Portfolio Construction

Assignment On

Portfolio Construction

Contents

S/No.

Topic

1

Introduction

2

Industry Criteria

3

Stocks Criteria

4

Tools and Database

5

Portfolio Analytics

6

Conclusion

Topic One INTRODUCTION Portfolio is a group of financial assets such as stocks, bonds and cash equivalents, as well as their mutual, exchange-traded and closed-fund counterparts. Portfolios are held directly by investors and/or managed by financial professionals. Prudence suggests that investors should construct an investment portfolio in accordance with risk tolerance and investing objectives. Portfolio can be thought of investment portfolio as a pie that is divided into pieces of varying sizes representing a variety of asset classes and/or types of investments to accomplish an appropriate risk-return portfolio allocation. Portfolio Construction is all about investing in a range of funds that work together to create an investment solution for investors. Building a portfolio involves understanding the way various types of investments work, and combining them to address your personal investment objectives and factors such as attitude to risk the investment and the expected life of the investment. Portfolio construction is based on choice and the risk appetite of the investor. For example, a conservative investor might favor a portfolio with large cap value stocks, broad-based market index funds, investment-grade bonds and a position in liquid, high-grade cash equivalents. In contrast, a risk loving investor might add some small cap growth stocks to an aggressive, large cap growth stock position, assume some high-yield bond exposure, and look to real estate, international, and alternative investment opportunities for his or her portfolio. Under this assignment I have to construct a portfolio worth Rs 10, 00,000 using stocks from a choice of around 260 stocks which have been analysed and the details reported in respective equity research report. Apart from constructing a portfolio, I have to optimize the portfolio using Bloomberg.

Investment Objective: The investment objective is to have long term capital appreciation with relative safety of capital. The approach is to have Large Cap stocks so that the chances of them performing well in the industry is high and therefore long term capital appreciation can be expected. Government of India Bonds is also included in the portfolio in order to have regular income and to preserve the capital. Small percentage of cash is kept to have liquidity and to meet the urgent requirements.

Asset Allocation Pattern: The asset allocation for the portfolio will be diverse i.e. Cash 0.36%, Stocks 86.96% and G-Secs 12.68%. Each of the stocks in the portfolio are Large-Cap stocks. All the stocks are top performing stocks in their respective industry.

Risk Profile: The portfolio will be constructed with an aim to minimise the risk while having average return but more than the benchmark chosen that is Nifty in my portfolio. Cash Stocks Government Securities

No risk but opportunity cost Large Cap only so moderate risk Risk Free

Topic Two INDUSTRY SELCTION Technology/IT: The IT & ITeS industry in India has today become a growth engine for the economy, contributing substantially to increases in the GDP, urban employment and exports, to achieve the vision of a powerful and resilient India. Indian firms, across all other sectors, largely depend on the IT & ITeS service providers to make their business processes efficient and streamlined. Indian manufacturing sector has the highest IT spending followed by automotive, chemicals and consumer products industries. Nasscom expects the IT services sector in India to grow by 13-14 per cent in 2013-14 and to touch US$ 225 billion by 2020. This growth potential is the reason that I have chosen IT industry for investment.

Banking/Finance: India’s Rs 77 trillion (US$ 1.30 trillion)-banking industry is well at par with global standards and norms. Prudent practices and conventional framework adopted by the regulator, Reserve Bank of India (RBI), have insulated Indian banks from the global financial crisis. The Indian financial services sector is one of the most complex, yet one of the most robust service segments of the Indian economy. Spanning from insurance to capital markets, banking to foreign direct investments (FDI) and from mutual funds to private equity (PE) investments, the financial services sector covers all related segments under its umbrella. Having major effects in its abstract as well as physical form post liberalization, the financial services segment is undoubtedly the mainstay of Indian economy.

