The Case for Gender Diversity in India

Contributed by- Shivani Chopra, CFA

Women in Investment Management (WIM) is one of the important initiatives of  CFA Institute since its launch in 2015. It acknowledges the underrepresentation of women within the industry, particularly in senior positions. The goals of this initiative have been set accordingly

•    Increase the number of women who join the profession and earn the CFA® charter

•    Retain women in the profession and influence culture from within

•    Create demand for diversity as an industry imperative

Although more awareness is being generated through social media, gender equality in the industry is a global challenge. Some countries like India have more problems than others. In May 2016, CFA Institute completed the largest ever survey on the subject of gender diversity. With women constituting only 11.7% of its CFA Institute members, India ranked a dismal 51st out of 57 countries surveyed. Our immediate neighbour China fared much better and ranked in the top five with 31.3%.

In India, urban female workforce participation rate at 15% is again one of the lowest in the world. What are the main factors that constrain women to join the workforce? The ability of women to seek employment is the outcome of various social and economic factors. The primary responsibility of managing all the household chores, taking care of the dependents, etc is still considered a woman’s duty. Parents instil this mindset in childhood and the result is an increasing number of females staying away from employment. Even the ones who beat the odds and take up the jobs may not get an equitable work culture. So, females regularly find it hard to manage work life balance. Many married women drop out of the workforce when they have children. In our investment management industry, they are confronted with one additional problem. It is widely perceived that this ‘male dominated’ profession demands long hours and higher stress at work. This further discourages women from pursuing a career in this industry and choose a different career path. As a result of all these challenges, their numbers are dwindling in senior positions.

There is an urgent need to acknowledge this issue. Industry studies have shown that mixed gender teams not only offer diversification but also improve investment performance. To attract and retain women professionals-The May 2016 report has outlined the following conclusions

•    Pursue university outreach to let women know of investing as a career, although building math and technical skills must begin even earlier.

•    Make potential entrants to the field aware of the current flexibility within it.

•    Educate firms on the importance of work structure and flexibility

Well, there may be a long way to go, there is a definite wave of change in today’s women in India. Dr. Monika Chopra, CFA (Senior finance faculty at Lal Bahadur Shastri Institute of Management) feels “It goes without saying “A hand that rocks the cradle rules the world.” The nature of a woman is caring, loving and giving. Her empathy and power to connect make her successful everywhere and the same applies to the financial world. Bringing women into investment management can ensure diversity which can be a catalyst to drive growth and innovation. The inclusion of women in finance signifies women empowerment, greater shareholder value and alpha delta gamma management by someone who is irrepressible.”


The Gender diversity challenge in India is closely related to the gender role mindset. We need to educate people regarding the benefits of financially securing women. The employers in our industry will play a very important role in creating an enabling environment as well. As part of the CFA fraternity, let’s join hands to spread awareness and help build a better community where women are able to reach their full potential.


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Market Outlook…

By: Navneet Munot, CFA, CIO, SBI Mutual Fund and Director, IAIP

Indian equity market has been one of the best performing equity market year-to-date. Foreign investors’ allocation to emerging markets has risen. Within that, India with an outlook of recovering growth and corporate earnings and reform oriented government, offers a lucrative opportunity. At the margin though, FIIs have pulled out money in last few weeks.

Looking ahead, global markets will be taking cues from political development in Europe (outcome of the French election, ECB’s exit policy), tax-administration reforms of the US (Trump’s reform agenda has been slow to pan out thus far) and developments in China. We also need to watch Geo-political events as they have the potential to out-turn the current regime of low volatility laid down in the global market due to comfortable liquidity and improving growth scenario.

In India, looking at the aggregate earnings growth could be misleading during this earning season. While NIFTY PAT is likely to post a double digit growth, it is largely driven by the low base of few cyclical sectors such as PSU banks, metals and oil & gas. Moreover, the positive tailwinds from soft commodity prices are fading and FY 2017-18 could face some disruption from GST implementation. To sum, despite the healthy earnings growth expectations for Q4 FY17, we remained cautioned at the quality of the earnings recovery.

Market expects the improvement in earnings to extend into FY18. However, valuations have grown well ahead of profits growth and Sensex is currently trading at ~18 times 1 year forward earnings (compared to historical average of 16x). One of the factors explaining richness in valuations is the rising liquidity in the equity market. The reduced attractiveness of physical assets and a scenario of structural fall in interest rate are leading the household to steer towards equity investment. Abundant liquidity can keep the market away from its fundamental equilibrium level for an extended period of time.

