communiqu
FROM THE DESK OF SRIKANTH BHAGAVAT
OVERVIEW
From the desk of Srikanth
Bhagavat
The outlook for the market:
Shankaran Naren
Positives & Negatives
Let's Learn!
Under the Peepal Tree
Fund of the Month
POSITIVES
Eurozone problem
postponed
Higher global liquidity
Q4 results are confirming
industry growth trend
Signs of recovery in the U.S.
economy
The Met departments
monsoon prediction
NEGATIVES
China looking for a soft
landing
Inflation
Higher global liquidity
As asset allocators we are always on the lookout for assets that are un-correlated to each
other, or in simple terms, behave differently from one another. It shouldn't happen that in
a bad market, all the components of your portfolio fall. (Hence we have bonds that do not
fall when equities fall.) But at the same time we are loathe to give up on returns in
exchange for true diversification! Well, we have recently located a product which solves
both the issues and finished our study on it. A measured presence of this in your portfolio
would give you equity like returns and also reduce risk to a large extent. I would have
loved to hear what the famous Hindi movie villain of yesteryears, Ajith, would have
commented on this product. (His famous dialogue Isko liquid oxygen may duba do
liquid isko jeene nehin dega aur oxygen isko marne nehin dega!) Do read on to find out
more about this super product.
We seem to have forgotten China's attempt to cool its economy and reduce demand.
Instead, it is Europe that is on everybody's mind. The consequences of letting Greece 'fall'
would have been terrible for the European banking system which has lent billions of Euros
to Greece. The spreading of this problem to other nations such as Portugal, Spain, Ireland,
Italy (etc.) would have been disastrous for the world economy and the markets. This USD
$1 trillion bailout has provided immediate relief, but remains only a balm and not a cure.
All this could have a curious consequence for emerging nations and India in particular:
India's case as a safe economy becoming stronger and the higher liquidity in Europe
finding its way to countries such as India for investments. As a result, as pointed out by
The Economist in a recent issue, that there exists the possibility of asset bubbles
happening in emerging nations due to the high liquidity and relative safety of these
markets attracting more funds. But, at current valuations we are yet way off......
Afterthought: Europeans are very thoughtful and considerate. Since most of the world
was unable to pronounce 'Eyjafjallajokull', they gave us simpler words such as 'Greece'.
OPPORTUNITIES IN MANAGED FUTURES
Managed futures work just like a mutual fund; the only difference being that the fund
manager is investing your funds in exchange traded futures contracts. A managed futures
fund will give you a wide exposure across asset classes (equities, currencies,
commodities, interest rates) and markets. The funds can take both long and short
positions, and are hence able to deliver returns on a market upswing as well as a
downswing. They appeared first in the 1970s and have since had a consistent track record
of delivering superior risk-adjusted returns. The Barclays CTA Index, an index that tracks
managed futures, reports a compounded annual return of 11.68% since January 1980.
But the main advantage of having a managed futures fund in your portfolio is a reduction
in portfolio volatility due to managed futures being non-correlated with equities and
bonds. The worst drawdown (fall) of the Barclays CTA Index is 15.66% and it has a
correlation of just 0.01 with the S&P 500 and a negative correlation (-0.01) with the world
bonds. A correlation of 1 signifies full correlation. The tables given below illustrate the
advantages better. Table 1: Portfolio of only equity funds
Table 2: Portfolio with the addition of a managed futures fund
As it can be seen, the maximum
drawdown of the two portfolios differs
vastly (-54% for equity only portfolio v/s
-20.31% for one the managed futures
fund). A look at the Sharpe Ratio is also
telling. The first portfolio has a Sharpe
ratio of 0.21 where as the second
portfolio is at 0.43, showing significantly
superior returns for the risk taken.

Conditions for best returns are consistent trends (either an upswing or a downswing). Range-bound markets and sudden trend reversals
hamper returns on these funds. It is generally advised to measure and determine the exposure required to benefit your portfolio value in
managed futures. Managed futures funds usually use an automated system that takes calls on entry and exit points based on technical
analysis of market trends. There are few funds which incorporate manual intervention and fundamental analysis before taking a trading call.
The trading platforms and strategies are proprietary to each firm. The success of a fund depends on robustness of their trading platform and
the strength in numbers of their trading team.

