the actual economic/corporate
performance might have varied year on year.

In India, the corporate earnings environment has seen severe
stress over the last year owing to macro and policy challenges,
which is evident from the sluggish earnings growth the Indian
markets have seen since 2012. Canada, as with many Western countries, is actually getting back on the track of economic
recovery since the last year. Hence, corporate performance is
reflecting that. This might be why we have seen the number
of shortlisted companies reduce in India in the last one year
as stress grips the markets, while a move towards recovery in
Canada in the last one year has led to more companies making
the bar.
It just goes to show how few companies actually make the stringent criteria set in this experiment, which aims to use this criteria as a low-cost substitute for extensive research that active
managers otherwise do at a higher cost. Once, the macro and
policy environment improves and gets reflected in corporate
performance, more number of companies will get shortlisted in
India.
• An obvious argument here is - What is the worst-case scenario, if the screening during a portfolio churn period does not
yield any shortlisted companies? What does the CDCF portfolio do then? It does exactly what active fund managers do during such phases when they do not find good-quality, opportune
stocks to invest in. (1) They either HOLD on to their existing
portfolio since that is the next best alternative available, or (2)
They relax their stringency criteria a bit in terms of the quality
bar if the overall market conditions indicate that. Either way, in
a worst-case scenario, the CDCF portfolio will retain its existing holdings since those were quality stocks nevertheless, or it
would relax the stringency of its criteria metrics, which is easily
doable in the system.

7. Comparing CDCF portoflio’s results with benchmarks
• Delivered outperformance in terms of annualized return for the
entire back-testing period (from Dec 2008 to Sep 2013) over each
of the indices taken in both the Indian and Canadian cases
• Delivered this outperformance at similar levels of volatility in
both India and Canada - CDCF’s annual standard deviation for
the period is similar to large-cap index in both countries, while
it is lower than the midcap/small cap and composite indices
• On a YoY annual basis (FY14YTD, FY13, FY12, FY11 and

Groupement Suisse des Conseils en Gestion Indépendants • www.gscgi.ch
Gram Gram
THE IFA’s

Wealth

LA TRIBUNE MENSUELLE DES MEMBRES DU GSCGI
wealthgram@gscgi.ch • www.gscgi.ch
	
Vol. II - N° 23 - Decembre 2013

7

PLACEMENTS & TECHNIQUES DE GESTION

Earning alpha at a passive cost!

Groupement Suisse des Conseils en Gestion Indépendants • www.gscgi.ch
Gram Gram
THE IFA’s

Wealth

LA TRIBUNE MENSUELLE DES MEMBRES DU GSCGI
wealthgram@gscgi.ch • www.gscgi.ch
	
Vol. II - N° 23 - Decembre 2013

8

PLACEMENTS & TECHNIQUES DE GESTION

Earning alpha at a passive cost!
FY10 for India and CY13YTD, CY12, CY11, CY10, CY09 for
Canada), it delivered positive excess returns in each of the
annual periods in both India and Canada, with the only a few
exceptions seen in the initial years (During FY10 in India against
midcap and equal weighted indices, and during CY10 in Canada
against smallcap and equal weighted indices. However, in Canada’s
case, CY09 saw negative excess returns against all the indices)
• Sharpe ratio has been higher in the CDCF basket for both
India and Canada, as compared to each of the indices used
• Delivered significant Alpha over all the benchmark indices
used based on annualized returns and beta for the entire backtesting period (from Dec 2008 to Sep 2013) in both India and
Canada

• Quarterly returns across the back-testing period shows the
CDCF basket has delivered positive excess returns in approx
70-80% of the quarters against each of the indices in India. The
same observation was about 60-70% of the quarters in Canada
• The Indian basket has also performed better as compared
to some of the Dividend Yield Mutual Funds (*shown in
Appendix)

8. Rationale behind the CDCF idea - 8 USPs
— ‘Consistency’ theme is USP 1 – to use the ‘consistency in
performance’ as a substitute for high-cost active management.
With a stringent screening criteria based on consistency in
fundamental and dividend performance, the shortlisted stocks

Groupement Suisse des Conseils en Gestion Indépendants • www.gscgi.ch
Gram Gram
THE IFA’s

Wealth

LA TRIBUNE MENSUELLE DES MEMBRES DU GSCGI
wealthgram@gscgi.ch • www.gscgi.ch
	
Vol. II - N° 23 - Decembre 2013

9

PLACEMENTS & TECHNIQUES DE GESTION

Earning alpha at a passive cost!

Groupement Suisse des Conseils en Gestion Indépendants • www.gscgi.ch
Gram Gram
THE IFA’s

Wealth

LA TRIBUNE MENSUELLE DES MEMBRES DU GSCGI
wealthgram@gscgi.ch • www.gscgi.ch
	
Vol. II - N° 23 - Decembre 2013

10

PLACEMENTS & TECHNIQUES DE GESTION

Earning alpha at a passive cost!

