ArthVeda - Research and Product DevelopmentGiventhefatperformanceofIndianstockmarketinlast5yearsandin case of developed market in the West for 10 years, ample discussions have concerned the relative performance of stocks and bonds. Some even argue thatinvestorsshouldallocateassetsentirelytobonds,notonlybecause bonds are safer investments but also because they believe that bonds will outperformstockoverthelongrun.Inotherwordsifbondscandeliver higher returns than stocks why bother with stocks? Citi group wrote a piece in 2009 arguing that: The Cult of equities was dead. Long live the cult of thebond.Precrisiserawasentirelydifferentwithinvestorsbecoming overlyoptimisticonstockmarketreturnsandexpectedsuchperformance to continue. People invariably arrive at their belief not on the basis of proof butonthebasisofwhattheyfndattractive. Astudyofhistoricalreturns is,therefore,usefulforbringingsensetoeithersituation,whetheroverly optimistic or overly pessimistic expectation.Historical Returns from Bonds and StocksEquity ownership in a business is generally risker than bond as shareholders getpaidonlyafterallthesuppliers,employeeandcreditorsarepaidoff. Equityretunisaresidualthatvarieswitheconomicfortuneofthefrm. Thereforeequityownersinafrmexpecttobecompensatedforthis additional risk over bonds. An analysis of historical returns in various equity markets shows that returns havebeeninconsistencywithaboveexpectation.Marketsgloballyhave generally outperformed bonds in long run. In short run performance could be dominated by various economic, political and business factors but in long run equity tend to do better than bonds.Beating Nifty through ArthVeda Alpha L50An Alpha Effcient StrategyAuthorsVipul Badjatyavipul.badjatya@arthveda.co.inVikas Guptavikas.gupta@arthveda.co.inSeptember 2013 - 50 100 150 200 250 300 350 400 450 5001999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012Inflation G-Sec Nifty TRIFigure 1: Stock market vs bond market performance since 1999Source: IMF, NSE, Arthveda Analysis, G-Sec returns are post taxes, No long term taxes on holding Nifty IndexBeating Nifty through ArthVeda Alpha L50September 20132Figure 1 & 2 above shows a comparison ofpost tax returns ofNifty 50,Composite G-Sec Index against infation. G-Sec is a well defned bond index to measure returns in Indian bond markets. Above charts clearly shows that equity has outperformed fxed income over a long holding period. A Rs. 100 invested in Nifty50 back in 1999 would have become approx. Rs. 490 including dividend and after tax in 13 years time delivering a CAGR of 13% while same amount invested in government bonds would have become Rs. 190 after tax delivering merely a CAGR of 5.1%.Considering last 13 time periods such as last 1 yr, 2Yr, 3Yr etc equity has outperformed in 11 periods. Even on a rolling 5yr basis as shown in Figure 3, equity has underperformed fxed income in only 2 out of 8 periods. It is interesting to note that both the periods i.e. 2000-04 and 2007-11 followed a bull peak period. In such period fxed income usually perform exceptionally well because of falling interest rate cycle. Baring those periods equity has outperformed fxed income. -5%0%5%10%15%20%25%30%35%Last 1yr Last 2yr Last 3yr Last 4yr Last 5yr Last 6yr Last 7yr Last 8yr Last 9yr Last 10yrCAGR S&P CNX Nifty Composite G-Sec indexFigure 2: Nifty 50 and G-Sec Historical Returns. Numbers are as of Dec12Source: NSE, Arthveda AnalysisFigure 3: Nifty 50 and G-Sec Historical Returns over 5Yr rolling period. Numbers for Dec to Dec0%5%10%15%20%25%30%35%40%45%50%'00-04 '01-05 '02-06 '03-07 '04-08 '05-09 '06-10 '07-11 '08-125-year rolling CAGRS&P CNX Nifty Composite G-Sec indexSource: NSE, Arthveda AnalysisBeating Nifty through ArthVeda Alpha L50September 20133A return analysis of a more mature market such as US for a longer period of time shows similar results.Table 1 shows the performance of the S&P 500 Index, Barclays Capital US Aggregate Bond Index and the Ibbotson US Long Term govt. bond Index over various time periods. Over a longer term history stocks have performed quite well despite bonds outperforming their own historical performance (Declining interest rate environment in US) and stocks underperforming in last decade. Over the very long term, starting 1926 stocks have outperformed bonds by over 4% annualized.Span S&P500BarCap US Aggregate BondIbbotson US Long Term Government BondLast 20 Yrs 9.14% 6.89% 6.56%Last 30 Yrs 10.71% 8.92% 8.51%Last 40 Yrs 10.14% 8.32% 7.81%Jan 1926 - Dec. 2010 9.87% NA 5.35%Following fgures shows the growth of $1 invested in 1900 in equities, bonds and treasury bills in US and UK. Charts clearly show equities have successfully created wealth for investors over long run world over.Table 1: US Stock and Bond Market Returns. Data available as of Dec10Source: US Federal Reserve, Morningstar, Seeking Alpha, Arthveda AnalysisFigure 4: Cumulative Real returns for US stock market, Bonds, T-BillsSource: US Federal Reserve, Morningstar, Seeking Alpha, Arthveda Analysis1900 1020 3040506070 8090 2000 101,00010010109529.42.7EquitiesBondsBillsCAGR 6.3%CAGR 2%CAGR 0.9%U.SBeating Nifty through ArthVeda Alpha L50September 20134Source: US Federal Reserve, Morningstar, Seeking Alpha, Arthveda AnalysisFigure 6: Active vs Passive InvestingSource: ArthVeda Fund Management Long term history provides two major insights: 1. Stocks have outperformed bonds over long period2.Stockscouldbemorevolatilethanbondsinshortrunbutlongerholdingperiodlowerstheimpactofshortterm volatility and rewards patient investors with higher returns.Havingrealizedthefactthatequitiesprovidebetterreturnoverlongrun,investorsareoftenfacedwithevenmore important question of whats the best way to take the equity exposure. All approaches to taking equity exposure can be broadly divided into two categories Active and Passive. The proponents of each have dramatically different beliefs about the way market behave as shown in fgure 6 below.Figure 5: Cumulative Real returns for UK stock market, Bonds, T-Bills1900 1020 3040506070 8090 2000 101,00010010103165.52.9Equities BondsBillsCAGR 5.2%CAGR 1.5%CAGR 0.9%U.KMarket timing is possibleSuperior security selection is possibleMarket timing is possibleSuperior security selection is NOT possibleMarket timing is NOT possibleSuperior security selection is possibleMarket timing is NOT possibleSuperior security selection is NOT possibleActivePassiveBeating Nifty through ArthVeda Alpha L50September 20135Active ManagementActiveinvestorsbelievethereisaconstantlychangingsetofinvestmentopportunitiesthatcanbe captured by carefully studying the market components or choosing a skilful investment manager to do the job. They buy and sell securities through market timing and stock picking to capitalise on these perceived opportunities.Self-Investing: An investor supporting active management style can choose to get his hands dirty and manage his own portfolio of securities. He is faced with the daunting task of hand picking his stocks. He would be seeking answers to questions such as what sectors are good? Which securities look attractive in those sectors? Which securities are