Portfolio Management 1 01 Presentation at IIM Calicut

Portfolio Management 1: 01 Presentation at IIM, Calicut ENAM Securities 13 August 2004

Some Key Concepts u Approaches to Portfolio Construction Ø Top Down v/s Bottom Up Ø Value v/s Growth Ø Think of Cycles… nothing is linear u Client Requirements Ø Match Needs, Requirements and Abilities u Risk Ø Use Math & Computing as tools Ø Make Bets Explicit Ø Why are you diversifying? u Your OWN Portfolio? ENAM Securities August 2004 2

Elements of Portfolio Construction Top Down Value Growth Momentum Bottom Up ENAM Securities August 2004 3

Decomposing Approaches Top Down Asset Class • • • Equities Bonds Currencies Property Commodities – Oil – Precious metals – Natural Resources Country • • • Developed Markets Emerging Markets Regional markets ENAM Securities Sector • • • FMCG Pharma Services TMT Manufacturing Cyclicals August 2004 4

Decomposing Approaches Bottom Up • • Value • • • Dividend Yield Price/BV Replacement Cost Volume Price Efficiency: – Costs – Assets Restructuring GARP • • Payback EV/EBIDTA P/E DCF ENAM Securities Momentum • • Technical Charts Reflexivity PE/G Option Value August 2004 5

Some Lessons from History u Japan V/s UK in 1944 u Korea V/s India in 1950 u Singapore! u Hero Honda V/s Kinetic Honda u Bharti V/s IDEA u Infosys V/s HCL u HDFC Bank V/s SBI There is NO trade-off between Top- Down and Bottom up ENAM Securities August 2004 6

Think of Cycles! Nature is cyclical, not linear! u Life Cycles u Business Cycles / Boom-Bust u Seasonality u Innovation / Schumpeter u Market Cycles ENAM Securities August 2004 7

Valuation Approaches Value Growth Momentum • Illiquid • Institutional Favorites • Max Volume • Misunderstood • UVG Stories • News Flow • Hated/Uncovered • Imagine it! • Volatile • Appraised value • DCF or Option value • Technicals In Reality, there is no distinction. Growth and Momentum are Long. Term/Short Term Value catalysts ENAM Securities August 2004 8

OUR VALUATION “SCREEN” ENAM Securities August 2004 9

VALUATION BENCHMARKS ENAM Securities August 2004 10

Think Client Management u WHO is the CLIENT? u WHAT does he want from you? u HOW are you shaping his expectations & mindset? u WHY should he stick to you? “Most clients would rather have their fund manager fail conventionally than succeed unconventionally. ” — Marc Faber ENAM Securities August 2004 11

CHANGING NEEDS OVER A LIFETIME Equity/Bonds Property Art/Misc Own Business House Durables Daily Exps ENAM Securities August 2004 12

KYC and Thyself! Asset Allocation Relative Pvt. Banks / Pension Funds / Macro Funds/ Fund of Funds Country Allocation Regional Funds Sector Allocation Country Funds/ Mutual Funds Large Cap Small Cap Absolute ENAM Securities HNW / PMS / Absolute Return Funds/ “Hedge” Funds August 2004 13

Key Success Factors Pvt. Bankers / Pension Funds / Macro Funds • Institutional Marketing • Deployment of Large Pools • Capital Preservation Regional Funds • Marketing Scale & Scope • Economist Country Funds • Fund Manager • Technician Absolute Return Funds BCA GLOBAL BCA EMG MKTS BCA CHINA INDIA FUNDS • Stock Picker ENAM Securities August 2004 14

Risk Mitigation u Formulas / Computers are tools, not cast in stone Ø Sterling Crisis Ø LTCM u Markets discount the rate of change ; most metrics measure history Ø Understand logic of EMT, CAPM and Beta; do not be bound by it. “Risk is something I manage between my ears. ” — Warren Buffett ENAM Securities August 2004 15

Make Explicit Bets u Asset / Sector / Class Ø Use Computing to make interrelations and risk explicit; scenario modelling u Catalyst Ø Reflation ; Upgrading Debt Rating ; Margins… u Valuation Ø Payback, DCF, etc → What will make you change your mind? →Your weightage should not be led by overconfidence ! ENAM Securities August 2004 16

IDEAL PORTFOLIO 75% ENAM Securities August 2004 17

Decompose | Decompose ENAM Securities August 2004 18

Decompose | THEN | Consolidate u A good investor is a good businessman and vice versa ENAM Securities August 2004 19

Typical Career Path to Nirvana Analyst Head of Research Fund Manager Abs. Manager Own Funds Large Fund Manager Marketing Guru Even Larger Fund Manager ENAM Securities August 2004 20

How is your Portfolio Tilted? OWN INTERESTS CLIENT TIME PROFESSIONAL COLLEGUES FAMILY WORK COLLEAGUES BUILD A CONSCIOUS LIFESTYLE ! ENAM Securities August 2004 21

HEAVEN AND HELL u AMERICAN SALARY u AMERICAN WIFE u ENGLISH HOME u ENGLISH CAR u GERMAN FOOD u CHINESE HOME u INDIAN WIFE u INDIAN SALARY YOUR REAL WEALTH = YOUR HAPPINESS = YOUR STATE OF MIND = WITHIN YOU ENAM Securities August 2004 22

SUMMARY u UNDERSTAND YOURSELF OBJECTIVELY u UNDERSTAND THE INVESTMENT LANDSCAPE u UNDERSTAND THE UNDERLYING INVESTMENT u UNDERSTAND THE MARKET PARTICIPANTS u FOLLOW BASIC PRINCIPLES AND STICK TO THEM! u BE HAPPY! ENAM Securities August 2004 23