are good-quality which have shown ‘shareholder friendly results’.
This acts as a substitute for active managers’ high-cost research
on individual stocks
— Low-fee/low-cost option if it were a fund – USP 2. The
screening methodology attempts to show earning alpha might
be possible without critical active management and paying
the commensurate high fee that active managers demand for
researching into each stock separately. The consistency criteria
in performance is expected to substitute for that research activity,
hence this basket can be maintained at a lower fee which is
comparable to passive ETFs – hence, an alpha approach at a
passive cost
— Screening criteria are defined and replicable for each period
of portfolio churning – USP 3. Criteria are replicable for each
period of portfolio churn and don’t need high-caliber active
management, hence ‘modified-variant of active’. This is seen in
the 2 validation methods when the portfolio was tested as of
recent fiscal and when tested over a period of time
— Attempts to deliver ‘better returns than benchmarks’ via
dividend and appreciation – its USP 4. Screening criteria
identifies quality stocks that have a consistent performance
record which would be reflective in its price trend. It gives scope
to gain from capital appreciation, as well as dividends (ideally
a safer option in volatile markets). Passive approach might not
always work in volatile markets if it is range-bound. Dividends
help to largely recover the initial investment, and appreciation is
the additional upside
— Concentrated nature enhances potential for upside, given
the screening methodology is tracking quality stocks – USP
5. Markets in stress might not always benefit excessive
diversification it it often negates upside opportunities as other
stocks dip. Concentration of quality stocks can help achieve
this upside. Tracking quality stocks brings the stock-specific
story into play
— Better sharpe ratio is its USP 6. It delivers better annualized
returns than benchmarks at similar levels of standard deviation
as compared to benchmarks. Hence, chasing alpha need not
mean incurring a higher degree of risk
— The theme can be relevant across geographies – USP 7.
India and Canada are different in terms of development and
maturity

— Useful for ‘Core-Satellite’ allocation or to create Product
Differentiation if this was a fund product – USP 8. This might
be relevant for ‘modified-active’ satellite strategies supporting
the beta-chasing passive Core. Also, the theme can help create
some differentiation while pitching to investors were this a fund
product, in an otherwise crowded fund product market.

9. Risk factors of the CDCF idea
• Screening criteria is based on a specific theme and will run
as long as economic and market conditions supports this basic
theme
• Timely data collection is an issue, since there would be a lag
when financials are made public as compared to fiscal year enddate
• Screening criteria loses out on high dividend-yield companies
whose recent financial performance may have taken a beating
• Sector exposure within the portfolio is often skewed towards
few sectors instead of spread over across many sectors
• Portfolio churning is done only once a year given the usage of
annual data, hence impact cost may need to be factored in
• Updating financials on an annual basis may ignore shifts in
financial performance that may be visible if done on a quarterly
basis
• Does not factor in valuation multiples of the underlyings
• Does not study the macro level factors impacting the economy,
sectors and companies the way active managers would do

10. Conclusion
Every investment faces a challenge in delivering consistent outperformance, more so when the inherent market volatility makes
it a struggle to beat inflation – touted as investors’ biggest enemy
by leading market gurus. The premise behind this concentrated
portfolio based on the CDCF theme was to highlight
that it can outperform benchmark indices during volatile
equity environment, without the need for high-level active
management or high fee, and thus become a low-cost substitute
for what active managers would otherwise do to generate alpha

Groupement Suisse des Conseils en Gestion Indépendants • www.gscgi.ch
Gram Gram
THE IFA’s

Wealth

LA TRIBUNE MENSUELLE DES MEMBRES DU GSCGI
wealthgram@gscgi.ch • www.gscgi.ch
	
Vol. II - N° 23 - Decembre 2013

11

PLACEMENTS & TECHNIQUES DE GESTION

Earning alpha at a passive cost!

– research on individual companies by charging a high cost.
The screening criterion devised is defined and replicable, which
aims to identify quality companies by ‘tracking the consistency
in fundamental and dividend performance’. In short, to show
that such a theme based can yet throw up opportunities for
out-performance in the current volatile world of equities, at a

comparatively lower cost of a passive product. The opportunity
to gain alpha without paying the commensurate high fee for
active management through this ‘CDCF’ theme might appeal
to investors and readers alike.

Sourajit AIYER

sourajitaiyer@gmail.com

Acknowledgement:
The author would like to thank Mr Vivek Sinha for his insights on the scrip-unit construction
methodology.

This is a project made in personal capacity.
Views and ideas expressed are author’s own and are not to be taken to represent those of the company.
This article is purely an academic exercise only.
Any action taken by you is your responsibility alone.

Groupement Suisse des Conseils en Gestion Indépendants • www.gscgi.ch
Gram Gram
THE IFA’s

Wealth

LA TRIBUNE MENSUELLE DES MEMBRES DU GSCGI
wealthgram@gscgi.ch • www.gscgi.ch
	
Vol. II - N° 23 - Decembre 2013

12

PLACEMENTS & TECHNIQUES DE GESTION

Earning alpha at a passive cost!
...appendix tables...

Groupement Suisse des Conseils en Gestion Indépendants • www.gscgi.ch
Gram Gram
THE IFA’s

Wealth

LA TRIBUNE MENSUELLE DES MEMBRES DU GSCGI
wealthgram@gscgi.ch • www.gscgi.ch
	
Vol. II - N° 23 - Decembre 2013

13

PLACEMENTS & TECHNIQUES DE GESTION

Earning alpha at a passive cost!
...appendix tables...

Groupement Suisse des Conseils en Gestion Indépendants • www.gscgi.ch
Gram Gram
THE IFA’s

Wealth

LA TRIBUNE MENSUELLE DES MEMBRES DU GSCGI
wealthgram@gscgi.ch • www.gscgi.ch
	
Vol. II - N° 23 - Decembre 2013

14

PLACEMENTS & TECHNIQUES DE GESTION

Earning alpha at a passive cost!
...appendix tables...