fairly priced?Which of them has a better return potential? What is the inherent risk on investing in those securities? Are there any competing securities which are better? What number of stocks to buy for the portfolio? Is the portfolio diversifed enough? How frequently should portfolio be churned? What is the news fow on the portfolio stocks in the market? Is investors pricing in all the available information correctly? How long should he hold the stocks? Withthiswholegamutofquestionsfacinginvestorsinhisfaceitisreallynotadvisablefornon-professional investors to go about stock-picking on his own. Non-professional investors are invariably at a disadvantage to other players and market participant because of following reasons:a.) Stockpickingwithouthavingagoodunderstandingofmarketdynamicscanincreasetheriskin equity investingb.) Asymmetry of information between investors and other market participant transfers market risk to person at a disadvantage. There are numerous fund managers constantly analysing the market on a regular basis. They have much more resources at their disposal and deep rooted network to extract informationc.) Signifcantamountofdataavailableinpublicdomain.Datacanbeslicedanddicedinnumberof waystoobtainresultswhichhavedifferentinterpretationandimplication.Thiscanleaveinvestor only confusedd.) Investing requires time commitment. It is not possible for an individual investor to set aside enough time required for analysing securities.Active Investing: In order to negate above disadvantages proponents of active investment management are left with the choice of hiring a professional fund manager to perform active management. Hiring a managerposesitsownsetofquestions.Whatstrategywillsuittheinvestor?Whichfundmanageris better? Is there a risk of any Ponzi scheme? What fees are they charging? Is there a risk of style drift with active manager? Is the performance track record a true refection of fund managers ability? Even after a careful selection, it has been proven that most of the active managers usually underperform market after accounting for fees.Active management is a zero sum game. Collective performance of all the active fund manager is market performance. And since active management is costly, the average return of all active investors will be less than the avg.Figure7belowshowsproportionoffundsundervariousstyleofinvestingunderperformingtheir benchmark over one, three and fve year horizon. With exception of large cap value fund, over 50% of funds have underperformed over last 5 years. On an overall basis 68% of funds underperformed in last 5 year. Beating Nifty through ArthVeda Alpha L50September 20136Similar results were observed for Indian markets. In the last 5 years about 53% of equity funds have underperformed theirrespectivebenchmarks.Onanoverallbasisi.e.includingfxedincomeandmixedfundsnumberremainslittle changed with about 52% of them underperforming.Another problem with hiring an active manager is that those of whom who are able to outperform the market during a particular period fnd it diffcult to remain consistent in their performance. Most of them lose the outperformance over a longer period of time.Data obtained from S&P persistence scorecard for US fund manager shows that very few funds manage to repeat their relative performance and maintain their top-half or top quartile performance consistently. As seen in the table 2 below only about 1% of 535 domestic funds in US were able to consistently maintain their position in top quartile for each year in last 5 year. Similarly only 5% of them were able to remain in top half for each years in last 5 years.Figure 7: Proportion of US Equity funds underperforming their benchmark0%10%20%30%40%50%60%70%80%90%100%All DomesticEquity FundsAll Large-CapFundsLarge-CapGrowth FundsLarge-Cap CoreFundsLarge-Cap ValueFunds1-year 3-year 5-yearSource: S&P Index vs Active(SPIVA) US mid-year 2012 report, Arthveda ResearchFigure 8: Proportion of Indian funds underperforming their benchmark0%10%20%30%40%50%60%70%Large Cap Diversified ELSS Balanced MIP Gilt Debt1-year 3-year 5-yearSource: S&P Index vs Active(SPIVA) India mid-year 2012 report, Arthveda ResearchBeating Nifty through ArthVeda Alpha L50September 20137 Fund category Start count Percentage Remaining in Top QuartileTop 25% Mar-08 Mar-09 Mar-10 Mar-11 Mar-12All Domestic Funds 535 31.0% 2.2% 1.3% 0.9%Large-Cap Funds 162 32.1% 0.6% 0.6% 0.6%Mid-Cap Funds 92 20.7% 1.1% 1.1% 1.1%Small-Cap Funds 126 35.7% 3.2% 0.8% 0.0%Multi-Cap Funds 155 32.3% 3.9% 2.6% 1.9%Top 50% Mar-08 Mar-09 Mar-10 Mar-11 Mar-12All Domestic Funds 1072 54.8% 14.3% 7.6% 5.2%Large-Cap Funds 325 56.9% 13.9% 7.1% 5.2%Mid-Cap Funds 183 53.6% 12.0% 6.6% 5.5%Small-Cap Funds 253 60.9% 20.2% 10.3% 5.1%Multi-Cap Funds 311 48.2% 11.3% 6.4% 5.1%Scene is no different when it comes to Indian market. Very few funds have been able to perform consistently relative to its peers year over year. There were about 97 funds in top 50% when ranked on the basis of their one year performance at the end of March-2008. Of these 97 funds only about 11 funds (or 11.3%) of funds were able to maintain their position in top 50% consistently over next 4 year. When measured for even stricter performance criteria, of the 48 funds which were in top 25% at the end on March 2008 there were no funds at the end of March 2012 who maintained their one year performance ranking every year. Below table summarizes the results.All Equity Funds Initial Count Percentage RemainingYear End >>> Mar-08 Mar-09 Mar-10 Mar-11 Mar-12Top 50% 97 57.7% 27.8% 18.6% 11.3%Top 25% 48 22.9% 0.0% 0.0% 0.0%Table 2: Consistency of US active funds in maintaining their relative performanceSource: S&P Index vs Active (SPIVA) US mid-year 2012 report, Arthveda ResearchTable 3: Consistency of mutual funds in India in maintaining their relative performanceSource: S&P Index vs Active (SPIVA) US mid-year 2012 report, Arthveda ResearchBeating Nifty through ArthVeda Alpha L50September 20138Why do most of the active funds fail?One of the biggest reasons for underperformance of active funds has been identifed as behavioural in nature. Number ofbiasesexistswhenafundmanagermakesaninvestmentdecision.Fundmanagersingeneralareoverconfdent and tend to believe they possess more skills than they do. Another important tendency that has been identifed is of herding. Fund managers keep interacting with each other and are generally aware of what others are buying and selling. They tend to follow other fund managers. An interesting study of mutual fund holdings conducted in US found that fund managers in Denver are more likely to hold same stocks are other fund managers in Denver. So was true for Boston based funds. Some fund managers underperform because they focus too much on their short term performance in order to attract investors.It has been found that even investing with a successful manager carries a lot of risk. To mention a few:1.Successleadstoassetgrowth,lowerfexibilityandreducedinvestmentalternativesforthefundmanagers.It becomes tough to stick with the strategy and remain invested in same companies 2.Success may lead to