Additionally, stable macro, contained inflation, strengthening external account, political stability and reform oriented government could lead one to argue than Indian equity should command a lower risk premium relative to history and support the valuation premium. These factors, too, tend to make the current valuations defendable as greater number of market participants bet on better economic environment and earnings trajectory.

To sum, while we get fidgety looking at the rich valuations, there are factors which could keep the valuations high. Moreover, we are bullish on Indian economy from the medium to longer term perspective and continue to focus on bottom-up stock picking. For FY18, the upswing in world trade is also benefiting India. Indian exports growth has been in the positive quadrant for six months running and bodes well for the manufacturing and hence overall economy. On top of that, the public sector investments continue to provide the support and the implementation of stalled projects has picked up sharply in last two years. This in turn frees up the blocked capital which can be utilized for other productive purposes. That said, fresh capital investment from the private sector continues to fall short of the required vigor.

India offers many low hanging fruits. A case in point could be the state of ‘Uttar Pradesh’- a state that has historically pulled down India’s growth, but has the potential to become a growth locomotive for the country. Uttar Pradesh inhabits nearly 200 million people (i.e 16.5% of India’s population) but ranks one of the lowest (better only to Bihar) in terms of per-capita GDP. The state has annual per capita income of Rs.40,000 ( ~ USD 621) compared to nations’ average of approx Rs. 94,000 per annum. The state has fared poorly on many economic parameters; such has literacy rate (ranks 29th among all states), poverty ratio (30% vs. national average of 21.9%) electricity penetration (~500 kwh per person- nearly half of national average) and so forth, thus being a huge drag on the rest of the country thus far. The focus on economic development in this one state alone could pull the overall GDP of the country.

Looking at the bond market, 10 year G-sec yields have sharpened since mid-February following a more hawkish stance by the central bank

RBI’s latest monetary policy minutes had a tone of hawkishness mainly because the central bank believes that the growth will improve in FY18, but the current muted inflation prints are not sustainable. Last couple of monetary policies has clearly brought out the RBI’s priorities. There is a clear change in stance and reinforced desire to bring inflation decisively towards the 4% target. Not only is it their mandate (since August 2016), but the central bank believes that at a time of heightened global risks (firming global inflation and volatility in financial markets), it is an important defense for the economy.

While the retail inflation is currently well behaved, it is headed to inch upwards owing to anticipated pressures from GST implementation, adoption of 7th Pay commission by states, tailwinds from soft commodity prices dying off and closing operating margins for the companies. Worth noting is that we are not even calling for capacity underutilization to close out anytime soon. Moving Indian inflation sustainably to 4% would require significant productivity improvement and easing the supply side constraints. The government has taken significant steps with regards to managing food inflation. However, few of the nontradable parts of core inflation components, particularly health and education, have remained stubbornly high, owing to insufficient reforms in these sectors. Taming these services inflation would require structural steps to be taken by the government.

Against such a backdrop, we expect an extended pause in the policy rate and the bond yields to be guided by other developments such as demand –supply dynamics, global yield movements and banking system liquidity. The central bank is currently absorbing the liquidity via reverse repo auctions and Issuance of MSS bonds.

From a longer-term perspective, the narratives around bond yields are broadly positive, guided by reduced risk premium for Indian G-secs, expectations of polity continuity and reform momentum in the country. We have been taking tactical calls on duration at the opportune time.

While we take the broad macro call on duration, credit call is a more nuanced and tricky one. The improvement in India’s economic fundamentals, legislative and regulatory improvement, disintermediation of the credit market – all lay down positive narratives for the lending market. But at the same time, corporates face host of disruptive forces and hence not all sectors can be served on the same credit platter. We focus on a completely bottom-up approach for credit picking in our portfolios.


(reproduced from SBI Mutual Fund Newsletter)

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Become a Great Presenter and Increase Your Influence


Contributed by: Manish Chandak

CFA Society India, Pune hosted a power-packed session on “Become a Great Presenter and Increase Your Influence” by Mr. Andrew Stotz on 15th April 2017. Andrew Stotz, who is known as one of the Thailand’s leading equity analysts, is a CFA Charter holder and has graduated with a PhD in Management Science and Engineering at the University of Science and Technology of China. He has authored many books which include “Transform your business with Dr. Deming’s 14 Points” and “You Won’t Get Rich in the Stock Market…Until You Change the Way You Think About”. He firmly believes in Educating, Empowering and Exciting people from different walks of life.