Automobile The favorable Indian market conditions are acting as a catalyst for luxury and premium carmakers, which are receiving impetus from new launches. The top-end carmakers have posted double-digit growth for the quarter ended June 30, 2013, with firms like Honda at 45 per cent and Audi recording 28.8 per cent, besides others. India is emerging as an export hub for sports utility vehicles (SUVs). Global automobile majors are looking to leverage India's cost-competitive manufacturing practices and are assessing opportunities to export SUVs to Europe, South Africa and Southeast Asia too. India is also one of the key markets for hybrid and electric mediumheavy-duty trucks and buses.

Healthcare The Indian healthcare industry, which comprises hospitals, medical infrastructure, medical devices, clinical trials, outsourcing, telemedicine, health insurance and medical equipment, was valued at US$ 79 billion in 2012, and is expected to reach US $160 billion by 2017. The Indian healthcare sector is expected to grow at about 15 percent year-on-year (y-o-y), on account of factors such as rapid growth in infrastructure development, creation of demand for higher levels of healthcare, rising awareness of end users, and launch of innovative insurance, reimbursement, and financing policies. The growth of the Indian healthcare sector is further driven by the 300 million strong middle class population with significant disposable income, which is likely to demand superior healthcare services.

Telecommunication The Indian telecommunication sector has registered a phenomenal growth during the past few years and has emerged as the second largest network in the world. On back of ongoing investments into infrastructure, the country is projected to witness high penetration of Internet, broadband, and mobile subscribers in the near future, as per an RNCOS report. India's mobile services market will touch Rs 1,200 billion (US$ 20.24 billion) in 2013, registering a growth of 8 per cent from Rs 1,100 billion (US$ 18.55 billion) in 2012, according to a report by Gartner Inc. Mobile connections are expected to grow to 770 million in 2013, an 11 percent increase from 712 million connections in 2012. Internet traffic in India is expected to reach from 393 petabytes per month in 2012 to 2.5 Exabyte per month in 2017, highlighted a Cisco study. "Internet traffic growth in India is the fastest globally," said Mr Robert Pepper, VP (Global Technology Policy), Cisco.

Cement Cement is one of the core industries which plays a vital role in the growth and development of a nation. The cement industry in India has been expanding significantly on back of increasing infrastructure activities and demand from housing sector. Keeping in line with the technological world, the Indian cement industry has transited itself into a more advanced one. At present, the Indian cement industry is positioned on the second rank globally and comprise of 183 large and 365 mini cement plants. A RNCOS report titled “Indian Cement Industry Outlook 2015” estimated that the total installed capacity of cement in India will increase with a compound annual growth rate (CAGR) of around 7 per cent during 2012-13 to 2014-15. The cement and gypsum products sector has attracted foreign direct investments (FDI) worth US$ 2,656.29 million between April 2000 to June 2013, according to the data published by the Department of Industrial Policy and Promotion (DIPP).

Paint Over the past few years, the Indian paint market has substantially grown and caught the attention of many international players. The country continues to enjoy a healthy growth rate compared to other economies, backed by the increasing level of disposable income and demand from infrastructure, industrial and automotive sectors. On the back of such advocacy, it is anticipated that the sector will post a CAGR of around 15% during FY 2012 to FY 2015, according to our new research report, “Indian paint Industry Forecast to 2015”. Presently, the growth of the Indian paint industry is being witnessed from new demand pockets, especially in Tier-II and Tier-III cities, thus, signalling the growing acceptance of quality paints and increasing income levels of people residing in these cities have pushed the growth in premium paint market of Indian decorative paint industry.

Topic Three Stock Selection

Following Stocks are chosen for the portfolio:

1. Infosys Ltd.: Infosys (formerly Infosys Technologies) is an Indian multinational provider of business consulting, information technology, software engineering and outsourcing services. It is headquartered in Bangalore, Karnataka. Infosys is the third-largest India-based IT services company by 2012 revenues, and the second largest employer of H-1B visa professionals in the United States, as of 2012. On 28 March 2013, its market capitalisation was $30.8 billion, making it India's sixth largest publicly traded company.

