FAQ – Model Portfolio

Frequently Asked Questions – Model Portfolio

Q. What should be the minimum portfolio size to benefit from model portfolio service?

As a thumb rule, an investor should ideally not be paying more than ~3% of the portfolio as advisory fees. This implies if one starts with a minimum capital of Rs 7 lacs, the service at this price point will be able to add decent value. If you have a lower capital to start with, but are confident of adding at regular intervals, then also you may opt for the service as service period is of twelve months.

Q: How many stocks will you have in the Model Portfolio?

We would have minimum of 15 and maximum of 25 stocks in the Model Portfolio. We understand historically great investors have built fortunes by investing in 3-4 great companies and there have also been fund managers who made a killing despite over diversifying to 75-100 stocks. Without debating the merits and demerits of these extreme strategies, we would like to state that we prefer a balanced approach to portfolio management and are quite comfortable with a portfolio comprising of 15-25 stocks.

Q: Would there be stated allocation to each idea or would it be equally weighted portfolio?

Generally no one would be equally bullish on all stocks in the portfolio; there would be some stocks where we would be highly optimistic, some with moderate level of optimism and some stocks where we just wish to try our luck (concept stocks). In the light of above, we would have clear allocation attached to each stock in the model portfolio. The minimum allocation would be 3% (concept stocks, newer ideas, emerging stories) and the maximum would be 10% (highest conviction bets with low downside). As a risk management practice we would never cross 10% allocation in any single stock at the time of entry. There would be some stocks where we initiate with a 3% allocation and over time as conviction goes up and/or valuation becomes more attractive we will keep on increasing allocation to higher levels.

However, if due to extraordinary price movements over time the allocation of a particular stock crosses 10%, we might not cut the allocation; why sell our winners?

Q: Will the model portfolio be 100% invested at all times?

No, there might be times when we would prefer to sit on some cash and wait for attractive opportunities to arise. However at no point in time, we would go more than 40% in cash.

Q. How frequent would be the changes to model portfolio?

We are investing in these stocks with a long term view so one might say that ideally there shouldn’t be any changes. However, as an investor we are chasing a moving target and hence when circumstances change we have no option but to adapt to the new information. Following could be the changes:

  • As conviction goes up, we can increase allocation in an existing stock using idle cash or by reducing allocation to some other stock.
  • We can reduce allocation or completely exit a stock and move either into cash or a new stock.

Though by default, the above changes, if any, would happen once a quarter during our quarterly update. However, if a development occurs which warrants an immediate action, we would have no option but to do interim re-balancing.

Q: What should be my risk & return expectations from Model Portfolio?

We aim to earn returns of 18-20% CAGR over a long period of time (at least 5 years) without taking too much risk. We may hold some quality stocks at above-average valuations (where earnings visibility is high) and hence might experience some time correction implying price stays same and earnings catch-up  for valuations to revert to normal levels. So we might under-perform the markets in the short term as cyclicals  like Infra/Cement  or PSU Banks perform well.  However, in the longer term, we are confident of our strategy of sticking to ‘quality at reasonable price’ and earn our desired return without taking too much risk.

Given global as well as domestic developments, there could be 20-25% volatility and portfolio may go negative temporarily however we don’t look at volatility as a risk. For us risk only has one meaning which is ‘permanent loss of capital’. To avoid the permanent loss of capital, we invest only in simple businesses which fall in our circle of competence, enjoy some sustainable competitive advantage, pass our filters on management quality and surprise us while we do intensive scuttlebutt to identify long term trends and preferences.

Read more about our equity research process.

Q: What is the benchmark index of the model portfolio?

For us it is a difficult question to answer. Nifty or Sensex would not be the right benchmark for our model portfolio as we would hardly have any stocks in common. Not to imply that we are just a small/midcap portfolio, we would indeed have some large cap stocks too but very few in common with front-line indices. That leaves us with CNX500 as one option, for it constitutes not only large caps but broader markets too.

When we worked at designing this portfolio, we did not start by looking at any index. We followed a bottom-up stock picking strategy where we followed processes which included assessing downside risks, visibility of earnings, size of the market opportunity, assessing management competence & integrity and judging attractiveness at prevailing market prices.

Q: Will there be common stocks in the SA Basic Plan (Stock Ideas) and Model Portfolio?

Yes, some of the stocks will be common. If we are extremely bullish on a stock covered under ‘Stock Ideas’ which is still available at similar price / fair valuations, we believe we would be inconsistent by not including that in our model portfolio.

The core difference between the two services are as follows:

  • SA Basic Plan (Stock Ideas) shares interesting ideas with a detailed and easy to understand research report (See sample Amrutanjan Healthcare) and is suitable for investors who wish to understand the investment thesis in and out, invest at regular intervals and build a portfolio of quality companies over time.
  • Model Portfolio, on the other hand, gives the ability to deploy a large sum of capital at one go- 15-25 quality stocks, their respective allocation and a one-pager thesis is shared, along with quarterly updates. This is exactly like us telling you our portfolio and you simply replicating the same in your account.

Over time, both services might have a significant number of common stocks, however we must understand that the utility served by both services are different.

Q: I am a subscriber of SA Combo Plan (Stock Ideas + Model Portfolio), how do I allocate incremental capital?

You would be deploying bulk of your capital as per model portfolio at the start of the service.

Stock Idea research reports on existing model portfolio stocks will help you understand the thesis behind those investment decisions and there will also be newer stocks covered.

Incremental monthly savings or fresh capital can be deployed in two ways:

  1. Increase investments in model portfolio proportionately
  2. Invest in new stock idea (if not already covered in Model Portfolio)

We leave this discretion with the investor to chose one from the two options above. If you are confused, invest it in the model portfolio proportionately.