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Andrew began the session by asking his audience about their motivation for becoming a great presenter. His overriding theme for the session was: “a Great IDEA + a Great PRESENTATION = CHANGE THE WORLD!” He wanted to teach all participants excellent presentation skills so that they can present whatever great idea they have in such a way that it will change the world for better.

He described five steps to delivering an excellent presentation as below:

  1. Strong argument: Simple, with a good flow.
  2. Clear benefit: Show benefits up front.
  3. Powerful delivery: Audience feels your passion.
  4. Attractive presentation: Attention on you and your message.
  5. Energetic ending: Your energy can change lives.

He kept his audience engaged by his confident delivery and mind-blowing presentation. He used his presentation as a demonstration to put his point across. He evoked strong emotions by sharing his personal story. He surprised his audience by giving away lots of goodies to those who posted brilliant snaps of the event during the event on his live blog. This was followed by Q&A session where he patiently answered audience queries. He ended the session by reiterating his overriding theme: “a Great Idea + a Great Presentation = CHANGE THE WORLD!”


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French Elections – Importance and Impact


Contributed by: Meera Siva, CFA

National elections can have major influence on not just politics but economic policies, market, currency and investments, globally. The upcoming French election is interesting in what it could mean to the region’s equation and its impact on other countries.

France’s two front-running candidates have different economic policies. Presidential contender Emmanuel Macron is a centrist while far-right leader Marine Le Pen has an anti-euro, anti-immigration platform. The election is held in two stages, with two top contenders picked for the 2nd stage. Polls predict that Macron, a former banker and economy minister in a Socialist government, could beat Le Pen comfortably in the May 7 final round. But the war in Syria and terrorist attacks may change the sentiment and results.

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Long dollar, short euro

The fate of the euro is fragile, whether France decides to stay with the EU or leave, said Dr. Bobby Srinivasan – Professor of Finance & Trading, Great Lakes Institute of Management; active trader; author; Professor for well over 40 years. He says that Macron’s win can bring some stability while Le Pen may accelerate the fall. Exit out of euro zone is a long process and Britain may take over 2 years to complete this. Also, the exit option is good for the old who want to keep away outsiders, but it is bad for the young who may find lesser job and education opportunities compared to the past.

After the Global Financial Crisis, Euro was expected to do well and the dollar was weak. The exchange rate was 1.59 USD to euro. Currently, it is just over 1. The concerns involve that of refugee inflows through the euro zone and settling in France. The country’s working hours are low, at 30 per week. India only has a small share of trade with euro (18%), so it may not have a big impact.

Anti-establishment wave

The jitter in the market is also likely due to uncertainties in the result. Dr. Stanly Johny, International Affairs Editor with The Hindu and adjunct faculty at Asian College of Journalism, Chennai notes that the US elections showed that opinion polls can go wrong. Anti- establishment sentiments are taking root and that can sway voter sentiments, he says. Netherland, for example, saw an increase in freedom party’s vote share. The unemployment rate is high (10%) and youth unemployment rate is staggeringly high (25%). Growth is sluggish, there are issues of terrorism with many fatal incidents and there is need to spend; immigration has been a hot-button issue. So sentiments of France first, anti-globalisation and no immigration – the same script that worked for Trump in the US, may find emotional appeal.

Too big to hold

The idea of euro was probably a shaky one, as it is hard to manage the needs and issues of so many countries, noted K Suresh, President/CEO/CFO India Cements Capital, with over 28 years of experience and a regular guest on Sun News TV Channel’s live program on the securities market. Data shows that there has not been economic progress in France over the last few years. France contributes 1/5th to the euro and in the EU it has 15% voting power.

EU also needs to think of their alignment with Russia as they depend on them for natural gas supply. A leader with more alignment with Russia can be good. France’s exit from EU will further weaken euro’s strength, but bad policies of France may also impact the currency.


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Quantamental Investing Across the World…

Contributed by: Chetan Shah, CFA, Secretary & Director, IAIP

Investors, professional as well as individuals, suffer from behavioral biases. The four important ones cited by Andrew Stotz, PhD & CFA, Co-Founder A. Stotz Investment Research, as investors’ worst enemies are Loss Aversion, Confirmation, Hindsight and Overconfidence bias. You feel pain of a loss 2 to 2.5 times more than the joy from an equal gain. That is loss aversion bias. This affects your investment decisions. This bias can be overcome by zero-based thinking wherein one can ask questions like “if I didn’t own the stock, will I buy it?” Confirmation bias, which is a tendency to search and put weight for information that confirms ones belief, can be corrected by considering opposing views and putting ones idea to test. Hindsight bias, a tendency to wrongly remember that you knew the event before it occurred, leads you to believe that the world is more predictable than it really is and can lead you to Overconfidence. Both these can be overcome by being humble and admitting that you don’t know it all. Also the chances of success in investing can improve dramatically if you have a framework in place and ignore the noise in the marketplace.