2. State Bank Of India: State Bank of India (SBI) is a multinational banking and financial services company based in India. It is a government-owned corporation with its headquarters in Mumbai, Maharashtra. As of December 2012, it had assets of US$501 billion and 15,003 branches, including 157 foreign offices, making it the largest banking and financial services company in India by assets. SBI provides a range of banking products through its network of branches in India and overseas, including products aimed at non-resident Indians(NRIs). SBI has 14 regional hubs and 57 Zonal Offices that are located at important cities throughout the country. SBI is a regional banking behemoth and has 20% market share in deposits and loans among Indian commercial banks. The State Bank of India was named the 29th most reputed company in the world according to Forbes 2009 rankings

3. TCS: Tata Consultancy Services Limited (TCS) is an Indian multinational information technology (IT) services, business solutions and consulting company headquartered in Mumbai, Maharashtra. TCS operates in 44 countries and has 199 branches across the world. It is a subsidiary of the Tata Group. TCS is the largest Indian company by market capitalization and is the largest India-based IT services company by 2013 revenues.

4. HDFC Bank Ltd.: HDFC Bank Limited is an Indian financial services company based in Mumbai, Maharashtra that was incorporated in August 1994. HDFC Bank is the fifth largest bank in India by assets and the largest bank by market capitalization as of 1 November 2012. As on August 2013, HDFC Bank has 3,119 branches and 11,088 ATMs, in 1,891 cities in India, and all branches of the bank are linked on an online real-time basis. As of December 2012 the bank had balance sheet size of Rs. 3837 billion. For the fiscal year 2011-12, the bank has reported net profit of 5167.07 crore (US$790 million), up 31.6% from the previous fiscal.

5. Ultratech Cement Ltd.: UltraTech Cement Limited is India's biggest cement company and India’s largest exporter of cement clinker based in Mumbai, India. The company is division of Grasim Industries. It has an annual capacity of 52 million tones. UltraTech cement holds the Superbrand status.

6. Mahindra & Mahindra Ltd.: Mahindra & Mahindra Limited (M&M) is an Indian multinational automobile manufacturing corporation headquartered in Mumbai, Maharashtra, India. It is one of the largest vehicle manufacturers by production in the Republic of India. It is a part of Mahindra Group, an Indian conglomerate. It is ranked #21 in the list of top companies of India in Fortune India 500 in 2011.

7. Reliance Capital Ltd.: Reliance Capital Limited is a financial services company and part of a Reliance Anil Dhirubhai Ambani Group. Reliance Capital ranks among the top 3 private sector financial services and banking companies, in terms of net worth.

8. Asian Paints Ltd.: Asian Paints Limited is an Indian chemicals company headquartered in Mumbai, India. It manufactures a wide range of paints for decorative and industrial use. Asian Paints is India's largest paint company and Asia's third largest paint company, with a turnover of Rs 96.32 billion. Besides Asian Paints, the group operates around the world through its subsidiaries Berger International Limited, Apco Coatings, SCIB Paints and Taubmans.

9. Idea Cellular Ltd.: Idea Cellular, commonly referred to as Idea, is an Indian mobile network operators based in Mumbai, India.

10. Fortis Healthcare: Fortis Healthcare Limited is an established chain of super speciality hospitals based in Delhi, also available in Amritsar, Kolkata, Navi Mumbai, Hyderabad, Mohali, Jaipur, Chennai, Kota, Bengalururu, Gurgaon. On 12 March 2010, Fortis Healthcare bought 23.9% stakes in Singapore's Parkway Holdings Ltd. On 29 May 2012, Fortis Healthcare reported an increase of 41.34% in the consolidated net profit for Q4.

11. Reliance Communication: Reliance Communications Ltd. (commonly called RCOM) is an Indian broadband and telecommunications company headquartered in Navi Mumbai, India. RCOM is India's second largest telecom operator, only after Bharti Airtel. It is world's 15th largest mobile phone operator with over 150 million subscribers.

