A guide to both new and seasoned investors for choosing suitable investments for their portfolio in the same way selectors choose a World Cup winning team.
A guide to both new and seasoned investors for choosing suitable investments for their portfolio in the same way selectors choose a World Cup winning team.
Last evening I had a chance to finally watch 83, a full three months after the movie was released in the theatres. The events of the film are well documented where India thrashed West Indies, the reigning world champions, to win the ICC 1983 Cricket World Cup Trophy.
While the movie itself had mixed reviews, there are lessons every investor can take away from the winning Indian team in the context of portfolio diversification and asset allocation.
In the context of creating an equity portfolio, the investing question is:
Given the outperformance of sectoral funds like IT/Technology in the last few years, does it make sense to allocate such funds significantly in the equity portfolio?
The cricketing analogy is:
If you are the selector of the 1983 Indian team, would you choose the team that was actually chosen or a hypothetical team of 11 Kapil Devs?
This question will seem strange, and Kapil Dev is just an example. We can make the same case for 11 Sunil Gavaskars, Mohinder Amarnaths or Ravi Shastris.
Using data from Cricinfo, we show what the Indian team did in the eight matches they played in the tournament. We have separately shown the Man of the Matchâs efforts and Kapil Devâs performance.
Match
Against
Result
Man of the Match
Kapil Devâs summary
Final
West Indies
India won by 43 runs
Mohinder Amarnath, 26 (80) & 3/12
15 (8), 1/21
1st SF
England
India won by 6 wickets
Mohinder Amarnath, 46 (92) & 2/27
1 (6)*, 3/35
23rd Match
Australia
India won by 118 runs
Roger Binny, 21 (32) & 4/29
28 (32), 0/16
20th Match
Zimbabwe
India won by 31 runs
Kapil Dev
175 (138)*, 1/32 & 2 catches
14th Match
West Indies
West Indies won by 66 runs
Vivian Richards, 119 (146)
36 (46), 1/46
11th Match
Australia
Australia won by 162 runs
Trevor Chappell, 110 (131)
40 (27), 5/43
8th Match
Zimbabwe
India won by 5 wickets
Madan Lal, 3/27
2 (8)*, 1/18
4th Match
West Indies
India won by 34 runs
Yashpal Sharma, 89 (120)
6 (13), 0/34
Let us look at some of the events in the team:
Of the eight matches, Kapil Dev was Man of the Match only once, and in the five other matches that India won, it was someone else
20th Match: Kapil Devâs legendary world record-breaking 175 runs helped India win the Match
4th Match: Yashpal Sharmaâs 89 runs boosted the score substantially
14th Match: Dilip Vengsarkar retired hurt and did not play further. Imagine the disaster if there were 11 Vengsarkars in the team
As it should be clear, from the table and any cricket match that you have witnessed, that cricket is a team sport. While the captainâs role is critical, it does not mean that only a single player is needed to win the Match. Different team members have different strengths and weaknesses that are useful under different situations. Factors like weather, pitch, batting conditions, opposition composition, and experience are just some of the items that require various team members to contribute at various times and work together as a team to win the Match.
Over-reliance on a single player does not lead to a successful outcome. Anecdotally, heavy dependence on Sachin Tendulkar in the late 90s and early 2000s led to a lot of fan disappointment.
Investing and, consequently, portfolio construction is not different.
Recap: historical performance of sectors and themes in India
Combined returns category-wise
We use data from Valueresearchonline to plot average, minimum and maximum returns from the highest equity fund (and one hybrid) categories. It is very easy to conclude from the data that Technology stocks are a sure shot bet based on historical data. They have the second best average, very little loss-making years and considerably high maximum returns.
Based on this chart, an investor will be very tempted to include technology as a significant component in their portfolio.
Yearly returns ranked
A very different picture emerges if we take the same data and rank it yearly.
(click to open in a new tab)
We can see that technology outperformance has been a relatively recent trend. Before technology started outperforming since 2018, there has been some years where an over-dependence on technology would have seriously tested the investorâs conviction. For example, in 2014, technology came at the bottom with even aggressive hybrid funds, which are a mix of debt and equity, giving higher returns. Also, the returns look extremely poor compared to small caps.
Investing heavily in a single sector or theme (or even market caps like small caps) run the risk that:
the allocation does worse than the broader market, which is a drag on portfolio returns
while some of these sectors like technology and healthcare are expected to do well in the future, the question is will they do better than the diversified index that will automatically have an allocation to trending sectors
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Your favourite trending sctor or theme is already a part of major indices
Using data from niftyindices.com, we can see that the biggest sectors are already a part of major indices. Two things happen when the index is rebalanced as a momentum effect:
the biggest sectors or stocks, due to their price movement, automatically change in weight in the index and contribute more to the index return
if the currently hot sectors continue to do well, their weightage will increase over time without any action needed from the investor
What is the alternative way to construct a portfolio?
The alternative is to diversify across market capitalisations (large, mid, small cap), sectors and themes as much as possible. There are two ways to construct such portfolios:
passive: choose one or more index funds in some proportion. One such case (equal weight-age in large, mid and small caps with yearly rebalancing) is shown in yellow above
active: invest in one or more flexicap funds and trust a fund manager to make the right calls based on market cap, sector and theme
The passive approach works very well given that market capitalisation weighted indices constantly cycle across sectors as per index construction methodology. Here is an image that shows how sectors globally have evolved over time.
There is no shortage of sectors and themes currently in the market that are investible via MF or Small case-type stock baskets. Apart from traditional sectors and themes like pharma, auto, banking and dividend-yield, we now have exotic themes like EV, factors (like momentum, low volatility etc) or even permanent portfolios.
Investors should consider such sectors or themes as a part of a satellite portfolio only if there is
the ability to understand and analyse particular sectors and themes to identify cycles
experience with multiple market cycles (not a new investor)
comfortable with a high tilt to active asset allocation
a high ability to withstand volatility
understands the drivers of portfolio risk across geographies and asset classes
understands how risks and correlations evolve with time
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This post titled What does the 1983 World Cup win teach us about investing? first appeared on 27 Mar 2022 at https://arthgyaan.com
