Reliance Equities International launches it’s Model Equity Portfolio for India…Thinking is Defensive and unDynamic…very unReliance like…I would say it’s even flawed !

Just perused the Model Equity Portfolio for India that Reliance Equities International has launched.It’s been authored by their Head of Research

Excited to know what’s in it ! ?…more  so after I tell you that the Report is titled ‘Boom and Bust’ with the tagline ‘Resistance is Futile’ !?

Turned out to be a Dampener really…no Originality at all ! …very unReliance like ! if I can say so !

The Portfolio has got 36 scrips chosen with the following criteria

• The benchmark is the Sensex
• No one scrip should weigh more than 10% of the Portfolio
• Those scrips that weigh individually more than 5% of the portfolio should not collectively weigh more than 40% of the Portfolio
• Liquidity in the Scrip must be there and the threshold is an average weekly trading volume of 4 lakh shares in the scrip
• Sector Allocation done on basis of current view which is Overweight on Energy,Materials,Consumer Discretionary and Healthcare and Underweight on Consumer Staples,Telecommunication and Utilities and Marketweight on Industrials,Information Technology and Financials 

These are my views on this Model Portfolio…I find the Investment Approach too Passive and Defensive and this is probably because the Thinking is UnDynamic…and even flawed…unless the objective is to only mirror the benchmark Sensex    

• It’s got 28 Sensex Scrips out of the 30 possible….They do not like Ranbaxy and NTPC…So there are just 8 stocks in this Portfolio that are not part of the Sensex…These 8 stocks constitute 14% of the Portfolio with Cairn having a 4% weightage,three others with 2% each and the rest four with 1% each weightage
• Top 5 Scrips have an aggregate 40 % weightage…Reliance Industries (10%),ICICI Bank (9%),ONGC and Larsen (8% each) and Infosys (5%)…this leaves it no room,as per it’s selection criteria, to buy into or increase weightage to over 5% in any other scrip,unless it reduces weightages in these Top 5 Scrips 
• The Portfolio virtually mirrors the Sensex and thus should have a Beta of 1…It thus will move more or less the same proportion as the Sensex will…..Might as well have brought the Sensex itself !…It’s clearly a Defensive Approach and  the Strategy can be termed as Passive Investment and therefore the Thinking is clearly flawed….This Portfolio will never beat the Sensex !…even if it does,it would not be by any significant percentage as the 8 Non Sensex Scrips in it have just a 14% weightage….. so what’s the point of Benchmarking !
• Even the Portfolio Sectoral Allocation more or less mirrors the Sensex Sectoral Allocation…even for the Overweights of Energy,Materials and Consumer Discretionary,the extra weightage in the Portfolio is insignificant from 1.3% to 3.4%
• This June 12,2009 Report on Portfolio Strategy states the Benchmark is the Sensex but it fails to Show the Sensex level in the Portfolio…so it becomes easy to relate perfromance…I’m assuming they have taken the Closing Sensex of 15238 on Friday,June 12,2009 as the starting benchmark
• The Report is titled ‘Boom and Bust’ with a tagline ‘Resistance is Futile’….I find this a bit too dramatic a Title with little corelation to this Model Portfolio launch,even after considering that they are positive about India’s Prospects  

Reliance Equities International sees an upside of 15%-30% upside from here in the next six months…18000 Sensex by December 2009…in the range of 16500-19000 definitely…ofcourse the risks have been spelt out

This target is based on FY 11 EPS growth of 17%-22% and a PE Multiple range of 17-19…that’s a Trailing PE of 22 on FY 09 EPS

The Current Sensex Level of 15238 (12/6/2009 closing) is 15.5 times of Projected FY 11 EPS 

So if this upside does happen,the Model Portfolio too will surge proportionately…the problem is that it will be a perfect proportion…so you will not be able to beat the benchmark…so as I stated earlier too, and I reiterate,might as well have just observed a Passive Investment Strategy and Invested in Units of the any Sensex  based Fund….because you’re not really going to be rewarded for any specific equity premium more than the market…. you’ll get what the market gets !…because the beta is One for this model portfolio

Building up your Portfolio on a specific scrip and bottoms up approach with more weightage of Non Sensex Scrips would have given the Portfolio a better thrust,without any significant compromise on Risk Taken…I’m not suggesting you chase Alphas…but atleast give your Portfolio a Chance to beat the Benchmark !

Cheers !