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Sanctum PMS 1 Year Performance & Investment Outlook

Sep 18, 2017

“The biggest risk is not taking any risk… In a world that is changing really quickly, the only strategy that is guaranteed to fail is not taking risks.” – Mark Zuckerberg

We are pleased to report performance for Sanctum’s PMS, which completed one year of operations last Thursday.

A dominant theme centered around valuation and slowdown has shaped investor thinking this year. We present additional factors that may be worthy of consideration in shaping investment strategy.

The market peaked last year in the same week that we launched our PMS. We remember wondering if we were launching at the market peak. Turns out we were; the Nifty P/E was at about the same levels it is today. While market returns have been average, stock selection and sectoral allocation allowed us to generate significant alpha.

Titans Portfolio Performance

Titans Portfolio Performance +28.0% 1 Year, +39.5% Year To Date

For the 1 year period, Titans outperformed the Nifty 50 by 12.5%, and its benchmark the NSE 200 by 9.9%. Year to date, Titans is up +39.5%, outpacing the Nifty 50 by 16.3% and its benchmark by 13.4%. While outperformance is welcomed, we are heartened that we were able to generate absolute 28.0% returns.

93% of Client Portfolios Have Outperformed the Model Portfolio

Clients came on board at various stages during the year. Client portfolios average annualized return in our PMS was 42.4%. 93% of portfolios outperformed our model portfolio.

Sanctum’s Flagship PMS Portfolio Titans Is Up +39.5% YTD and 28.0% YOY In Its First Year…
…Outperforming the Nifty 50 by 16.3% and 12.5% Respectively

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93% of Client Portfolios Outperformed Our Model Portfolio Performance…
…Titans Has Delivered 20%+ for the YTD, 1 Year, 2 Year, 4 Year and 5 Year Periods

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Managed for Tax Efficiency

Titans is managed for maximum tax efficiency. Our average holding period is in years. Further, we endeavor to limit turnover. We exited five names year to date, four of which were underperformers. As we move forward, our turnover is likely to remain lower than averages.

Peer Group Comparison

While our peer group would generally be PMS providers, we unfortunately do not have competitor performance data. Our secondary peer group is mutual funds, which we compare against below. Were we to include pure large, mid/small cap funds, Titans would still rank in the top decile.

Please note that our returns are gross returns; adjusting for fees would still leave us amongst the top 3 funds in our peer group on a 1 year comparison, and #1 or #2 in year to date comparisons.

Versus a Peer Set of Top Performing Multi Cap Funds…
Titans Is Ranked #1 or #2 For the 6 Month, YTD and 1 Year Period

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Olympians Portfolio Performance

Olympians Portfolio Is Up +31.2% Year To Date, and Up +11.8% over 1 Year

Olympians under-performed the Nifty 50 by 3.8% for the one year period. Year to date, however, Olympians is up 31.2%, outpacing the Nifty 50 by 8.0%. The pickup was a result of two key actions: a portfolio manager change, and a re-shuffling of holdings.

80% of Client Portfolios Have Outperformed the Model Portfolio

Clients came on board at various stages during the year. The average annualized return of actual client portfolios in Olympians is 32.9%, and 80% of client portfolios are outperforming our model portfolio and the index on a one year basis. 100% of client portfolios are outperforming the model portfolio, and benchmark over the past 6 months.

Post a Portfolio Manager Change in Q1 2017, Olympians Is +31.2% YTD…
…Outperforming the Nifty 50 by 8.0% YTD

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Olympians Turned Around Its Performance In Q1 2017…
…As a Result of a Portfolio Manager Change and Re-Orienting the Portfolio Towards Growth

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Olympians Has Matched Top Large Cap Funds YTD…
…And Outperformed Over the Past 3 and 6 Months

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Outlook

The Prevalent Investment View Is That Valuations Are High, Earnings and the Economy Are Weak

Despite the bull market making new highs, investor risk aversion is elevated and fear levels spike on any sell-off. At a lower level of granularity, the concerns are three-pronged. One, valuations are stretched to levels that have led to painful corrections in the past. Two, earnings have not come through this quarter and fears abound around earnings growth. Finally, fears about a slowing economy and geo-political risks.

There is however an alternative story that we see emerging.

A Coordinated Global Economic Upswing Appears Underway

The U.S., after a long time seems to be showing clear signs of an economic upswing. Employment data is encouraging. Europe, surprisingly, has pushed past their debt doldrums and is showing a similar strong pickup in activity. China continues to demonstrate growth momentum and economic activity, confounding bears. India and emerging markets continue to demonstrate growth. For the first time in years, a coordinated global upswing appears underway. It’s a trend we’re keeping an eye on and we’ll dive deeper into this in future commentaries.

Pro-Growth Geo-Political Alignments Are Emerging

While markets continue to be rattled by geopolitical noise and tension, we are witnessing geo-political re-alignments. The superpowers – U.S., China, Europe, Russia and India – are no longer at odds and are, behind the scenes, choosing cooperation over confrontation. Trump getting rid of Bannon could prove to be a turning point in his presidency. China appears to have chosen economic growth and diplomacy over belligerence. Russia is actively involved in brokering peace between the U.S. and North Korea.