lack of focus (marketable star managers may be used to launch new products or simply in other non-investing capacities)3.Star managers may be lured away with higher pay by other frms 4.Star managers may quit to start their own frms, or simply lose interest and motivation 5.Success could lead to overconfdence, sloppiness and downplaying risksAnother reason identifed for the underperformance of active funds is fees charged by the fund manager. Active managers must pay for more research and has to bear cost of hiring expensive analysts. They manage their expense by charging higher fees to investor. Even higher turnover which leads to too much transaction cost and tax ineffciency for the fund leads to lower performance numbers.With all the above risks associated with active management and hence low predictability and consistency of performance of fund managers with respect to market, investors choose to stick to passive management.Passive ManagementPassive investors believe there is a relatively constant relationship between risk and reward that can best be harnessed by using a consistent strategy over time. They do not engage in market timing or stock picking. Instead, passive managers seek to own a large basket of securities in pre-defned asset classes. They may be active in controlling costs, controlling taxes and rebalancing. But they are passive with respect to market timing and stock picking. Lot of risk associated with active investing can be mitigated by taking a passive management approach. As mentioned earlier passive investors are generally believer of market effciency and try to restrict themselves to index funds or ETFs which track index. Passive strategies are pure and consistent market exposure. They maintain consistency in their risk profle.Passivemanagementaregenerallylessexpensiveespeciallyinmoreliquidandeffcientmarketslikelargecap equities. Fund managers charge less fees as compared to active fund managers. Passive strategies also tend to have lower turnover resulting in low trading costs. ETF can also be advantageous from a tax perspective. ETFs can honour large redemption by providing investors with underlying stocks instead of cash which prevents immediate capital gain realization. Below fgure gives a schematic overview of how passive funds are able to beat over 85% of funds on an average after accounting for all fees and expenses. Passive funds can further improve their relative performance by intelligently diversifying, rebalancing and managing the fund with discipline. Beating Nifty through ArthVeda Alpha L50September 20139Why passive Investing is not the best choice?Although passive strategies seem to be a perfectly viable option when it comes to potential risk reward ratio in long term, it sounds like accepting mediocre return from day 1 of the game. Passive funds generally have their returns capped to benchmarks and often lag the benchmarks after fees. It seems to eliminate possibility of spectacular returns. Passive funds spend most of their time tracking the index rather than generating risk adjusted returns. Another problem with investing in index or ETF funds tracking an index is they are often structurally fawed. They tend to remain overweight on overvalued stocks and underweight on undervalued stocks. Returns for such funds can often be explained by movement in few stocks. This also leads to lack of diversifcation by concentrating in wrong stocks. Further passive strategies are based on assumption that markets are effcient and all assets are fairly priced. This assumption undermines the idea of investing in passive strategies as number of research has clearly established that markets are anything but effcient.Within this debate of active vs passive there is in fact a middle ground: Alpha effcient strategies. Alpha effcient strategies liesomewherebetweenpurelypassiveandcompletelyactivestrategies.Suchstrategiestargetthesweetspotof return to risk effciency. Alpha effcient strategy tries to extract the best of both the worlds. Like traditional passive fund it offers the advantage of low turnover cost, low taxes and high diversifcation while at the same time offer disciplined approach to security selection and portfolio construction process of an active fund. Such strategies are a way to add alpha generating returns higher than benchmark with risk lower or similar to benchmark. L50 strategy is an alpha effcient strategy based on Nifty Index. Strategy aims to deliver returns higher than index while taking risk similar to the index and thus generating alpha over long run. The L50 strategy is based on the globally accepted value investing philosophy. Value investing requires buying stocks at below intrinsic value with a margin of safety in order to generate superior risk adjusted returns. Across the globe true followers of value investing have created signifcant wealth. There are ample evidences both academic and practical Figure 9: Schematic representation of performance comparison of Active vs Passive fundSource: AFVM AnalysisBefore Fees,Transaction Cost andTax EffectAfter Fees andTransaction CostAfter Fees,Transaction Cost andTax EffectWith Diversification,Rebalancing andDisciplineIndex FundActively Managed FundL50 An Alpha Effcient StrategyBeating Nifty through ArthVeda Alpha L50September 201310whichsupportsthevalueinvestingphilosophy.EvensimplevaluestrategiesofinvestinginlowPE,PBorP/CFare proven to generate returns higher than market. (See Ling, C. and Koo, S. 2011, On Value Premium Part 1). Well know follower of value investing, Warren Buffett, was able to generate 20% CAGR since 1965-2011 against S&P500s 9.3% for the same period. Similarly, Peter Lynch gave 29% CAGR vs S&P500s 13% during 1977-90.Valueinvestingworksthroughthickandthinifinvestorsaremethodicalandpatientenough.Valueinvestorstakea business owners perspective towards prospect investment opportunity. They aim to understand the underlying business to its very bottom and be able to appreciate various moving parts involved. Their understanding of the business helps them judge the quality and prospects of the business. Based on the learning and future expectations from the business, value investors estimate the intrinsic value of the business. Finally before taking an investment call value investors make sure they buy at a price below the intrinsic value with a signifcant margin of safety. They buy and hold their investment till the time they are able to realize its fair valuation upon which they exit with profts.Investment StrategyL50investmentstrategyappliesthesamevalueinvestingphilosophytoNifty50universe.Strategytriestoestimate valuation mismatch within its universe of stock and invest based on this mismatch.L50 strategy is to invest only in Nifty 50 stocks and remain invested in all of them. It uses fundamental and valuation parameters to determine relative under or over valuation in Nifty stocks given their fundamentals. A company with strong fundamentals but low valuation will show greatest valuation mismatch and is a value buying opportunity. On determining the relative valuation mismatch of Nifty stocks strategy goes