Groupement Suisse des Conseils en Gestion Indépendants • www.gscgi.ch

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  • 1. Gram THE IFA’s Wealth LA TRIBUNE MENSUELLE DES MEMBRES DU GSCGI wealthgram@gscgi.ch www.gscgi.ch Vol. II N°23 - Decembre 2013 QUANTITATIVE FINANCE INVEST IN MATHEMATICS Groupement Suisse des Conseils en Gestion Indépendants • www.gscgi.ch
  • 2. Gram THE IFA’s Wealth LA TRIBUNE MENSUELLE DES MEMBRES DU GSCGI wealthgram@gscgi.ch • www.gscgi.ch Vol. II - N° 23 - Decembre 2013 2 SOMMAIRE 3 Editorial La supervision prudentielle ... dans un système de co-régulation Pierre Christodoulidis, Président d’Honneur du GSCGI 4-5 Sponsor de Décembre 2013 Quantitative Finance: Invest in Mathematics Meliora Capital SA, Membre du GSCGI 6-7 Les Membres du GSCGI FECIF’s Chairman of the Board, Vincent J. Derudder, informs... 8-9 Placements & Techniques de Gestion Earning alpha at a passive cost! Sourajit Aiyer, Mumbai, India 10-11 Juristes & Fiscalistes Le nouveau tournant de la place financière suisse... – Conférence Academy & Finance, article de Cosima F. Barone 12-13 L’Avis de l’Analyste UNITY: The Free Will of the Egyptian People Ron William, Director of SAMT, Geneva Chapter various ...by Bern eXchange, Pierre Christodoulidis and Cosima F. Barone In Globo La Réunion Mensuelle du GSCGI 18 Book Review 14-15 16-17 19 Clin d’Oeil à l’Histoire Calendrier Réunions Mensuelles La Parole est à Vous 20 Sponsor de Décembre 2013 Nov. 8/Geneva: The end of Quantitative Easing... Eurofin Capital SA, article by Cosima F. Barone Crise Financière. Pourquoi les gouvernments ne font rien de Jean-Michel Naulot A 1987-type meltdown in the spring/2014 horizon? Cosima F. Barone - FINARC SA MELIORA CAPITAL SA – www.melioracapital.ch Editeur: G S C G I Secrétariat Général: 3, Rue du Vieux-Collège Case Postale 3255 CH - 1211 Genève 3 Tél. +41 (0) 22 317 11 22 secretariat@gscgi.ch Zürich: sekretariat@svuf.ch c/o Findling Grey AG - Tél. +41 (0) 43 819 4243 Bimenzältenstrasse 32 / Postfach 2255 CH - 8060 Zürich-Flughafen Lugano: segreteria@gscgi.ch c/o Camplani & Partners SA - Tél. +41 (0) 91 921 1414 Viale S. Franscini 16, CH - 6900 Lugano Advisory Committee Director, Maquette & Réalisation: Cosima F. Barone www.finarc.ch c.barone@finarc.ch Groupement Suisse des Conseils en Gestion Indépendants • www.gscgi.ch
  • 3. Gram Gram THE IFA’s Wealth LA TRIBUNE MENSUELLE DES MEMBRES DU GSCGI wealthgram@gscgi.ch • www.gscgi.ch Vol. II - N° 23 - Decembre 2013 1 PLACEMENTS & TECHNIQUES DE GESTION Earning alpha at a passive cost! An experiment in an emerging and a developed market (Canada and India). Developing a concentrated portfolio idea on a ‘Consistent Dividend Consistent Fundamentals’ (CDCF) theme to outperform the benchmarks during volatile equity environment… Article’s Flow We start with (1) Introduction of the portfolio idea (to discuss the central idea, validation methods conducted, for whom is it relevant and idea’s conception/history). (2) Key Motives behind this idea. (3) What is the CDCF theme. (4) Screening methodology and Assumptions of the stock screening process. We have used 2 validation methods for testing. (5) Conduct NAV Back-testing and Scrip-Unit calculation as per 1st method for initial validation, using the latest fiscal as base year. (6) Also test it as per 2nd method for additional validation to check whether the idea would actually have run over a period of time, using a historic base year and churning the portfolio annually up till the recent fiscal year. (7) Compare Results Achieved for India/Canada from NAV back-testing to see whether our portfolio actually delivers. We conclude with (8) Rationale - 8 USPs of this theme and (9) Risk Factors involved. 1. Introduction of the portfolio proposal Equity investment exposure has long debated between aspects like concentrated portfolios, diversified approach, beta, alpha, fundamental or technical patterns to base decisions. Depending on the market environment and investor’s risk-return appetite, all approaches have their importance. But market factors are ever-changing and impact companies’ financials and price trends, more so during periods of volatility. During volatility, the high fees paid for active management often eats into the potential returns to the investor, posing a question on the rationale for active management in the first place. This experiment assimilates some of these concepts into a concentrated portfolio idea based on a ‘Consistent Dividend Consistent Fundamentals’ (CDCF) theme to see if it can outperform benchmark indices during volatile equity environment, without the need for high-level active management or the high fee that it demands. In short, it attempts to earn alpha at a comparatively lower cost of a passive product. This ‘Consistent Dividend Consistent Fundamentals’ (CDCF) theme is based on ‘tracking the consistency in fundamental performance’. It uses this consistency in financial and dividend performance of stocks to develop criteria for a screening methodology which can beat benchmark indices in volatile times, and thus become a lowcost substitute for what active managers would otherwise do to generate alpha – research on individual companies by charging a high cost. The intention is to test whether a portfolio can generate only alpha by paying that high cost for active managers, or whether a portfolio can still earn alpha at a cost which is largely comparable to passive products - by devising a screening criteria which is defined and replicable, which aims to identify quality companies whose price trends reflect the consistency in their fundamental performance. Secondly, if this portfolio idea were to be converted into a product, then this theme might be relevant to create a differentiation in an otherwise crowded fund market. With numerous funds in the market vying for investor dollars, why would there be an interest for yet another product? In short, the opportunity to gain alpha without paying the