Today’s antagonist is the dictator of a tiny country. There is unrest of a different nature amongst the developed world; however, nothing succeeds in pacification like a growing economic environment. Connectivity and cooperation is the emerging new order.

Crude’s Importance Is Waning, Making Business Cycles Less Susceptible to Oil Spikes

Crude has contributed to each U.S. recession going back to 1973. As Crude Oil – and OPEC – wanes in influence, it’s contribution to business cycle excesses looks to get dramatically reduced.

Global Cost of Capital Remains Attractively Low

Mitigating valuation concerns is a low cost of capital that is desperately seeking return. There remain limited opportunities for return, and India stands bright.

Weak Domestic Sectors Are Stabilizing

A case is building that the sectoral story is improving in India. Earnings this past quarter were impacted by Healthcare, Information Technology, Telcomm, Banking, Energy and Materials.

Pharma: The FDA has now started issuing clearances to a number of companies. While pricing pressures remain, in time the U.S. will recognize that sanctions and controls are a quid pro quo and the U.S. would appear to be at least as dependent on India as vice versa. Healthcare appears to be bottoming, or at least stabilizing.

IT: IT majors are structurally impaired in our opinion, and will need to go through a painful re-invention, or descent into slow oblivion. Some midcaps, however, seem to be re-inventing themselves and innovating. A next generation of players appears to be slowly stepping forward.

Telecom: Sometimes, one can be too early to a story. We met a star portfolio manager that was optimistic on telecom consolidation last year. He was too early, but it’s now evident that consolidation and exits are underway. At some point, the blood-letting will stop and the government appears intent to ensure that the industry can operate at some measure of profitability.

Infra Spending: Infrastructure impetus is growing. Some small companies are starting to show improving metrics, suggesting spending is finally coming into the sector.

Energy: Post an inventory loss, Energy is likely to declare handsome profits this quarter and CY18.

Banking: NBFCs and Private banks are picking up the slack and growing solidly. PSU losses appear to be stabilizing. Improvements in infra and metals sectors will help defaulters improve their ability to renegotiate loans.

Flows and Returns Are Propagating an Equity Wealth Effect

With India being amongst the best performers globally, the flow of FI and DI money is likely to continue. The massive wealth creation that has occurred will bring more investors and money into the fold, generating a virtuous wealth effect that will spill over into consumption, other asset classes and eventually investment.

What Story Does One Choose?

With High Valuations, Index Returns Will Remain Muted…

Index returns will remain muted. Managers that manage to the index will deliver muted returns as well. We remain of the view that it’s an opportune time to prune portfolios and rotate to investment managers that manage with valuation discipline and have ability – and intention – to deliver alpha. Secondly, we’d be wary of funds with large AUM as size has historically created challenges for the best fund managers.

Investment Strategy for High Valuation Environments

1. Invest with fund managers with discipline: discipline in investment valuation, discipline in the size of assets managed, and discipline in fund deployment.

2. Specialist portfolio managers are likely to deliver excess returns versus the index.

3. If markets are making you nervous, invest some profits in protecting portfolios. We have a hedging desk that can structure custom protection strategies.

4. Review investment portfolios, re-balance to Strategic Asset Allocations, and doggedly hold on to reasonably valued, high performing growth portfolios.

5. Hold on to the long view, ten years or greater.

As we head into Q4 CY2017, we stand to benefit from a low base effect versus last year’s demonetization impacted Q4 CY2016. Similarly, Q1 CY18 and Q2 CY18 are low base effect quarters. It is difficult to make a case today that the economic environment is deteriorating. GST, demonetization have led to a difficult period of adjustment and the slowdown has mitigating factors. We will acknowledge that rising commodity prices is a factor that bears watching.

Valuation Is Not the Only Factor

The Nifty 50 was elevated last year in Sep-16 at a P/E of 25 times trailing earnings. Fear was high then as it is now. Demonetisation came. GST came. Despite the hand wringing, fear, sell-off, Trump and Korea, competent fund managers have delivered significantly above 20% plus returns.

Exiting the market last year, or taking a conservative view would have cost us dearly. Right now, the market seems to be suggesting that things are improving as it strives for new highs. The worst mistakes in investing can often be pre-emptive in nature. We’ll constantly re-assess as the economic environment evolves, from a macro and portfolio management perspective.

Technical Strategy

It was a positive week for the market with the Nifty gaining 1.50% to close at 10085.40 levels. Domestic fund flows continue to be strong which have absorbed the foreign outflows in Aug-17. After consolidation of last four weeks’ 9685-9988 levels, index has given breakout on the upside and now trading at all time high. Momentum indicators have also given positive crossover on daily chart. Now, if index sustains above 9950-10000 it can see rally towards 10350-10500 levels. Now 10000 level is the immediate support for the market which has the highest open interest for Nifty put options indicating short term base for market. Also in Nifty options, 9800 strike price put has the high open interest indicating the second important support level for the market. Nifty put/call ratio is moving up and trading at comfortable zone indicating positive bias. India VIX last month touched a high of 15.20 and retreated back to 11.35 levels which is supportive for positive sentiment.

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