Tuesday, 20 January 2015

Hot Stock Picks Make Super Gains

One year on, model portfolios built by top fund managers for Echelon Magazine outperforms market

By devan daniel.

The returns blew us away: Echelon Magazine was not prepared for the superlative returns one year after top fund managers built hypothetical stock portfolios for the January 2013 edition in an exercise to understand how long term portfolio investments worked. Ramesh Schaffter of Janashakthi Insurance, Indika Rajakaruna of Ceybank Asset Management and Sumith Perera of Guardian Acuity Asset Management were each asked to create a model portfolio valued at Rs10 million. One year on the Rs30 million combined portfolio has grown to a little over Rs46 million for a combined growth of 53%, outperforming the overall market which grew at 24%. We take a look at how each portfolio performed and present reallocated portfolios which will be reviewed again next year.

Disclaimer: This story is not meant to represent advice or to suggest transactions in securities referred to in it. It is not a substitute for the exercise of independent judgment and readers should consult independent investment advisers in making investments. Neither Echelon magazine nor the investment funds mentioned in this story accept any liability whatsoever for any loss arising from the use of the information presented here.

Comfort zones challenged: Sumith Perera

Guardian Acuity Asset Management (GAAM) is a joint venture, equally owned by Ceylon Guardian Investment Trust, a subsidiary of Carson Cumberbatch, and Acuity Partners, the investment banking arm of DFCC and HNB. Sumith Perera, Fund Manager at GAAM, discusses the performance of his model portfolio and reasons for reallocation.

How did the market perform during the past year and how did your model portfolio fare?
The stock market had a great run over the last year with my portfolio providing a return of 56.41%. The All Share Price Index has given a return of 23.99% for the same time period. Foreign inflows into the CSE continue to be strong and are invested in a wider-than-usual selection of stocks. Declining interest rates has pushed retail investors out of their fixed deposit comfort zones and into higher prospective returns in the CSE. Earnings growth is more encouraging relative to last year and interest rates remaining low will help the stock market along. Softer commodity and energy prices have also brought down costs for many of the listed companies.

What was the best performing stock and what drove its performance?
Hemas Holdings performed the best with a share price growth of 115%. The share price performance was a result of significant foreign and local institutional demand based on strong performance in its FMCG and healthcare sectors and a positive outlook for leisure. As a value investor, I will only buy into a stock if there is a suitable upside based on its intrinsic value. The strong share price movement of Hemas has resulted in the stock closing in on its intrinsic value. As a result, I have reduced my allocation in Hemas for the new portfolio of stocks to 7% from 13% last year.

What factors prompted you to reallocate your model portfolio?
My top weight in the portfolio this year will be Access Engineering. This company is a great proxy for the thriving construction sector. The large scale ongoing infrastructure projects in Sri Lanka have resulted in companies like Access having a healthy project pipeline to maintain its ongoing earnings momentum. I have increased my allocation this year to the stock by 4% to 14%. Last year my exposure to the banking sector was 26% through NTB and Sampath Bank. Sampath Bank’s share price has recovered well as expected after its exposure to gold pawning affected earnings. NTB has delivered strong results with a high ROE stemming from higher margins and good loan growth relative to peers. I see further upside in both these stocks and have included them back in the portfolio with slightly different allocation based on expected share price upside. I have also included HNB Non-voting in the portfolio due to the bank’s strength in the SME segment and anticipated loan growth recovery in the overall sector. To ensure the portfolio benefits from the growth in the leasing industry, I have included a 10% allocation into Central Finance. Hayleys MGT, one of the largest players in Sri Lanka’s knit fabric manufacturing industry is a new entrant to my list of shares for 2015. Management challenges in 2011-13 saw its share price crash but the new management is expected to herald a strong turnaround. I have also taken a portfolio exposure of 11% to Lanka Tile for 2015. The tile manufacturer is expected to do well with demand increasing as a result of lower interest rates.

Room for more growth: Indika Rajakaruna

Ceybank Asset Management Limited manages five open-ended Unit Trust funds, two of which are directly in the stock market, namely Ceybank Unit Trust and Ceybank Century Growth Fund. Indika Rajakaruna, Fund Manager at Ceybank Asset Management, discusses the performance of his model portfolio and prospects for 2015.

How did your model portfolio perform?
My model portfolio made a return of 47% during the one year period, growing nearly twice as much as the 24% overall market return during this period. The stock that performed the best was Tokyo Cement with a total return of 137.1%. Its performance was primarily driven by its financial performance and construction industry prospects; improving profitability was not factored into the price at the time of selection and was grossly undervalued.

What are the prospects for 2015?
I am bullish on the construction sector, especially Access, due to the business model they adopt (backward and forward integration). I have selected IOC in my reallocated model portfolio because I feel the tumble in oil prices which would give room for the company to improve its profitability. I believe banking, construction, manufacturing and export sectors’ stocks will have room for further growth and with improved econo activities, we may expect higher earnings growth from listed companies which may improve broader market valuations.The outcome of the Presidential elections may have some implications over investor sentiments. Global oil prices are expected to hover below US$ 70 a barrel and would favourably impact on oil exporting countries such as Sri Lanka. The US, EU and China are likely to benefit from lower oil prices and the recovery in the US and EU would benefit our exports,
 however there could be some setbacks to exports to Russia and the Middle East.Lower oil prices are likely to reduce the pressure on imports, however a rise in domestic demand on the back of lower interest rates may stimulate import demand and offset the benefit from lower oil prices. Lower inflation and interest rates would prop up credit growth, and improve private consumption and investment. If capital flows in to the country are sustained at current levels, we could reasonably anticipate the exchange rate to stabilize at present levels. However the growing demand for credit may exert slight pressure on interest rates.

I am bullish: Ramesh Schaffter

Janashakthi Insurance has the fifth largest composite market share in both life and general premium in a highly competitive market of 22 players. Ramesh Schaffter, a Director of Janashakthi Insurance, discusses how his model portfolio fared in 2014 and prospects for 2015.

How did your model portfolio perform?
My portfolio made a 57% return, which was pretty good given that the overall market gained 24% during the same period. Janashakthi Insurance, Lanka Indian Oil Company and Access Engineering performed exceptionally well.

What was the best performing stock and what drove its performance?
I was particularly confident that Janashakthi Insurance would perform well given that the stock was undervalued and financial results continued to improve, it was a no brainer really.

What factors prompted you to reallocate your model portfolio?
Whatever the election outcome may be, the stock exchange will have a buoyant year. Even if interest rates were to increase, there would be a lag so the market would still be an attractive place. So overall, I am bullish for 2015. I have reallocated more funds to Access Engineering and included Kelsey Developments to the portfolio, because the construction sector will continue to drive GDP growth. It is unfortunate that there are not enough stocks in this sector.

ACL Plastics is another inclusion which has promise. The stock is undervalued and growth prospects are good. Citizens Development Bank has continued to outperform the sector in terms of financial performance, so this is another stock I want to be exposed to.

I will exit Lanka Indian Oil Company because falling global fuel prices will affect its profitability because regardless of whoever comes to power, there will be a reduction in domestic prices. I have exited from Expo Lanka and United Motors Lanka as well.


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