overweight on relatively undervalued stocks and underweight on relatively overvalued stocks. ThisiscontrarytoNifty50Indexwhichisusuallyoverweightonovervaluedstocksandunderweightonundervalued stocks. At the time of portfolio creation strategy limits the maximum allocation in any stocks to 4%-6% while minimum weight is restricted to 0.5%-0.75%. Post portfolio creation L50 portfolios are rebalanced only after one year using then allocation. Like value investing L50 strategy buy and hold the stocks. No portfolio transactions are done during the year. Above portfolio creation and one year rebalancing process is repeated every year to generate strategy returns.L50 strategy as implemented above lowers the risk of self-investing or investing with any mutual or active fund. L50 has a well-defned stock selection and portfolio creation process. It restricts number of stocks in the portfolio to 50 nifty stocks. It does not carry any stock picking risk as all the nifty companies are safe quality stocks. For any given combination of fundamental and pricing data strategy always results in one unique portfolio. Strategy has no room for fund managers discretion in selecting and assigning weights to portfolio stocks. It eliminates any fund manager risk or human biases usuallyfoundinactiveportfoliomanagement.Fundmanagersactionsaregovernedbytheirpastexperience.Prior experience often leads to preconceived notions and actions based on such beliefs are subject to emotional biases. L50 strategy leaves no room for such errors as portfolio creation and rebalancing process are pre-defned.Strategy returns are independent managing the strategy. Further, portfolios managed using active strategy could see a style drift over time. Its risk profle could change depending on fund managers action. For e.g. risk profle of a large cap strategy could increase over time if fund manager starts adding smaller stocks in order to boost performance. Portfolio managed using the L50 strategy pose no such risk. L50 maintain its style over time because it restricts universe to Nifty50 stocks. Hence risk profle of L50 strategy does not change. Itsawell-establishedfactthatmutualfundsinIndiahavebeeninconsistentintheirperformancerelativetotheir benchmarks. Hardly any funds have been able to beat benchmarks consistently over time. Even when compared against each other, funds have been struggling to maintain their ranking within its peer group. Very few funds have been able to maintain themselves in top performer. L50 evaluation shows that the strategy returns have been consistent with respect to its benchmark over time. Strategy has been able outperform its benchmark consistently over a long holding period. When compared with other active fund, L50 delivers exceptionally high returns. It consistently has been amongst the best performing strategy.Nifty Index funds are the closest comparable funds for L50 from the passive fund universe. Index funds by design have their returns capped to benchmarks but they usually lag index because of cost involved in managing the index fund. Index funds like index have overexposure to few large stocks and often lack diversifcation. They are usually overweight on overvalued stocks and underweight on undervalued stocks. L50 strategy unlike any Index fund does not have capped Beating Nifty through ArthVeda Alpha L50September 201311returns. Strategy evaluation shows that L50 outperform its index consistently over long run. In terms of diversifcation, L50 gives higher diversifcation when compared to an Index fund. A 4%-6% limit of maximum allocation and 0.5%-0.75% ofminimumallocationkeepsL50diversifed.Further,unlikeindexfunds,L50goesoverweightonlyonundervalued stocks. This reduces the risk of strategy signifcantly.L50 strategy also avoids use of any derivatives, futures or options for its execution. Futures and options are complex tools. These instruments are diffcult to price. At times of panic their pricing tend to deviate from the underlying. This could have a severe negative impact on the portfolio. Such instruments are also leveraged. Use of leverage increases volatility of the underlying portfolio. This makes strategy riskier. Further, use of derivatives also involves rollover cost. Theserolloverscouldbeexpensivewhenliquiditydrieswhichinturnimpactportfolioreturns. Thereforebyavoiding derivatives, futures and options, L50 strategy avoids any unknown risk from leverage.InshortL50strategycanbesummarizedasalowriskstrategyonIndianlargecapstockuniversewhichusesa disciplined approach to portfolio creation and management without taking any excessive or unknown risk when compared to Nifty Index. It follows a buy and hold strategy with low turnover based on value investing philosophy. Figure below summarizes the investment strategy of L50. L50 Investment UniverseAsdiscussed,L50strategyrestrictsitsinvestmentuniversetoonlyNifty50stocks.Itremainsinvestedinallthe50 stocks all the time. Every time portfolio is created or rebalanced the universe is defned by the Nifty constituents at that point of time. Following are the benefts associated with L50 investment universe:a.) L50 represents about 2/3rd of the total m-cap of Indian equities and covers all major sectors of Indian economy (Table 4 below). These companies are well entrenched in the economy. Owning these stocks is an easy and cost effective way to participate in the Indias growth story. Figure 10: Summary of L50 Investment StrategyUniverseWeight AllocationRebalancingMinimize cost and tax Exposure to all 50 stocks of Nifty Remain invested in them Use of fundamental and valuation parameters Overweight onrelatively undervalued and underweight on relativelyovervalued Maximum 4%-6% and minimum 0.5%-0.75% weight Annual portfolio rebalancing Lower transaction cost Near zero taxBeating Nifty through ArthVeda Alpha L50September 201312 L50 Sectors (as of 31st Dec 2012)Banks PowerComputer Software DiversifedCigarettes Automobiles 2 and 3 wheelersRefneries Steel and steel productsFinance Housing Telecommunication servicesAutomobiles 4 wheelers MiningPharmaceuticals Electrical equipmentEngineering Financial InstitutionCement and cement products PaintsOil - explorations/production ConstructionGas Aluminumb.) L50universerepresentsgroupofmostliquidstocksinIndia.Impactcostofexecutinglargeordersisamongst lowest in L50 stocks. Exiting the portfolio is not a challenge as large orders can be executed within a short span of time.c.) Most of the L50 companies are leaders in their market. They have exhibited business excellence and have achieved an edge over their peers. Further, businesses of these companies have survived through various economic cycles. They are amongst the set of companies well equipped to handle any future crisis and stand the test of time.d.) Owning a L50 portfolio lowers the agency risk. L50 companies are professionally managed and have an Independent board which supervises management decisions. Board takes the responsibility to make sure management actions are in the best interest of shareholders and there is no wrong doing at managements part. e.) L50 companies generally follow high corporate