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If you're confused by the current market, seek professional help to gain from it

The weekly seesaw in the equity indices has left the investors anxious. When they see the index climbing swiftly, they worry that they have missed the bus. When it corrects, they console themselves that their apprehension were right. However, many of them are unable to make up their minds. Should they remain invested or stay out? They ask for a view of the markets and receive mixed opinion. Some tell them that the market has bottomed out, others warn them about unknown risks waiting to play out. Much of this dilemma comes from a mix-up of strategy and tactics in investing.

There are only two approaches to making money in equity. The first is the strategic bottom-up approach, which searches for stocks that are likely to perform well. This focuses on selection and requires a lot of hard work. The second is the tactical and opportunistic call on how prices will move. This approach hopes to cash in on market inefficiencies, and move in and out swiftly. In the first approach, the mind is set on returns. In the second approach, the focus is capital. The intent is to make money work hard and fast, cut losses and mov

e on to running faster. Both the positions are risky, which is why they ask for a market view.
Why is it tough to have a market view at this time? When the economic cycle bottoms out, it is stock selection that will win the game for investors. The companies that have rebuilt their businesses, restructured their balance sheets, or reoriented themselves after the downturn, are beating the market index hollow. There will still be many companies that will require a call on their ability to turn around; or their potential to see a recovery in demand; or their propensity to benefit early from a recovery in the economic cycle. The reasons that these star performers do not translate into an appreciation in the market indices are many.

Some of these turnaround stocks may not even be in the index. Therefore, even as individual stock may be doing well, the investors would be looking for signals from the index.

Stock selection may not be as easy as it seems for it requires a good understanding of the company and the business, the ability for a sharp analysis of data and the skill to forecast. Anyone who has been a part of an investment process in an institutional set-up will vouch for the complexities, the huge requirement for information, and the constant need to cross-check, verify and revisit assumptions made about the stock. To these professionals, the courage with which investors buy on the basis of tips and names can only seem audacious and dependent on getting lucky. For the pure stock-picker, there is no market view; all that they know is the stocks that work and those that don't.
Who should then have a market view? It is the asset allocator who should be tuned to the market. The adviser, who is trying to rebalance the investor's portfolio to achieve absolute returns for financial goals, should have a market view. These are professionals, who take a topdown view of the asset class and take a call for the investor about how equity, as an asset class, might perform. The adviser should have a market view because he is handling an investor portfolio that should deliver a return in alignment with a financial goal, with a defined level of downside risk it can take. He has to do so to deliver this mandate.

How would the advisers know? They look up to stock selectors for cues. When they see managed portfolios systematically outperforming the market index, they know that stock selection is beginning to pay off. However, a managed portfolio, such as a mutual fund, is constrained by its structure. It has to be a diversified portfolio, tracking the index that it seeks to beat. Therefore, it would be constructed to hug the benchmark a bit, while trying to do better. Such a portfolio would be holding the winning stocks that the managers have selected, but the proportion is not significant enough to make a noticeable difference. In a market that is turning around, outperformance is at the stock level, or at best, at the sectoral level. A diversified fund can take advantage of such stocks, but only to a limited extent. Diversified portfolios join the game a bit later, when the better performers are beginning to appear across sectors. The investors waiting for clear signals from the index might join the party late.

In the current market, investors need to make their choices. If they are keen to participate, the money would clearly be in stock selection, a task not many are cut out for, or have the skills and resources to pursue. If they choose funds, those with the ability to take concentrated bets that enhance the benefits of stock selection, would do best. The market may show signs of turnaround much after these early gains. Tactical gains from market momentum may be too far away

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