commensurate high fee for active management through this ‘CDCF’ theme might appeal to investors and readers alike. Validation of the theme — 2 validation methods are used for the screening/back-testing process. For initial validation, we test using the latest fiscal year as base year - FY2013 for India and CY2012 for Canada. For additional validation, the theme is tested over a period of time to see if it would work had it been operational. We assume the portfolio was incepted in FY2011/ CY2010 for India and Canada resp. (For India, FY2011 is the initial base year and FY2012 and FY2013 are subsequent base years after portfolio churning is done annually). Our idea uses a developed and an emerging market (Toronto and Mumbai exchanges) to test it across geographies. For whom will it work and not work — This idea might be a relevant for risk-averse investors who prefer dividend stocks rather than growth stocks in volatile times, but still like to go for alpha at minimal cost. It might be relevant for those willing to invest in a theme that seeks alpha without undertaking research into each stock separately (just for a satellite position in coresatellite portfolios), and for those unwilling to pay high fee for active managers, hence prefer passive products. This idea might not be relevant for risk-averse investors who do not want any risk of downside that can come with an alpha objective. It may not work for those who seek exposure into only large-cap stocks Groupement Suisse des Conseils en Gestion Indépendants • www.gscgi.ch
  • 4. Gram Gram THE IFA’s Wealth LA TRIBUNE MENSUELLE DES MEMBRES DU GSCGI wealthgram@gscgi.ch • www.gscgi.ch Vol. II - N° 23 - Decembre 2013 2 PLACEMENTS & TECHNIQUES DE GESTION Earning alpha at a passive cost! of certain sectors, because this criteria includes the larger midcaps as well and is sector-agnostic in nature. stocks. The screening criteria tracks consistent performers to identify quality stocks. Do investors need an AMC/institution to get this portfolio, or can they do it themselves since it is really built on a screening model — One needs an institution’s help since the free screening models available for investors does not cover the extensive number of data metrics and criteria used here. Financials of companies of the entire stock exchange universe are not so easily/freely available either. Without much need for active management, it can be a low-fee/lowcost option – hence ‘alpha approach at a passive cost’ — High fees of active managers are pinching investors in volatile markets, a reason why passive products have risen in popularity now. The CDCF theme attempts to show alpha might be possible without paying the commensurate high fee that active managers demand. Since it does not require a critical level of active management, it can entail a low fee, which is comparable to passive products Conception/history of the idea — The initial thought was provoked by Raamdeo Agrawal, Joint MD of Motilal Oswal Financial Services, in his 2011 Annual Wealth Creation Study where he stressed the importance of investing in dividend stocks. I thought on further aspects that might appeal to investors over and above dividends, and what might create a differentiation for investors if this portfolio were actually a fund product. I worked on the idea of using consistency in financial performance as a substitute for active managers, which might be a lower-cost alternative and help create investor appeal. I made my own criteria for consistency in dividend/financial performance. This article is Version 2 of this theme. Version 1 was made for India initially in 2012 and published in IFA’s Wealthgram magazine of Switzerland in August 2013. In Version 2, I have made several changes in the screening criteria, hence the difference in shortlisted stocks. I believe Version 2 has much betterquality companies than Version 1 since the criteria is now more stringent, hence it is a better criteria for the CDCF theme. In Version 2, I have included the Canadian case as well, in order to compare the theme across markets. Why can this idea fail? — It is based on a specific theme and its screening criteria are based on this. The theme will run as long as the economic conditions supporting this theme exist - a risk with all thematic products. (Further risks are detailed in Risks section). 2. Key motives behind developing this portfolio theme/ idea To bring in the term ‘consistent’ into portfolio approaches as a substitute for high-cost active management — The term ‘consistent’ has a certain reassuring tone, especially in volatile markets. Stock-screening methodology developed for this experiment assumes stringent criteria based on the consistency in fundamental and dividend performance. This acts as a potential substitute for active managers’ work, i.e. research on individual Screening criteria is defined and is easily replicable, hence ‘modified-variant of active’ — The screening criteria are defined and replicable for each period of portfolio churning. This is evidenced by the 2 validation methods when the portfolio was tested as of recent fiscal and when tested over a period of time. This screening methodology aims to substitute high-caliber active management to identify stock picks, hence can be really described as ‘modified-variant of active’ Identifies quality stocks to gain upside from dividends and capital appreciation and beat benchmarks, at similar levels of risk — Generating alpha is tough in volatile times. Passive approach also has a flipside, as benchmarks can be range-bound, not trend-bound. The CDCF screening criteria aims to identify good-quality companies which have demonstrated consistent performance in their fundamentals which would be reflective in its price trends, and thus gain from opportunities from dividend and capital appreciation Concentrated nature of the portfolio enhances potential for upside, given screening is tracking quality stocks — While diversification is advisable, stressed markets often negate upside opportunities as other stocks dip. Concentrated quality stocks can achieve upside... Helps create product differentiation in an otherwise crowded fund product market — The fund universe is full of ‘me-too’ products, which are duplicative. The attempt is to create a differentiation which managers can use while pitching to clients, were this a product. 3. What is the “CDCF” theme What are the aspects that can be ‘consistent’ in stocks which can enable substituting in-depth research with our screening criteria? Despite the headwinds, some management teams have delivered Groupement Suisse des Conseils en Gestion Indépendants • www.gscgi.ch