governance standards. Most of them are audited by a Big4 or an equivalent auditor. This put investors at some ease and gives confdence in the fnancials reported by the companies. L50companiesfollowstringentdisclosurenormswhichareeitherself-imposedorimposedbyexchangehouse. Largecompaniesalsoremainundertheleseofregulatorybodies.Regulatorsconstantlymonitorthemforany irregularities or inconsistencies in their disclosure or business practice.f.) Obtaining information and conducting research on the L50 companies is relatively easier than smaller companies. L50 companies disclose signifcant amount of information via stock exchange and through press releases. These companiesarealsowidelymonitoredbymedia. Anysignifcantdevelopmentintheirbusinessgetslotofmedia attention.With all the sources of information available at investors disposal market participants can price in same setofinformationaccordingtoindividualsexpectation.Thereisrelativelylessinformationasymmetryinthese stocks.g.) L50 companies also pay dividends to its shareholders on a regular basis. The dividend yields may range from 1%-2%. Considering the dividend pay-out with growth in earnings over time it is estimated that over long period investors can recoup 30%-40% of its capital back from dividends alone and thus preserve his capital to some extent.Table 4: Sectors included in Nifty 50 as of 31st Dec 2012Source: NSE and Arthveda ResearchBeating Nifty through ArthVeda Alpha L50September 201313h.) L50 portfolio is a well-diversifed portfolio. Apart from the exposure it provides to various sectors of Indian economy it also diversify away economic and currency risk. L50 companies have a global business portfolio and hence their growthiscorrelatedtogrowthofvariouseconomiesglobally.Growthfromonecountrycouldoff-setslowdown from another and thus reduces cyclicality of the business. Similarly L50 companies consist of both exporters and importers. Fluctuations in Indian currency have an off-setting impact on importers and exporters. Exporters beneft when currency depreciate as their goods and service become cheaper for their customer. While at the same time importers are at a loss as depreciated currency increases their cost of goods and hence shrink their profts. Therefore thenetimpactofthecurrencymovementontheportfolioinsubstantiallylowerthantheactualmovementinthe currency.i.) InshortL50companiesaresomethesafestcompaniesofIndianeconomy.Itprovidesalowerriskexposureto Indian economy.L50 Portfolio CreationFor the portfolio creation L50 uses a valuation weighted allocation policy given the company fundamentals. Strategy uses fnancial data as released by the companies in the universe (Defned by Nifty constituents at any point of time). Financialsincludebalancesheetparameterslikedebt,receivables,payables,currentassets,currentliabilities,net worth,totalassetsandvarioussubcategoriesmakingthosenumbers.Ontheincomestatementsideparameters include sales, operating margin, depreciation & amortization, interest expense, tax rate, net income, number of shares. For price indication strategy uses current market price, enterprise value and market capitalization. Strategy allocation model takes above parameters as input to generates L50 portfolio % allocation. In order to avoid portfolio concentration infewstocksallocationmodellimitsmaximumallocationof4%-6%andminimumallocationof0.5%-0.75%toany stock in the portfolio. Having an allocation limit on the stocks while creating the portfolio lowers the concentration risk of portfolio unlike Nifty which have about 9%-15% weight in its top stock.Figure 11: Representation of L50 allocation modelProcess Input Balance Sheet Parameters: Long termdebt, Shorttermdebt, Accounts receivable, Accounts payable,Inventory, Total current asset, Total current liabilities,Net worth, Total assets Income Statement Parameters: Sales, OperatingMargin, D&A, Interestexpense,Taxrate, NetIncome,Number of shares Market Pricing Parameters: Current share price,Enterprise value, Market CapitalizationProcess OutputL50 portfolio with % allocation to each stockBeating Nifty through ArthVeda Alpha L50September 201314 L50 Portfolio RebalancingUpon portfolio creation L50 strategy is to rebalances portfolio every one year. Since L50 strategy goes overweight on undervalued stocks rebalancing annually provides time for such stocks to correct their valuation mismatch and realize returns when those corrections happen. Every one year portfolio is rebalanced into stocks which are undervalued at that point of time. Rebalancing also brings portfolio composition back in line with the allocation policy every year so as to avoid prolong concentrated exposure to any particular stock if any. Annualrebalancinglowerstransactionintheportfolio.ItisestimatedthatL50strategyhasaturnoverofabout20% annually.Suchlowturnoversavesonbrokerage,stampdutyandotherfxedcostassociatedwithtransactionsand hence improves the portfolio returns. Annual rebalancing under L50 strategy also lowers the impact of tax on realized return. A 20% return with zero taxes is signifcantly higher that a 20% return with 15% tax on the income. As of now there are no taxes on long term capital gains (defned as capital gains on stocks with holding period of over 1year) in India. Therefore L50 strategy has a holding period of one year before any rebalancing takes place. Table 5 below illustrate the impact of transaction cost and taxes on returns.Portfolio 1 Portfolio 2Beginning AUM 1,00,000 1,00,000Turnover 20% 400%Cost Round Trip 0.50% 0.50%Returns before cost 20.0% 20.0%Returns post cost 19.2% 16.1%Return post cost & Tax 19.1% 13.9%Ending AUM 1,19,100 1,13,900Table 5: Impact of transaction cost and taxes on returnsFigure 12: Representative L50 portfolioL50L50L50 has exposure to all major sectors L50 has a diversified stock exposureBeating Nifty through ArthVeda Alpha L50September 201315Strategy PerformanceInordertoestimatestrategyspotentialreturnstrategywasevaluatedusinghistoricaldata.Rawdatarequiredfor evaluationwassourcedfromreliablesourcessuchasNSE,BSEandCapitalLine.L50portfolioswerecreatedand performance was measured for the historical periods.Evaluation PeriodExhaustive strategy evaluation was conducted for 2002-12 period. 