Hypothesis as well as back testing should form essential part of portfolio management. One needs to verify if strategies like owning high ROA (Return on total assets) or low P/B (Price/Book) generates higher returns. Andrew’s tests showed contradictory results that companies with low ROA generate higher returns.  Low P/B works only when companies are valued very low, not otherwise. Likewise gearing (net debt to equity) and returns seem to have lower correlations. Maybe these fundamental factors form only small contributors individually. On the other hand three month price momentum strategy seems to work for both equal weighted and market cap weighted sample portfolios.  The stop loss strategy too improves the investment results by around 180bps to 260bps for top and bottom decile portfolios to 22% and 3.1% respectively over a 10 year period. The level of stop-loss (10%, 20% or 30%) depends on the countries with 20% working for most of them.

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Last interesting point, which Andrew highlighted, was that the benefits of diversifying risks start diminishing after the number of stocks held in the portfolio crosses a particular number. Ten stocks removed 64% of unsystematic risk. Additional 10 stocks will take this number to only 74% and 25 stocks will remove only 77% of the unsystematic risk. Also the portfolio returns tend to reduce with higher number of stocks and converge with all stock portfolios or market returns. Put in other words concentrated portfolios (say ranging from 10 to 25 stocks) tend to provide better returns and with reasonably lower risk. However, larger fund size may have no choice but to have higher number of stocks, else their buy & sell actions may start impacting each company’s stock prices.


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Equity Valuation Methodologies

Contributed by: Kailash Chhabria, CFA

We are all very watchful for the price we pay for the things we buy. For example, if one is to buy a mobile phone, he would visit all the online portals, compare the price with Brick & Mortar store, check for offers and arrive at the best value for the product. We are extremely vigilant in determining the right value for the product. Investments are no different. Be it Real Estate, Gold, Equities, Bonds; we attain satisfaction only when we have paid the right price. But how do we really determine the right price while making Investments? What are the inputs one considers while making investments and how do we filter noise?

DSC_0256 I was fortunate to attend a session on “Equity Valuation Methodologies” conducted by Indian Association of Investment Professionals (IAIP) and presented by Mr. Sampath Reddy, CFA, CIO Bajaj Allianz Life Insurance.  It was a very thought provoking session wherein we discussed what drives valuations and how we could have a quick check while making investment decisions.

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There is no doubt that approach like DCF is exhaustive and considers all aspects of mature businesses we are valuing. We consider all relevant criteria while applying DCF and base our assumptions on a lot of research we do on companies.  The approach requires time and ability to make right judgements. Could we not consider other time bound relative valuation approaches while making an investment decision? The question then arises what is the right P/E or P/B ratio for a company & an Industry. How should one interpret the value of a company, its future potential by usage of mere ratios?

Below are some of the key takeaways while considering relative valuation (Method of Comparables) approach to compare companies:-

While Brand visibility, distribution, Technology, Monopoly, access to natural resources are important for a business to succeed, they are not the sole drivers and firms could trade at low multiples to their peers in their respective industry. The likes of SBI trade at low multiples to peers and may not necessarily be the best investments.  Low multiples do not necessarily mean attractive investments.

The most important driving factor for a business is ROE. What’s in it for the investor? When businesses generate ROE greater than their cost of capital they tend to enjoy good multiples. It is the ability of the business to continuously report strong ROE’s which makes a good investment.

The growth of a business tends to have a direct relationship with the firm’s PE. Companies with growth rates higher than their cost of capital tend to enjoy healthy multiples. PE is constantly adjusted and rerated keeping growth in mind. For example, Infosys which commanded a PAT CAGR of 46% in FY04-07 period traded at 21.7 1 yr forward PE. While FY10-13 saw growth no’s come down to 15% the 1 yr forward PE was rerated downwards to 16.2.

The relative valuation approach may not work best for commodity driven companies and other approaches should be considered. The PE & EV/EBITDA ratios appear to be cheap at the peak of the business cycle and vice versa which could be misleading. Tobin’s Q could be considered as an alternative measure.