  • 5. Gram Gram THE IFA’s Wealth LA TRIBUNE MENSUELLE DES MEMBRES DU GSCGI wealthgram@gscgi.ch • www.gscgi.ch Vol. II - N° 23 - Decembre 2013 3 PLACEMENTS & TECHNIQUES DE GESTION Earning alpha at a passive cost! ‘consistent’ growth in their financial metrics despite challenging environments. They have grown their topline and bottomline consistently and maintained ‘consistency’ in profit margins earned. Secondly, volatile price trends may not always reward shareholders by capital appreciation as investors may not always liquidate at opportune times, missing opportunities to book gains. But some stocks have paid out dividends ‘consistently’ to reward shareholders. Lastly, stocks with low leverage have further headroom for expansion, if needed, to enhance growth and maintain its ‘consistent’ fundamental track record. These aspects are used to develop on the ‘consistent’ theme of the screening criteria of our CDCF theme. Thus, this ‘Consistent Dividend Consistent Fundamental’ portfolio idea is based on the premise of investing in a concentrated portfolio of consistent dividend paying stocks which achieved consistency in their fundamental performance at low leverage in recent years. It believes this can be a low-cost substitute for active managers in volatile times when paying higher fund cost pinches. The screening criteria seeks to identify good quality companies who took good management decisions, without the need for researching into each stock separately. It screens the universe of listed Indian scrips from the Bombay Stock Exchange and the universe of listed Canadian scrips from the Toronto Stock Exchange for testing in Indian and Canadian contexts. 4. Stock screening methodology and assumptions used The screening methodology seeks stocks which have delivered growth over the past 3 rolling fiscal years in Revenues, EBITDA, PAT; maintained consistency in Profit Margins; have low Debt Equity ratios; and rewarded shareholders with consistent Dividends. Month of fiscal year-end of companies differ. Hence, all companies with year-end within a particular fiscal year (FY) period are clubbed within that FY itself (Fiscal Year is assumed to be Apr to Mar for India and on calendar year ‘CY’ basis for Canada). • Annual financial data of the companies is taken till CY2012 for Canada and till FY2013 for India, since these are the latest fiscal for which financials are available. The underlyings’ data will remain as such till the next fiscal year’s financials are available. That is when underlyings will change and portfolio churn will happen. Databases used were Capitaline for India and Bloomberg for Canada. • Data is taken for screening purposes for last 3 rolling fiscal years, i.e. if the base year is FY2013 in India, then we used annual financial data from FY2011 onwards. If the base year is CY2012 in Canada, then we used annual data from CY2010 onwards. • Scrips with market cap of more than INR 1000 crores as of Mar 2013/Jun 2013 (1 crore = 10 million or 100 crore = 1 billion) for India and CAD 800 million as of Dec 2012/Jun 2013 for Canada. This might be on the lower side, however it is still within the acceptable limits of the mid/small-cap universe. Market cap of some holdings of prominent small-cap funds are at even lower levels. • We select stocks which showed revenue growth in the last 3 rolling years of over the average inflation rate (in last 1, 2, 3 year CAGRs). We use inflation as the threshold for growth in topline on the assumption that it may reflect, or at least give some indication, of the growth of its actual business volumes within its revenues. The reasoning is it might have been able to pass on most of the effects of inflation from its suppliers on to its buyers, in effect increasing revenues commensurately. Actual volume is a truer indicator of fundamental growth of the company’s inherent business, rather than just the price effect. Hence, the screening methodology tracks those which achieved growth over and above the average inflation. A critic may debate that a company could have increased its prices higher than inflation or many quality companies might not have been able to pass it on fully to buyers, hence this assumption may not mean volume growth always. While this argument might be true, we assume such instances might be very few in number. • This growth rate/inflation assumption is repeated for tracking the consistency in growth in operating profits and net profits as well. • The stress here is on profit margins, since profitability is a key metric stressed on. Assuming profits to have grown at similar rates to the top line, we believe that the company has successfully achieved consistent margins during the previous 3 fiscals. Basic threshold level for profitability for companies which achieved profit margins of at least 10% in each of the previous 3 fiscals. • We target dividend payout of over 20% and dividend yield of over 1% consistently in each of the last 3 FYs. 1% yield seems low, but Indian companies do not really have any clear dividend policy and dividend payouts are very low. The average dividend payout in India is comparatively lower. Though, our yardstick selects the above-average ones, we have had to assume a lower threshold for dividends. However, the stress here is really on the Groupement Suisse des Conseils en Gestion Indépendants • www.gscgi.ch