2002-12 has seen various possible macroeconomic and market cycles. During the period stock market has moved from bear market to bull market and then back to bear market. It has also witnessed prolonged sideways movement. During the period RBI has revised its monetary policies number of times. Interest rates have fallen from around 9% to 7% during 2002-04 followed by a gradual increase during 2005-07 from 7% to 8%. Interest rate fuctuations increased during 2007-2008 seeing a rapid increase from 8% to about 9% and a rapid decline in interest rates from 9% to 5%. Infation cycles have also been long during the period. It hovered around 4.5% during 2002-05. During 2005-10 infation climbed up signifcantly rising from 4.5% to 12%.2010-12 has been a sustained high infation regime with infation sticking around 10% mark. Indian currency has also seen a though ride during the period rising from the Rs. 50 mark during 2001-02 to Rs. 35-40 mark during 2007-08. Post bear market of 2008 currency fell from the Rs. 40 mark to the Rs. 55 mark during 2012. Figure below summarizes these market cycles seen from 2002-12 period.As seen above, event set of 2002-12 is quite exhaustive. It is highly likely that future market behaviour could possibly include some or all of these events.A study of strategys performance in all these scenarios was used to build expected performance of the strategy over long run.Figure 13: Macro economic cycles seen during 2002-12 periodBeating Nifty through ArthVeda Alpha L50September 201316Evaluation ProcessIn order to evaluate strategys expected performance over long run without being biased by selecting a favourable portfolio creation date or favourable holding period, the L50 strategy was executed on a daily basis. During the evaluation period L50 portfolios were created daily and held for exactly one year. At the endofrespectiveoneyearperiodseachportfolioswererebalancedandagainheldforoneyear. This processwasrepeatedforalltheportfolios.Fore.g.on2nd April2002L50portfoliowascreated. This portfolio was held for one year with no transactions throughout the year. On 2nd April 2003 the portfolio was rebalanced and the new portfolio was again held till 2nd April 2004. This was done for all the dates starting1stJan2002to31stDec2012.Foranyparticulardayportfoliocompositionwasdetermined bytheL50allocationmodelwhichusespricingandfundamentaldataavailableonthatparticularday. Fundamental data for any period is usually published within 90 days of period end. Therefore in order to avoid any look ahead bias in the strategy evaluation data was used for all the companies with a 90 days lag. So for the portfolios created on 28th March 2005 allocation model uses fundamental data published for period ending 28th Dec 2004 and pricing information as of 27th March 2005.Around 250 portfolios were created every year based on annual trading days.All the portfolios created in 2002 were counted for 1 Yr holding period return in 2003. Same 250 portfolio were held for another year and counted in 2004 for a 2Yr holding period (they were rebalanced in 2003). Similarly all the portfolios created in 2005 were counted for 1 Yr return in 2006 and were counted in 2009 for 3 Yr returns. So adding all the numbers, there were about 2,500 portfolios for which 1 year returns were measured. Similarly there were about 1,000 portfolios for which 7 year return numbers were measured. Table 6 below shows details on the portfolios. InordertocompareL50returnswithNiftyreturnsandmakethecomparisonapplestoapples,Nifty portfolios were created in a fashion similar to as above. Nifty portfolio (N50) were created using weights of stock in the Nifty Index on the portfolio creation date. Each Nifty portfolio was held for one year and was rebalanced only annually. This put L50 and Nifty portfolios (N50) on a similar ground for taxes and transactions. Nifty portfolio returns are what investors would realize in real world when they buy and hold index. Nifty TRI index cannot be used directly for comparison because TRI would mean daily rebalancing andhencehighertransactionandtaxesforinvestors.Investorsrealizedreturnswouldbemuchlower than what TRI index would indicate.StandardReturnandriskratioswerecalculatedforalltheL50andN50forvariousholdingperiods. Numbers were analysed to estimate expected strategy returns and compare it with Nifty returns.Strategy OutcomeStrategy performance and risk ratios were calculated by averaging numbers across all the portfolios as disclosed in table 6 below. Graph below shows performance of the 5yr median L50 portfolio represented by blue line. Red line represents corresponding Nifty portfolio. Median L50 portfolio delivered a CAGR ofabout24.3%basedonendingNAVofRs.1,096.CorrespondingNiftyportfoliogaveaCAGRof 18.1% for the similar period. Graph also shows NAV of best and worst 5yr L50 portfolios and NAV of the corresponding Nifty portfolios. Beating Nifty through ArthVeda Alpha L50September 201317Table 6: Number of portfolios for different holding periods Holding Period >>>Portfolio Ending in Year >>>1Yr 2Yr 3Yr 4Yr 5Yr 6Yr 7Yr 10Yr'02 - - - - - - - -'03 251 - - - - - - -'04 254 251 - - - - - -'05 254 254 251 - - - - -'06 251 254 254 251 - - - -'07 250 251 254 254 251 - - -'08 249 250 251 254 254 251 - -'09 246 249 250 251 254 254 251 -'10 243 246 249 250 251 254 254 -'11 252 243 246 249 250 251 254 -'12 247 252 243 246 249 250 251 251Total 2,497 2,250 1,998 1,755 1,509 1,260 1,010 251Disclaimer:AboveresultsarebasedonL50strategyevaluationover2002-12.Resultsfromstrategyevaluationdoesnotguaranteeanyfuture performance. Actual performance could vary from above numbers. Holding Period ReturnBelowgraphshowsaverageperformanceofL50portfoliosvsNiftyportfolios(N50)forvariousholdingperiods.L50 returns ranged from 24% to 30% for various holding periods. Corresponding N50 numbers ranged from 20% to 23%. ForaholdingperiodofoneyearL50deliveredabout29%whileNiftyportfoliosdeliveredabout23%.Fora5year Figure 14: Performance of Median L50 portfolio against corresponding Nifty Portfolio** B-L50 & W-L50 = Best and Worst L50 portfolios, B-N50 & W-N50 = Nifty portfolios corresponding to B-L50 & W-L50Median L50 portfolio and corresponding N50 portfolio 1,096 621W-L50 733W-N50 654B-L50 1,212B-N50 682 0 200 400 600 800 1,000 1,200 1,400Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12L50 N50Beating Nifty through ArthVeda Alpha L50September 201318holding period L50 strategy delivered about 24% while N50 delivered 20%. Even though there is a slight decrease in the gap between Nifty and L50 on a longer holding period, strategy is able to outperform its benchmark consistently unlike active funds which often lack consistency over a long period.Range of returnThere are about 2,500 portfolio with 1 year holding period and similarly 1,500 portfolios with 5 year returns as seen in table 6 above. Returns for each portfolio could vary depending on its start date. Below graph shows the range of returns for the median 80% L50 and N50 portfolios.L50 returns on a one year holding period ranged from -11% to 87% while for Nifty it ranged from -14% to 65%. For a 5 year holding period returns for L50 ranged from 9% to 41% as compared toN50s5%to38%. Ascanbeseen,L50hasshownsuperiorperformanceoverNiftybothonupsidesaswellas downsides.Figure 15: Holding period return for L50 strategy against Nifty Portfolios (N50)29.1%26.7%26.4%25.1%24.0%23.3%22.0% 21.9%21.1%20.2%1 Year 2 Year 3 Year 4 Year 5 YearL50 N50Figure 16: Range of return for median 80% L50 & N50 portfolios with various holding periods-11%-1%7%10% 9%87%54%47%44%41%-14%-3%3%4%5%64%46%43%41%38%1 Year 2 Year 3 Year 4 Year 5 Year-30%-10%10%30%50%70%90%Annualized Returns (%)L50 N50Beating Nifty through ArthVeda Alpha L50September 201319Frequency Distribution of L50 returnAbove graphs plots number of portfolios (on Y axis) vs return of the portfolios (on X axis). As seen in the graphs, range of returns delivered by L50 strategy varied widely from -45% to 167% for a one year holding period but as holding period goes up range becomes narrow. For a 