Its ‘Fundamental Strategy Index Portfolio’ claims to offer superior returns based on Nomura’s proprietary quantitative model. To hard-sell the product to customers, it is showing astronomical back-tested performance
When the market is extremely bullish, you can trust the self-serving portfolio management services (PMS) companies to come up with innovative techniques to make you rich with their often poorly-conceived and ill-fated products. Some proudly exhibit historical performance through a convoluted display of returns vis-a-vis the benchmark, while others show off a hypothetical scenario of past returns based on simple back-testing of the product. ICICI Prudential is aggressively pushing one such PMS product.
The ICICI Prudential PMS Fundamental Strategy Index Portfolio will create a portfolio based on the Nomura India Fundamental Strategy Index, which selects its stocks according to a quantitative stock-selection methodology. This is an index of 20 stocks selected based on a proprietary quantitative strategy which combines eight fundamental parameters.
The product tries to grab the eyeballs of the investor by showing off the phenomenal back-tested historical performance of the Fundamental Index. Sure enough, the numbers displayed are mind-blowing. According to the product document, if a portfolio had been operational since 30 January 1998, it would have yielded astronomical returns of 5,893% (till 16 July 2010) as compared to the Nifty return of 559%, or 10 times better than the Nifty during this period!
Not only this, it claims a part of the back-tested performance (since April 2009) as live performance, making a case for another round of mis-selling. ICICI Direct which is aggressively selling this product, is even promising a 50% return per annum to prospective investors. PMS are always aggressively (mis) sold at the height of a bull market and this time is no exception.
The Nomura index attempts to identify and optimise fundamental parameters that the market is giving importance to. Note that we are not talking normal fundamental factors but fundamental factors that the "market is giving importance to". This looks too clever. Either the stock picking is based on fundamental undervaluation or rising price trend (which captures what the market is interested in). Combining the two would seem a bit dubious.
Nomura's method screens a universe of top 100 listed stocks by market capitalisation and ranks them on each of the identified fundamental parameters. These include price to earnings, price to book value, price to sales, EV (enterprise value) to sales, EV to EBIT (earnings before interest and tax), EV to FCF (free cash flow), dividend yield and market capitalisation. Apparently, these parameters have been selected based on an analysis that indicated that a combination of these eight parameters was able to forecast most of the stock outperformance.
The strategy assigns weightages to each of these fundamental parameters every quarter. While doing so, it supposedly takes into account the most recent trends, giving more weight to the fundamental factor that the market is assigning importance to, on a quarterly basis. A weighted average composite score is given to each stock in order to identify stocks that scored well across all the fundamental parameters. The top 20 stocks that have the best composite score across all factors are then included in the index.
ICICI Prudential claims that the portfolio not only offers high returns but also minimises risk through built-in controls like equal allocation to stocks, volatility adjustment and drawdown events. Since no one stock has a higher allocation, the portfolio claims to be diversified enough to mitigate any event risk. The portfolio also decreases exposure to equities with increase in volatility. While the allocation to equities is never less than 65% and not more than 100%, any excess funds are invested in interest-bearing instruments for that quarter. The drawdown event is built in, to react proactively to a sudden change in market conditions. This is triggered automatically if the strategy underperforms Nifty by more than 10% within a quarter. In this scenario, the equity allocation for that quarter is switched to a portfolio that replicates the broad index like S&P CNX Nifty. These strategies look fine on paper, but their efficient execution remains a major concern, what with the dubious history of many PMS products in the past. In this case, for instance, the top 20 would possibly include stocks like Infosys and State Bank of India which have got their once-in-a-lifetime lift. It would be ridiculous to extrapolate their performance into the future.
Inside story of the National Stock Exchange’s amazing success, leading to hubris, regulatory capture and algo scam
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Fiercely independent and pro-consumer information on personal finance.
30-day online access to the magazine articles published during the subscription period.
Access is given for all articles published during the week (starting Monday) your subscription starts. For example, if you subscribe on Wednesday, you will have access to articles uploaded from Monday of that week.
This means access to other articles (outside the subscription period) are not included.
Articles outside the subscription period can be bought separately for a small price per article.
can anybody give valuable feedback..???
(It appears SEBI does not allow PMS people to promise the Returns.It is not understood why SEBI should intervene in such matters.)
http://www.ppfas.com
if u wants to invest like warren buffett
I dont know who to complain about mis selling by icici as I am NRI
In the past sold insurance policy that too very bad
Any PMS in equity and equity related assets is very risky indeed !! Especially when they promise you a fixed rate of return, you need to be extra cautious about that PMS scheme. If you need to manage your assets better than the PMS way, giving you excellent returns over the medium to long term, use a portfolio of Mutual Funds instead. These have a lot of advantages over direct equity investments, including reducing your capital gains tax implications for every sell trade executed within a year. Also you can spread your risk across stocks, sectors, themes and even geographies and asset types (including alternative assets) with excellent ease. Want to know how?
If yes, you may contact me at [email protected]