In addition to the above pointers, one needs to be watchful of the quality of the management which runs the business. Initiatives and policies adopted by the management go a long way in determining the prospects of business. The capital allocation decisions, dividend payout policies, disclosures, accounting policies, diversification in new businesses which are done at management discretion can make or break a business.

In words of Warren Buffett, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”.
Happy Investing!!



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Why Smart Investors Do Dumb Things?

Contributed by: Shivani Chopra, CFA


The Delhi chapter of the Indian Association of Investment Professionals (IAIP) organized a speaker event titled,” Why Smart Investors Do Dumb Things” on March 18, 2017.The event was delivered by Mr. Puneet Khurana who is a renowned investor and educator. The focus of the event was to discuss in details the most common errors investors make and what makes such smart people do really dumb things.

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The session started with a discussion of how the society has evolved by the collective efforts of some smart people who came together and led to some tremendous achievements which have changed the world for good (e.g. Google, Manhattan project, Bell Las etc.). But unfortunately, the same record is not replicated when it comes to investing domain and the speaker referred to the records of hedge funds and funds of funds to put across the point (e.g. LTCM, etc.). He discussed three key differences between other organizations and a team of investors and what are the key differences in two types of human collections and endeavors. He explained that there are primarily three differences:

1.    Measurable Goals

2.    Feedback Loops

3.    Checks and Balances

The absence of factors mentioned above in individual decision making at the investment firms accentuates the impact of individual quirks in decision making. For this very reason, the first and foremost reason for errors is the human misjudgement, and hence the speaker went on to explain the science behind the human misjudgement. He compared investing to Keynesian newspaper beauty contest where the decisions are not objective but also based on the subjectivity of masses and how in investing the decisions of masses can become influential in the final outcome. Hence the investing activity becomes not only an individual pursuit but also an endeavour of understanding the wisdom and follies of masses.

The lesson started with the understanding of Biology and Human evolution and how the various parts of brain got developed providing a survival advantage. The explanation of the role of the amygdala, sensory cortex, thalamus, hypothalamus, etc. was discussed and provided a context of the physiology of decision making and what caused the brain to go into the freeze, fight or flight mode.

From here on Mr. Khurana explained the critical errors which he has suffered or observed and explained few of the key human biases that lead to errors. The key biases he discussed were Overconfidence, Rigidity of thoughts process, Activity bias, Hard Work Fallacy, Once Bitten twice shy error, Recent event Bias, Confirmation Bias, Anchoring Bias and Romantic Lovers Bias.

The speaker went on to give a detailed explanation of all these biases and how it specifically interacts with investing decisions. He was candid in providing examples from his own life where the mistakes caused him to make investing errors.

Mr. Puneet Khurana, referring to Charles D Ellis’ tennis analogy, compared investing to the game of amateur tennis where reduction of errors is a tremendous edge.

Moving forward, he then explained errors beyond the human psychology and in the realm of investing. The speaker continued with a disclaimer that the list is not comprehensive but what in his understanding are the most crucial ones. He divided the majority of errors into the following categories:

1.    Errors in Behavior (which he discussed above)

2.    Choosing the wrong battleground

3.    Errors of omission

4.    Errors of commission

5.    Error of risk assessment

6.    Errors of Portfolio Management

7.    Errors of Execution

Each of these errors was then explained in great detail with examples of companies and examples from his observations across many investors, his students and his own errors too. In short, it encapsulated a large amount of learning from the personal investments journey of the speaker.

After this, he then went on to give examples of how Checklist development has dramatically led to a reduction of errors. But then he gave a very interesting perspective that error reduction is a significant edge and takes an investor in the above average league, but it’s not enough to take the investor into the “TOP” league. After all the ship can reduce all the errors by staying on the deck, but that’s not what it is meant for.

The second part of the success equation in investing is “Insight Generation”.

He referred to the work of Gary Klein to substantiate his assertion. He then went on to explain how different investors can generate insights during their practice and have pattern recognition that leads them to shift the odds in their favor. In fact, for all the errors of omission and commission discussed, some outliers generate special insights in one or two areas, and shift the odds in favor and make money. He then went on to explain his areas of insights over a decade-long practice, where he has been able to develop patterns and shift the odds in his favor.

It was a 3.5-hour long session but was so gripping that none of the participants agreed to the breaks in between despite the offers. It was filled with real life cases and amazing insights for all the investors.



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