Topic Four Tools and Database Bloomberg Terminal is the most powerful and flexible platform for financial professionals who need real-time data, news and analytics to make smarter, faster and more informed business decisions. Hence Bloomberg Terminal is being used which will serve as both the database and the tool for my portfolio. Bloomberg as database: Bloomberg is an online database providing current and historical financial quotes, business newswires, and descriptive information, research and statistics on over 52,000 companies worldwide. Bloomberg database is used to gather data about the stocks for my portfolio. Bloomberg as a tool: Bloomberg provides an inbuilt tool for portfolio management called Bloomberg Portfolio Manager. It helps in constructing and optimizing a portfolio for maximum return. It provides various option like risk option.

Topic Five PORTFOLIO ANALYTICS

Summary User Name Portfolio Benchmark Start Date(Earliest Available) End Date Currency

GUNJAN NIMJE GUNJAN NIFTY 8/30/2013 9/10/2013 INR

Attribution Detail (All Securities, I ncluding Buckets) Po rt

Avg % Wg t Be n ch +/-

C TR Po rt Be n ch

GUNJAN 100.00 100.00 0.00 4.82 N o t C l a ssi fi e d 86.96 100.00 -13.04 4.76 INFOSYS LTD 19.93 8.35 11.58 0.33 STATE BANK OF INDIA 19.39 2.27 17.12 1.46 TATA CONSULTANCY SVCS LTD 11.96 5.83 6.14 -0.27 HDFC BANK LIMITED 10.54 6.20 4.34 0.78 ULTRATECH CEMENT LTD 9.01 0.87 8.14 1.39 MAHINDRA & MAHINDRA LTD 4.58 2.01 2.57 0.17 RELIANCE CAPITAL LTD 3.83 3.83 0.40 ASIAN PAINTS LTD 2.70 1.06 1.64 0.16 IDEA CELLULAR LTD 1.85 1.85 0.08 FORTIS HEALTHCARE 1.59 1.59 0.03 RELIANCE COMMUNICATIONS 1.57 1.57 0.22 9 - 10 12.68 0.00 12.68 0.07 IGB 8.15 06/11/22 12.68 12.68 0.07 < 1 0.36 0.00 0.36 0.00 INR 0.36 0.36 0.00

Return before optimization:

+/-

7.90 -3.08 7.90 -3.14 0.13 0.20 0.17 1.28

Po rt

4.82 5.48 1.71 7.54

-0.13 -0.14 -2.23 0.46 0.32 7.41

To t R tn Be n ch

7.90 -3.08 7.90 -2.43 1.71 0.00 7.54 0.00

-3.08 -0.97 -2.11 0.00 -0.91 -0.09

-2.42 -2.42 -0.91 -0.09

0.00 0.00 0.00 0.00

0.00 0.00

-0.81 -0.03

-0.81 0.00 -0.03 0.00

0.00

0.73

0.73 0.00

0.00 10.79 5.90 0.00 4.55 1.89

-0.13 0.12 -0.04 -0.07 -0.11

1.25 15.77

15.77

0.08

0.10 3.79 0.40 10.79 0.10 5.90 0.08 4.55 0.03 1.89

3.79

0.22 15.06 0.07 0.48 0.07 0.48 0.00 0.00 0.00 0.00

To t Attr Al l o c Se l e c C u rr Po rt Po rt Po rt Po rt

-2.23 7.41

0.14

0.06

+/-

15.06 0.48 0.48 0.00 0.00

0.12 -0.94 -0.94 0.00 -0.03 -0.03 0.00

-0.13 0.12 -0.04 -0.07 -0.11

0.00 0.00 0.00 0.00 0.00

0.12 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00

Before optimization the returns are: Benchmark (NIFTY)

1.2555 %

Portfolio

1.8298 %

With the selected asset allocation my portfolio return was 1.8298%

Return after optimization:

Return after optimization:

Benchmark (NIFTY)

1.2555 %

Portfolio

3.6458 %

After the optimization the return from my portfolio almost doubled to 3.6458%

Topic Six CONCLUSION From the above exercise, it can be concluded that proper weights needs to be assigned to the portfolio to get the maximum returns. Also the amount of returns generated by the portfolio/portfolio manager depends on the investment objectives, style and risk profile of the investor.