5 year holding period range narrows down to +6% to 50%. Narrowing range imply that the predictability of L50 returns increases as holding period goes up.Figure 17: Frequency distribution of L50 portfolio returns050100150200250300350400450500-55.0% 1.2% 57.5% 113.8% 170.0%1 Year CAGRMin: -45%Max: +167%050100150200250300350400450500-55.0% 1.2% 57.5% 113.8% 170.0%2 Year CAGRMin: -11%Max: +70%050100150200250300350400450500-55.0% 1.2% 57.5% 113.8% 170.0%3 Year CAGRMin: -6%Max: +67%050100150200250300350400450500-55.0% 1.2% 57.5% 113.8% 170.0%4 Year CAGRMin: +1%Max: +50%050100150200250300350400450500-55.0% 1.2% 57.5% 113.8% 170.0%5 Year CAGRMin: +6%Max: +50%Beating Nifty through ArthVeda Alpha L50September 201320Capital PreservationAn analysis of returns from various portfolios was performed to check for capital preservation tendency of L50 strategy. As seen in graph 19 below about 80% of portfolios were able to protect investors capital when portfolios were held for one year. The number improves signifcantly as holding period goes up. There were no portfolios with holding period of 4 year and above which lost capital. All the 4yr and above holding period portfolios returned back investors capital with profts. L50 strategy seems to have virtually no risk of losing capital over a longer holding period.Probability of outperformanceReturnsdeliveredbyL50portfolioswerecomparedwithNiftyreturns.Comparisonshowsthatbyincreasingholding period of the portfolios probability of outperformance goes up. Over a one year holding period about 67% of portfolios outperformed Nifty. With time as valuation mismatch for undervalued stocks (which are top weighted in the portfolio) goes away the portfolio begins to outperform. Therefore, as seen in the graph below, with an increasing holding period probabilityofoutperformancegoesupforthestrategy.Ona5yearholdingperiodbasisabout90%ofportfolios outperform Nifty. Figure 18: Capital preservation with L50 over various holding periods80%86%97%100% 100%1 Year 2 Year 3 Year 4 Year 5 YearL50Figure 19: L50s Probability of outperformance over Nifty67%65%70%77%89%33%35%30%23%11%1 Year 2 Year 3 Year 4 Year 5 YearUnderperforming portfoliosOutperforming portfoliosBeating Nifty through ArthVeda Alpha L50September 201321Risk in L50Its a common belief that market rewards higher risk with higher return. A simple comparison of excess return is incomplete without any reference to risk taken. Standard deviation of return is a widely accepted parameter to measure total risk in any strategy. A higher standard deviation number implies higher risk. Graph below compares the average standard deviation of the L50 and Nifty portfolio across various holding periods. As seen in the graph standard deviation of L50 strategy always measure below Nifty portfolios implying lower risk in L50 strategy. For a 5 year holding period standard deviation of L50 returns was about 26% whereas for Nifty portfolios number was about 27%.L50 BetaBeta is a measure of risk with respect to market. Beta greater than one means risk higher than the market. L50 strategy has an average beta of less than one across all the holding period implying that the risk of the strategy is lower than the market. As holding period increases risk with respect to market decreases slightly.L50 AlphaStrategygeneratedhigherreturnswithlowerriskasseenabove.Whenmeasuredforriskadjustedreturnsagainst benchmark L50 proves to add value. Alpha is a measure risk adjusted excess return. Graph below shows the average alpha generated across all the holding periods. For a one year holding period L50 delivers an alpha of about 5.6% while for a 5 year holding period alpha is about 4.7%. A positive alpha number indicates value add from the strategy.Figure 20: L50 standard deviation compared to Nifty5023.3%24.6%25.4%26.1%26.3%24.1%25.4%26.2%27.1%27.4%1 Year 2 Year 3 Year 4 Year 5 YearL50 N50Figure 21: L50s holding period beta0.920.930.930.920.911 Year 2 Year 3 Year 4 Year 5 YearL50Beating Nifty through ArthVeda Alpha L50September 201322Range of Alpha As seen in the graph below risk adjusted excess returns could vary signifcantly over a one year holding period for any particular portfolio. However over a longer holding period range of alpha becomes narrower. Strategy alpha becomes more predictable with time. L50s one year alpha ranged from -20.3% to 61.5% while for a 5 year holding period alpha ranged from -1% to 12.5%Figure 22: Average L50 Alpha for various holding period5.6%5.1%5.2%4.9%4.7%1 Year 2 Year 3 Year 4 Year 5 YearL50Figure 23: Range of Alpha for various holding period-20.3%-11.3%-6.3%-2.8%-1.1%61.5%36.7%27.3%17.3%12.5%1 Year 2 Year 3 Year 4 Year 5 Year-25%-15%-5%5%15%25%35%45%55%65%Annualized Returns (%)L50Beating Nifty through ArthVeda Alpha L50September 201323Comparison of L50 strategy with Mutual FundHistorical returns from the L50 strategy evaluation process were compared with returns from various large cap mutual fundsavailableinthemarket.PerformancenumbersformutualfundsweredownloadedfromCrisilsdatabase.For each calendar year starting 2003 1Yr, 2Yr, 3Yr, 4Yr, 5Yr, 7Yr and 10Yr holding period XIRR returns were calculated forthefundsavailablethen.TheseholdingperiodnumberswerecomparedwithL50XIRRnumbersforthesame holding period. L50 strategy was ranked in the available set of funds based on the performance numbers. Table below summarizes the performance ranking of L50 for each period.Holding Period 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Full Period1YR 14 10 18 32 41 10 9 2 52 72 142YR 7 10 26 34 28 4 7 5 57 113YR 8 12 30 29 5 2 4 7 124YR 920 24 14 3 2 9 105YR 12 14 13 5 3 2 66YR 8 10 7 4 4 67YR 6 8 7 6 610YR 5 5# Funds 24 32 35 39 43 50 59 67 78 84 84As seen in the table above L50 strategy does signifcantly better for a holding period of 3 year and above. At the end of 2012 L50 returns was ranked 7th on last 3-year return and ranked 2nd on last 5-year return basis.When compared for the full 2002-12 period strategy was ranked 6th based on its 5-year XIRR return.Chart below shows overall L50s rank for over various holding periods.When it comes to choosing between funds investors prefer funds which provide superior higher returns with lower risk. They are willing to give up some extra return in return of protection of their capital. A fund achieving a higher rank by taking excessive risk would not excite investor. Therefore top performing large cap mutual fundswere compared on their risk to reward ratios. Graphs below shows sharpe and sortino ratios for these top performing funds. Sharp ratio is Table 7: Ranking of L50 based on historical performance amongst large cap fundsFigure 24: L50 Strategy Rank amongst Large Cap Mutual Funds for different Holding Period141112106Out of 84 Out of 78 Out of 68 Out of 59 Out of 511Yr 2Yr 3Yr 4Yr 5YrL50 RankBeating Nifty through ArthVeda Alpha L50September 201324measure of excess return generated per unit of risk taken while sortino measures excess return generated per unit of downside risk taken.As seen in the graphs above of the 5 funds which ranked above L50 on the return basis only two funds actually delivered superior risk