Performance measurement – the difference between TWRR and XIRR Performance measurement – the difference between TWRR and XIRR
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Equity

Performance measurement – the difference between TWRR and XIRR

Performance reporting in the PMS industry had no standardized reporting till SEBI mandated managers to only report TWRR.  (Time Weighted Rate of Return).

TWRR measures skill of a fund manager – TWRR does not care about quantum of money invested, only the return earned over the time period money was invested.  It is calculated by multiplying returns over each time period money is invested and dividing it by the total time period. Alternatively, one can calculate this by assuming units are being issued at prevailing prices and calculating how the NAV of each units has evolved (MF method).

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The stock market is not being irrational

In our last communication on 5 May, we had shared that we need to be realistic in return expectations as monetary policy is reversing which will have an impact on multiples.  We are seeing this play out as the market reprices risk.  There is a higher probability vs the last few months that inflation will stay elevated and that developed world Central Banks will need to raise rates aggressively and that could push their economies into recession.

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Need for realism in return expectations

Conversations with partners over the past few days suggest some partners are not appreciating the change in monetary policy underway and what that means for future returns.

Hence, some points we have made earlier merit repetition.

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The Fin Tech Valuation delusion

Technology buzzwords – “ML. AI. Blockchain. Platforms” are fueling investor delusions.   We share 2 articles and also explain why we don’t own any “FinTech” as of now. 

Technology buzzwords are fueling investor delusions

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Will Technology firms take value away from Private Banks?

A question we introspect on significantly is whether the next stage of value migration in Banking will be from Private Banks to Digital players.

Our working hypothesis at present: well-run Banks will grow aggregate profits; however, their valuations will drift downwards as ROEs will decline. 

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The flaws of Sharpe Ratio

Sharpe ratio seeks to determine risk-adjusted returns, or “returns per unit of risk”.   The higher the Sharpe ratio, the better the fund’s historical risk-adjusted-performance.

Solidarity’s Sharpe ratio since inception is ~2x that of the NIFTY.  This implies for the same level of risk, we have delivered twice the return.   

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Our perspective to some commonly asked questions (part 2)

What risk in the market do you worry about the most at present?

Markets seem to be ignoring the risk of significantly higher inflation down the road and abrupt change in monetary policy.  At present, the markets are complacent that the US Fed will not raise interest rates in the short term and are justified in this because the US Fed, the most important Central Bank in the world, is still buying USD 120 B of Bonds monthly which keeps long term interest rates low.  However, company after company is reporting higher inflation in the US even as economic growth in the US is surging.

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The shocking resilience of India’s stock markets

Commentators are wondering why the Indian stock market is “shockingly resilient” amidst the devastation caused by the Covid second wave.    Their premise is that Covid’s second wave is causing significant devastation and death.  2021 GDP growth has been downgraded.  Rising raw material prices will erode margins. The virus has spread across the country and will cause massive unemployment.  Analysts have started downgrading estimates.   Stock price valuations are 2X of China.  So why has the market fallen only 5% since February?

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The futility of taking cash calls

In our last blog we explained we don’t intend taking cash calls just because markets may seem overvalued.

In this note we provide more rationale for the same.  Even if one was to get market timing – selling and re-entry – both legs perfectly right, and that is a big assumption, the net impact on your incremental IRR vs staying invested is marginal.

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Our perspective to some commonly asked questions (part 1)

4 common questions we have recently been getting

1.      Is this still a good time to enter markets?

2.      Will you invest all additional capital at present?

3.      Will you take some cash calls because markets have run up so quickly?

4.      Will you rejig the portfolio as cyclicals may do better short term?

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