Many opportunities in the big discount sale, but is anyone buying?

While the headlines were loud and TV anchors gloomy, hiding behind this 1,878 companies was something every long-term investor would be waiting for: an opportunity to invest. For long, correction-seeking analysts and investors alike had been waiting… waiting… waiting for a market that in the very near term rose 1,000 points in four days, to correct itself. Well, at close to 1,500 points, they’ve got more than their share of short-term correction.

Of the lot, the share prices of 397 companies fell by more than 10 per cent. That’s almost every fifth company. Among the stars here are Reliance Energy (Rs 1,333) which fell almost 28 per cent, Bank of India (Rs 256, down 21 per cent), Reliance Capital (Rs 1,498, down 20 per cent), BHEL (Rs 2,051, down 15 per cent), State Bank of India (Rs 1,668, down 15 per cent), Bharti Airtel (Rs 968, down 14 per cent).

The fall came across sectors — cement (ACC, Ultratech Cement, Mangalam Cement), metals (Steel Authority of India, National Aluminium Co), banking (Union Bank of India, IDBI, Bank of Baroda, Kotak Mahindra Bank), fertilisers (Chambal, Nagarjuna), infrastructure (GVK, GMR, Simplex), finance (IFCI, Indiainfoline, IDFC, Geojit, Indiabulls), construction (IVRCL, Jaiprakash Associates, Nagarjuna). The list is pretty and long.

Additionally, if you take a longer view, say a year, the numbers remain attractive. The prices of more than a third of the sample (829 or 36 per cent) are quoting below their prices a year ago. Within this sample, there are 643 companies, or 28 per cent, that have fallen by more than 10 per cent, 470 below 20 per cent, and 263 companies whose prices have fallen by more than 30 per cent.

This juicy list includes companies like Raymond, Indian Oil, Shopper’s Stop, Procter & Gamble, PVR, ITI, Cipla, Novartis and Trent. The point is not that these are companies you can go and buy tomorrow but that companies that are or have been stars on the exchanges, are available at prices that should make correction-seeking investors drool. These are fair to good companies that have long-term performance track records and sound managements. In the list are also many IPOs that had been oversubscribed and are now quoting below their offer prices.

This worst-ever fall in the market benchmark has seen bundles of opportunity flying. Sometimes leaning on Left-induced uncertainty, sometimes on the uncertainty created by policy changes, but always irrationally so, for in the short term, the market cannot behave rationally. And because of this misbehaviour, the long-term investor stands to gain. The cost is borne by day traders and institutional players, offering benefits to investors with a vision some 10 to 20 years away.

If pundits, who have been proven wrong repeatedly, are right this time, this fall has perhaps not ended yet. Then again, perhaps it has. I certainly don’t know and a lot of other analysts, observers, investors and money managers don’t either. If you take these three assumptions together — one, nobody knows where prices will be in the short term; two, a fairly clear and growing long term picture; and three, the current fall is an opportunity to buy rather than a reason to cry — the way ahead is fairly clear.

It’s like a giant discount sale in your favourite mall, where the prices of four of five goods are quoting below yesterday’s prices. If you’ve identified your five good companies, maybe some of them are available at basement prices.

How have the experts performed?

Maybe all of us are financially illiterate and perhaps need to use the crutches of experts to get an exposure to Indian equities. So, I looked at the performance of mutual funds, the most transparent, most well-regulated (compared to the ease with which insurance companies selling equity products get away) segment of financial services with the maximum disclosures. The results are somewhat mixed.

Only half (or 37) the 75 diversified equity schemes I studied beat the Nifty (which rose 49.6 per cent) over the past year. Three out of four schemes (or 45) bettered the Sensex (which rose 45.3 per cent). On a three-year timeframe, again half the funds beat the Sensex, while 65 per cent beat the Nifty. The real good track record came over five years, when four out of five funds beat the Sensex and nine out of 10 beat the Nifty.

But when you’re paying an average annual fee of around 2 per cent, the minimum you expect rises by that much. Add to that the additional fund manager risk. I would add 5 percentage points today (the factor being linked to benchmark performance) to that. Else, why not go for an exchange traded fund? The question, therefore, investors should be asking is: how many funds have outperformed the Indices by 7 percentage points?

The answer: not too many. Over the past 12 months, two out of five funds (31 funds) outperformed the Sensex, while 18 funds (or one out of five) outperformed the Nifty. Over three years, 21 funds (28 per cent) outperformed the Nifty, while 13 funds (just 17 per cent) outperformed the Sensex. Overall, a below average score, and one that needs to be monitored carefully. I haven’t given up on them yet, but I suppose most of them need to show us the real money, adjusted for performance. We have applauded a rising tide so far; the going’s getting tougher now, as the numbers show.