adjusted returns. L50 was ranked 3 amongst those top funds based on sharpe and sortino ratios. Superiorperformanceofthetop2fundscanbepartlyexplainedbypresenceofmidandsmallcapstocksinthe portfolio. Even though smaller stocks fall beyond fund managers investable universe managers often engaged in taking advantage of smaller size effect. They usually add smaller stocks in the portfolio in order to boost performance.A recent study by Crisil shows that mid and small stocks have outperformed large caps in last 10 year. It can be deduced form this that exposure to mid and small cap stocks in a large cap fund would have boosted the fund return in last 10 years. Table below shows exposure of Top 5 mutual fund and L50 to different market capitalization stocks as of April 2013 endGiant Large Mid SmallRank 1 52% 32% 14% 2%Rank 2 48% 42% 10% 0%L50 70% 30% 0% 0%Rank 5 40% 51% 8% 0%Rank 3 59% 24% 16% 1%Rank 4 60% 30% 9% 2%Mutual fund performance also carries effect of switching in and out of cash. Mutual fund manager have fexibility to move allocation to cash in falling market in order to prevent NAVs from falling. Fund manager could also make use of derivatives to lever up and boost returns. In light of above facts L50s performance against mutual funds is commendable as L50 remains invested only in large and safe stocks. L50s performance does not carry any small size effect. Further, even in falling market L50 strategy does not switch to cash and sticks to its investment policy.Figure 25: L50 Strategy Rank amongst Large Cap Mutual Funds based on risk ratios0.000.200.400.600.801.00Rank 1 Rank 2 L50 Rank 5 Rank 3 Rank 4Sharpe0.000.400.801.201.602.00Rank 1 Rank 2 L50 Rank 5 Rank 3 Rank 4SortinoTable 7: Ranking of L50 based on historical performance amongst large cap fundsBeating Nifty through ArthVeda Alpha L50September 201325ConclusionL50 strategy seems to resolve the confusion which has often grappled investors when it comes to equity investing. Investors need not restrict themselves to either active or passive strategies in order to harness superior returns. L50, which is an alpha effcient strategy, is shown to deliver returns higher than its benchmark while taking risk lower than the benchmark itself. Performance of L50 strategy is also consistent with time with respect to its benchmark when compared to various active and passive funds in the universe. L50 which follows a value investing philosophy uses a valuation weighted policy on Nifty 50 stock for its portfolio creation. Strategy generates an average CAGR of about 24% over a 5 year holding period as compared to benchmarks 20% return. Risk of the strategy is lower than that its benchmark. Strategy has a beta of about 0.9 for a 5 year holding period. Higher return and lower risk combined to give a superior risk adjusted return. L50 strategy generates an alpha of about 4.7% over 5 year holding period. Strategy is also shown to perform signifcantly better than majority of mutual funds in India. It is one of the best three large cap strategies in India when looked on a risk adjusted basis. A disciplined approach to equity investing in Indian market using L50 strategy is shown to deliver good results and hence lead to wealth creation over long term.Beating Nifty through ArthVeda Alpha L50September 201326About ArthVedaArthVeda Fund Management Pvt. Ltd. is in the business of asset management with a focus on alternative investment fundscoveringassetclassessuchasrealestate,infrastructure,fxedincome,tradedmarkets,agriculture,debtand unlisted equities. ArthVeda is an associate company of Dewan Housing Finance Ltd (DHFL). DHFL is the third largest housing fnance company in India and is listed on the Bombay Stock Exchange and National Stock Exchange.The objective of ArthVeda is to manage funds (designed by our in-house research team) that offer ample opportunities for extracting alpha, i.e. high risk-adjusted returns, from asymmetric risk-return opportunities. The company believes in Value Investing and predominantly follows this principle in all its investment-decisions across asset classes. ArthVedas investor-focused approach is guided by its belief in transparency and high standards of corporate governance.DisclaimerThis document is not an offering document for any securities or units of any kind and should not be seen as solicitation for investments. The document is intended for illustration and information purposes for intended user only. Further, the contents of this document are provisional and may be subject to change.This document is produced solely to the specifed recipient for the purpose of its internal use. This document may not be transmitted, reproduced or made available to any other person. The information contained herein is proprietary and confdential and may not be disclosed to third parties or duplicated or used for any purpose other than the purpose for which it has been provided. Any unauthorized use, duplication or disclosure of this document is prohibited by law. Certain information included in this document is based on information obtained from sources considered to be reliable, however, the accuracy of such information cannot be guaranteed and further such information may be incomplete or condensed. No liability is assumed for the relevance, accuracy, or completeness of the contents of this document. Thisdocumentissubjecttothemoredetailedinformationspecifedinthedisclosuredocumentsandclientservice agreement.Investorsmustreadandagreetothecontentsofthedocuments,includingallriskshighlightedtherein, prior to making any investment related decisions. Before making an investment, each potential investor should make its independent assessment and inquiries.Document may include predictions, estimates or other information that might be considered forward-looking while these forward-lookingstatementsrepresentourcurrentjudgmentonwhatthefutureholds,theyaresubjecttorisksand uncertainties that could cause actual results to differ materially. Investors are cautioned not to place undue reliance on these forward-looking statements.Neither ArthVeda Fund Management Ltd., nor any person connected with it, accepts any liability arising from the use of this material. The recipient of this material should rely on their investigations and take advice from their professional advisors opinion, if any, expressed are our opinions as of the date appearing on this material only. We endeavour to update the material on a regular basis. However there is no regulatory compulsion for us to do so.Investments in equity markets are subjected to market risk and there is no guarantee that the investment objective of the strategy will be achieved. Please read the strategy related documents (Disclosure and Client Service Agreement) carefully. Investors should consult their tax and investment advisors before investing.Beating Nifty through ArthVeda Alpha L50September 2013Wealth from WisdomArthVeda Fund Management Pvt. Ltd.Grd. Floor, HDIL Towers, Anant Kanekar Marg, Bandra (E),Mumbai 400051,Maharashtra, IndiaContact no.: +91 22 67748558/500; Fax: +91 22 67748585Email: ir.pms@arthveda.co.inwww.arthveda.co.in