  • 6. Gram Gram THE IFA’s Wealth LA TRIBUNE MENSUELLE DES MEMBRES DU GSCGI wealthgram@gscgi.ch • www.gscgi.ch Vol. II - N° 23 - Decembre 2013 4 PLACEMENTS & TECHNIQUES DE GESTION Earning alpha at a passive cost! consistency of paying dividends, rather than absolute threshold. • We target debt:equity ratio of less than 2x, which allows them headroom to raise future capitalization in case that is required for enhancing top line growth and thus, maintain their overall growth track record going forward. • ROE (return on equity) track record consistently of at least 10% in recent years. 5. Scrip units and NAV back testing calculated for India/ Canada for intitial valuation (*Using FY2013 as base year for India and CY2012 for Canada) Weights and scrip units are calculated on a quarterly basis to conduct NAV back-testing on every quarter-end from Dec 2008 onwards. • Post stock-screening, weights are assigned as per equal-weight method. The experiment is based on the consistency of their performance, rather than their size. The basis for choosing equal-weight rather than free-float weight is to give each of these stocks equal chance to boost the overall NAV. Some of the smaller underlyings might have performed just as well as larger companies. Even using free-float weights would have required a natural upper limit of upto its equal-weight since the number of stocks in this concentrated basket is less. Hence, even free-float weights would have ultimately ended very close to equal-weights only. • We start the back-testing phase from Dec 2008 onwards using the Starting NAV as 100. • Scrip units as of any quarter-end are rebalanced based on the weights as of that quarter-end, current prices of the underlyings and the NAV that was calculated for that quarter-end. This NAV was calculated based on scrip units rebalanced as of the previous quarter-end. Following the rebalancing of the scrip units as of the current quarter-end, it will be factored with next quarter-end’s prices to calculate next quarter-end’s NAV. Scrip units and NAV calculations are based assuming 1 unit of the portfolio basket (hence the scrip units per individual underlying might be in Sub-1 decimal levels). • These NAVs calculated are the ‘Price-based NAVs’ as they are based only on price factor. Adding dividends to this gives us Gross NAV. • All dividends paid on the scrips are assumed to be done in final quarter only (Mar for India and Dec for Canada), hence the impact of dividends received will be seen in last quarter’s NAV only (relevant only for QoQ NAVs). Groupement Suisse des Conseils en Gestion Indépendants • www.gscgi.ch
  • 7. Gram Gram THE IFA’s Wealth LA TRIBUNE MENSUELLE DES MEMBRES DU GSCGI wealthgram@gscgi.ch • www.gscgi.ch Vol. II - N° 23 - Decembre 2013 5 PLACEMENTS & TECHNIQUES DE GESTION Earning alpha at a passive cost! • Price-based NAVs are used to compare to normal values of indices, not Total Return values, since we are assuming in this experiment that dividends are distributed off and not retained to purchase further units. Price-based NAV of Canadian CDCF basket is compared to normal values of TSX indices. Price NAV of Indian CDCF basket is compared with price-based values of NSE indices. • We have also included ‘Equal-Weighted Indices’ of TSX and NSE in our comparison in line with our method of using equalweights in scrip-unit calculation, apart from large-cap, small- cap and composites. (*That is why we used NSE indices in India, not BSE indices). 6. Scrip units and NAV back testing for additional valuation, to test the theme over a period of time had it been an operating portfolio ((*Using FY2011/CY2010 as initial base years for India/Canada, and subsequently using FY2012/CY2011 and FY2013/ CY2012 as base years after portfolio churning is done annually) • Methodology for screening, scrip units and NAV back-testing remains same as seen in the earlier section. Groupement Suisse des Conseils en Gestion Indépendants • www.gscgi.ch
  • 8. Gram Gram THE IFA’s Wealth LA TRIBUNE MENSUELLE DES MEMBRES DU GSCGI wealthgram@gscgi.ch • www.gscgi.ch Vol. II - N° 23 - Decembre 2013 6 PLACEMENTS & TECHNIQUES DE GESTION Earning alpha at a passive cost! • What changes is the initial base year used and rolling years for back-testing. Two validation methods are used for the screening/back-testing process. For initial validation in the previous section, we had used FY2013 as base year for India and CY2012 for Canada. In this section, the theme is now tested over a period of time for additional validation, to see if it would actually work over a longer period of time had it already been an operational portfolio • For India’s case, we assume the portfolio was incepted in FY2011. Thus, we start with FY2011 as the initial base year and screen financial data for previous 3 rolling years, i.e. from FY2008 onwards. Thereafter, we use FY2012 and FY2013 as subsequent base years once portfolio churning is done each year using the new set of annual financial data (Methodology section churning as per annual financial data). Underlyings change during each churn to comprise those which meet the criteria as of that specific base year. We test with this new set of underlyings for the 3 rolling years accordingly. • As per India’s chart, 20 stocks were selected when the portfolio was incepted in FY2011 (Dabur to Sun TV Network). In FY2012, only 10 companies were retained (Dabur to Engineers) and also 5 new were added (HCL to Oil India). In FY2013, only 5 were retained from the original FY2011 basket (Dabur to eClerx). Also, 6 new were added (Crisil to Torrent) for FY2013. • For Canada’s case, we assume the portfolio was incepted in CY2010. So, CY2010 is the initial base year and screens data from CY2007 onwards. Subsequently, CY2011 and CY2012 are used as base years once portfolio churn is effected with the new set of annual financial data. • As per Canada’s chart, 