2014 Mid Year VIIR Portfolio Performance Update

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The Nifty Index just ended the first half of 2014 up 22.3%. It’s the best half yearly performance we’ve seen since the second half of 2009, when Ben Bernanke was introducing the world to quantitative easing and the global economy began the slow recovery from 2008’s Great Recession.

The Indian market has been in a celebratory mood following Narendra Modi’s decisive victory in the recent elections. Undoubtedly, the next leg in this market rally will be predicated on the ability of the BJP to deliver on market oriented reforms and to revive economic growth. It’s still too early to tell whether they’ll deliver. As a value investor, I pay careful attention to the macroeconomic outlook but understand and realize that investment performance is driven by individual stock selection.

Generally, value investors tend to underperform in bull markets as momentum stocks lead the parade. As a result, I’m glad to inform you that the Value Investing India Report (VIIR) portfolio was up 28.2% year-to-date as of June 30, 2014.

We have achieved this performance with a concentrated portfolio of only 16 holdings as of June 30, 2014. Thus, some of our holdings have widely outperformed the overall market. Typically, a major drawback of a concentrated portfolio is that you will also be prone to periods of significant underperformance, if the stocks or sectors you own fall out of favor. Thus, I prefer to view performance relative to a benchmark from at least a three-year to five-year perspective. The chart below shows the VIIR portfolio performance over a longer term perspective. Fortunately, the VIIR portfolio is now outperforming the Nifty index since inception.

Value Investing India Report Portfolio Transactions in 2014

I want to emphasize that we take take a long-term outlook when investing in individual stocks. In general, I only close a position in the event my underlying investment case was wrong or the stock is trading at a wide premium to my estimate of intrinsic value. I’ve only closed three positions since launching the Value Investing India Report, which attests to the fact that long-term investing is a core part of my investment process.

As you can see from the table above, I recently closed out my position in Ratnamani Metals & Tubes. I originally recommended the stock on Tuesday (January 1, 2013) when the shares closed at INR 133.75. With the shares closing at INR 373.95 on Tuesday (June 17, 2013), I decided to close out the position after an extremely profitable run. Subscribers to my Premium Access service achieved a total return of 180%, including dividends.

Although I still like the business, there just isn’t enough upside from current levels to justify maintaining a position. The shares have had an amazing run and there are now better opportunities with more upside available in the market. I actually recently highlighted such an opportunity in the July issue of the Value Investing India Report. The company I highlighted is still undervalued despite the recent market run-up, produces excellent shareholder returns and has a tremendous market opportunity ahead of it. If you want to learn more about this idea and the other holdings in our portfolio, I encourage you to sign up for a risk-free trial of our Premium Access service.

What’s in Store for the Indian Market for the Remainder of 2014

The recent market gains have been driven in large part by Foreign Institutional Investors (FIIs) who have invested approximately USD 9.9 billion into the Indian equity market in 2014, according to Livemint. Although it’s nice to see FII flows come into the market, they can also turn around just as quickly. If the NDA and Modi disappoint on the reform front, I would expect to see outflows materialize rapidly.

From my experience the majority of Indian investors have been sitting on the sidelines. For the current rally to be sustainable, you’ll need the participation of both domestic funds and retail investors. You could theoretically wait for a better opportunity to enter the market, but I think it’s more important to be invested than trying to time the market.

From an investment perspective, I think the biggest risk remains getting carried away in a bull market and not maintaining a strict value discipline. With the recent market performance, I must admit that it has become harder to find good value investments. But there are always opportunities for the enterprising investor.

It’s likely that the second half of 2014 will be much more volatile than the first half. We will continue to focus on our proven and tested investment process and try to let market volatility work to our advantage. We’re always patient and will be waiting for investment opportunities to present themselves.


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