4 stocks were selected when the portfolio was incepted in CY2010 (Morguard to RioCan). In CY2011, 4 new stocks came in the list and none retained from CY2010 (Allied to Canadian Nat Railway). In CY2012, a total of 9 stocks were shortlisted. This included all the 4 stocks from CY2011, 1 from CY2010 (Morguard), as well as 4 new stocks (Canadian Utilities to BCE). • Interesting observation here – The number of shortlisted stocks is reducing each year in India while it is increasing in Canada. This is because the stringent screening criteria are kept fixed across all base years, while the actual economic/corporate performance might have varied year on year. In India, the corporate earnings environment has seen severe stress over the last year owing to macro and policy challenges, which is evident from the sluggish earnings growth the Indian markets have seen since 2012. Canada, as with many Western countries, is actually getting back on the track of economic recovery since the last year. Hence, corporate performance is reflecting that. This might be why we have seen the number of shortlisted companies reduce in India in the last one year as stress grips the markets, while a move towards recovery in Canada in the last one year has led to more companies making the bar. It just goes to show how few companies actually make the stringent criteria set in this experiment, which aims to use this criteria as a low-cost substitute for extensive research that active managers otherwise do at a higher cost. Once, the macro and policy environment improves and gets reflected in corporate performance, more number of companies will get shortlisted in India. • An obvious argument here is - What is the worst-case scenario, if the screening during a portfolio churn period does not yield any shortlisted companies? What does the CDCF portfolio do then? It does exactly what active fund managers do during such phases when they do not find good-quality, opportune stocks to invest in. (1) They either HOLD on to their existing portfolio since that is the next best alternative available, or (2) They relax their stringency criteria a bit in terms of the quality bar if the overall market conditions indicate that. Either way, in a worst-case scenario, the CDCF portfolio will retain its existing holdings since those were quality stocks nevertheless, or it would relax the stringency of its criteria metrics, which is easily doable in the system. 7. Comparing CDCF portoflio’s results with benchmarks • Delivered outperformance in terms of annualized return for the entire back-testing period (from Dec 2008 to Sep 2013) over each of the indices taken in both the Indian and Canadian cases • Delivered this outperformance at similar levels of volatility in both India and Canada - CDCF’s annual standard deviation for the period is similar to large-cap index in both countries, while it is lower than the midcap/small cap and composite indices • On a YoY annual basis (FY14YTD, FY13, FY12, FY11 and Groupement Suisse des Conseils en Gestion Indépendants • www.gscgi.ch
  • 9. Gram Gram THE IFA’s Wealth LA TRIBUNE MENSUELLE DES MEMBRES DU GSCGI wealthgram@gscgi.ch • www.gscgi.ch Vol. II - N° 23 - Decembre 2013 7 PLACEMENTS & TECHNIQUES DE GESTION Earning alpha at a passive cost! Groupement Suisse des Conseils en Gestion Indépendants • www.gscgi.ch
  • 10. Gram Gram THE IFA’s Wealth LA TRIBUNE MENSUELLE DES MEMBRES DU GSCGI wealthgram@gscgi.ch • www.gscgi.ch Vol. II - N° 23 - Decembre 2013 8 PLACEMENTS & TECHNIQUES DE GESTION Earning alpha at a passive cost! FY10 for India and CY13YTD, CY12, CY11, CY10, CY09 for Canada), it delivered positive excess returns in each of the annual periods in both India and Canada, with the only a few exceptions seen in the initial years (During FY10 in India against midcap and equal weighted indices, and during CY10 in Canada against smallcap and equal weighted indices. However, in Canada’s case, CY09 saw negative excess returns against all the indices) • Sharpe ratio has been higher in the CDCF basket for both India and Canada, as compared to each of the indices used • Delivered significant Alpha over all the benchmark indices used based on annualized returns and beta for the entire backtesting period (from Dec 2008 to Sep 2013) in both India and Canada • Quarterly returns across the back-testing period shows the CDCF basket has delivered positive excess returns in approx 70-80% of the quarters against each of the indices in India. The same observation was about 60-70% of the quarters in Canada • The Indian basket has also performed better as compared to some of the Dividend Yield Mutual Funds (*shown in Appendix) 8. Rationale behind the CDCF idea - 8 USPs — ‘Consistency’ theme is USP 1 – to use the ‘consistency in performance’ as a substitute for high-cost active management. With a stringent screening criteria based on consistency in fundamental and dividend performance, the shortlisted stocks Groupement Suisse des Conseils en Gestion Indépendants • www.gscgi.ch
  • 11. Gram Gram THE IFA’s Wealth LA TRIBUNE MENSUELLE DES MEMBRES DU GSCGI wealthgram@gscgi.ch • www.gscgi.ch Vol. II - N° 23 - Decembre 2013 9 PLACEMENTS & TECHNIQUES DE GESTION Earning alpha at a passive cost! Groupement Suisse des Conseils en Gestion Indépendants • www.gscgi.ch
  • 12. Gram Gram THE IFA’s Wealth LA TRIBUNE MENSUELLE DES MEMBRES DU GSCGI wealthgram@gscgi.ch • www.gscgi.ch Vol. II - N° 23 - Decembre 2013 10 PLACEMENTS & TECHNIQUES DE GESTION Earning alpha at a passive cost! are good-quality which have shown ‘shareholder friendly results’. This acts as a substitute for active managers’ high-cost research on individual stocks — Low-fee/low-cost option if it were a fund – USP 2. The screening methodology attempts to show earning alpha might be possible without critical active management and paying the commensurate high fee that active managers demand for researching into each stock separately. The consistency criteria in performance is expected to substitute for that research activity, hence this basket can be maintained at a lower fee which is comparable to passive ETFs – hence, an alpha approach at a passive cost — Screening criteria are defined and replicable for each period of portfolio churning – USP 3. Criteria are replicable for each period of portfolio churn and don’t need high-caliber active management, hence ‘modified-variant of active’. This is seen in the 2 validation methods when the portfolio was tested as of recent fiscal and when tested over a period of time — Attempts to deliver ‘better returns than benchmarks’ via dividend and appreciation – its USP 4. Screening criteria identifies quality stocks that have a consistent performance record which would be reflective in its price trend. It gives scope to gain from capital appreciation, as well as dividends (ideally a safer option in volatile markets). Passive approach might not always work in volatile markets if it is range-bound. Dividends help to largely recover the initial investment, and appreciation is the additional upside — Concentrated nature enhances potential for upside, given the screening methodology is tracking quality stocks – USP 5. Markets in stress might not always benefit excessive diversification it it often negates upside opportunities as other stocks dip. Concentration of quality stocks can help achieve this upside. Tracking quality stocks brings the stock-specific story into play — Better sharpe ratio is its USP 6. It delivers better annualized returns than benchmarks at similar levels of standard deviation as compared to benchmarks. Hence, chasing alpha need not mean incurring a higher degree of risk — The theme can be relevant across geographies – USP 7. India and Canada are different in terms of development and maturity — Useful for ‘Core-Satellite’ allocation or to create Product Differentiation if this was a fund product – USP 8. This might be relevant for ‘modified-active’ satellite strategies supporting the beta-chasing passive Core. Also, the theme can help create some differentiation while pitching to investors were this a fund product, in an otherwise crowded fund product market. 9. Risk factors of the CDCF idea • Screening criteria is based on a specific theme and will run as long as economic and market conditions supports this basic theme • Timely data collection is an issue, since there would be a lag when financials are made public as compared to fiscal year enddate • Screening criteria loses out on high dividend-yield companies whose recent financial performance may have taken a beating • Sector exposure within the portfolio is often skewed towards few sectors instead of spread over across many sectors • Portfolio churning is done only once a year given the usage of annual data, hence impact cost may need to be factored in • Updating financials on an annual basis may ignore shifts in financial performance that may be visible if done on a quarterly basis • Does not factor in valuation multiples of the underlyings • Does not study the macro level factors impacting the economy, sectors and companies the way active managers would do 10. Conclusion Every investment faces a challenge in delivering consistent outperformance, more so when the inherent market volatility makes it a struggle to beat inflation – touted as investors’ biggest enemy by leading market gurus. The premise behind this concentrated portfolio based on the CDCF theme was to highlight that it can outperform benchmark indices during volatile equity environment, without the need for high-level active management or high fee, and thus become a low-cost substitute for what active managers would otherwise do to generate alpha Groupement Suisse des Conseils en Gestion Indépendants • www.gscgi.ch
  • 13. Gram Gram THE IFA’s Wealth LA TRIBUNE MENSUELLE DES MEMBRES DU GSCGI wealthgram@gscgi.ch • www.gscgi.ch Vol. II - N° 23 - Decembre 2013 11 PLACEMENTS & TECHNIQUES DE GESTION Earning alpha at a passive cost! – research on individual companies by charging a high cost. The screening criterion devised is defined and replicable, which aims to identify quality companies by ‘tracking the consistency in fundamental and dividend performance’. In short, to show that such a theme based can yet throw up opportunities for out-performance in the current volatile world of equities, at a comparatively lower cost of a passive product. The opportunity to gain alpha without paying the commensurate high fee for active management through this ‘CDCF’ theme might appeal to investors and readers alike. Sourajit AIYER sourajitaiyer@gmail.com Acknowledgement: The author would like to thank Mr Vivek Sinha for his insights on the scrip-unit construction methodology. This is a project made in personal capacity. Views and ideas expressed are author’s own and are not to be taken to represent those of the company. This article is purely an academic exercise only. Any action taken by you is your responsibility alone. Groupement Suisse des Conseils en Gestion Indépendants • www.gscgi.ch
  • 14. Gram Gram THE IFA’s Wealth LA TRIBUNE MENSUELLE DES MEMBRES DU GSCGI wealthgram@gscgi.ch • www.gscgi.ch Vol. II - N° 23 - Decembre 2013 12 PLACEMENTS & TECHNIQUES DE GESTION Earning alpha at a passive cost! ...appendix tables... Groupement Suisse des Conseils en Gestion Indépendants • www.gscgi.ch
  • 15. Gram Gram THE IFA’s Wealth LA TRIBUNE MENSUELLE DES MEMBRES DU GSCGI wealthgram@gscgi.ch • www.gscgi.ch Vol. II - N° 23 - Decembre 2013 13 PLACEMENTS & TECHNIQUES DE GESTION Earning alpha at a passive cost! ...appendix tables... Groupement Suisse des Conseils en Gestion Indépendants • www.gscgi.ch
  • 16. Gram Gram THE IFA’s Wealth LA TRIBUNE MENSUELLE DES MEMBRES DU GSCGI wealthgram@gscgi.ch • www.gscgi.ch Vol. II - N° 23 - Decembre 2013 14 PLACEMENTS & TECHNIQUES DE GESTION Earning alpha at a passive cost! ...appendix tables... Groupement Suisse des Conseils en Gestion Indépendants • www.gscgi.ch