Performance of Hexagon's Model Portfolio

At the beginning of every financial year, Hexagon's Research Desk prescribes, as a benchmark, model portfolios for every risk appetite i.e.
Aggressive, Moderate and Conservative. These portfolios are revised every year based on performance. In this edition of the Communiqu,
we present the 1 year performance of last year's model portfolio for the Moderate risk profile. The composition focuses equally on risky and
less risky products and returns vary accordingly. Contact your RM for the latest model portfolio

Suggested Asset Allocation Model portfolio composition Benchmark Portfolio composition

Fund Allocation Corpus Benchmark Portfolio - Asset Allocation

HDFC Top 200 10.0% 500,000 Nifty 2,500,000.00 50%

DSPBR Top 100 10.0% 500,000 Crisil Short-term
2,500,000.00 50%
Birla SL Frontline Equity 10.0% 500,000 Bond fund Index
Total 5,000,000.00
Franklin India Bluechip 5.0% 250,000
Franklin India Prima Plus 5.0% 250,000
Reliance Growth 5.0% 250,000
IDFC Premier Equity 5.0% 250,000 Hexagons
Portfolio Value,
Templeton India Ultra Short Bond fund 12.5% 625,000 Benchmark
7,524,550
Portfolio Value,
Templeton Floating rate Long Term 12.5% 625,000 6,996,810
Templeton India Short Term Income Plan 12.5% 625,000
BSL Dynamic Bond Fund (Medium Term) 12.5% 625,000
Investment
100% 5,000,000 Value,
5,000,000

Performance of Model Portfolio v/s Benchmark Portfolio

Value as on Benchmark Portfolio Model Portfolio
1-Apr-09 5,000,000.00 5,000,000.00
1-Apr-10 6,968,809.60 7,524,550.46
Portfolio Returns (Annualized) 39% 50%

All our fund picks have

Top contributors to benchmark outperformance
outperformed the Nifty, a Fund HDFC Top 200 Performance laggards
few more than the others. Performance DSPBR Top 100
Birla SL Frontline Equity
This is represented in the Analysis
Reliance Growth Franklin India Prima Plus
table to the right:
IDFC Premier Equity
Let's Learn!
LL, is an initiative by Hexagon to enlighten our clients with basic financial concepts.

Ll4: Understanding Fiscal Deficit Part 1

Fiscal deficit arises when the government is spending more than it is earning. Government incomes are categorized into: Income
from taxes (direct and indirect) & Income from non-tax sources i.e. Revenue receipts (recurring incomes, for example, income from
dividends of PSUs) and Capital receipts (one-time incomes, for example, sale of stakes in PSUs). Government expenses again are of
two types: Revenue expenditure - For example, Salaries of government employees & Capital expenditure - For example, expenses of
building a new power plant.

When spending is greater than income, there is a deficit. This deficit is financed either through government borrowing or through
printing more currency. Printing more currency should be a temporary arrangement as an increase in money supply will lead to a
spike in inflation (a larger supply of money chasing the same amount of goods, leads to a price increase). Government borrowing is
the better solution to the problem. But large government borrowings over sustained periods will leave a smaller amount of funds
available for other borrowers in the market (like corporates) which will lead to an increase in the price of money (i.e. interest rates &
this directly impacts corporate profitability).

While studying fiscal deficit, it is also important to look into what the government spends the borrowed money on. Borrowing money
from the market to pay staff salaries is akin to taking a loan to pay household expenses. On the other hand, if the government raises
money to create assets such as infrastructure then, it indicates better fiscal management.

The deficit number is represented as a percentage of GDP in order to judge how sustainable the borrowing is compared to the value
of goods being produced in the country. The projected fiscal deficit number for the current year is 5.5% of GDP. A fiscal deficit of
about 4-5% is considered healthy for a growing economy. For developed countries the acceptable deficit is generally much lower.

Under the Peepal Tree - A new series at Hexagon

Hexagon kicked off a new series called Under the Peepal Tree, which is a string of interactions where our clients share their diverse
experiences with Team Hexagon. The Peepal Tree signifies awareness and illumination, as it is under this tree that the Buddha
received enlightenment.

Guest Speaker Ms. Vinatha Reddy

Ms. Vinatha Reddy founded and heads Grameen Koota, which was rated one of the best 50 micro-finance institutions in the world by
Forbes magazine. She has been a client with us for almost 5 years and the narration of her journey from being a Montessori teacher to
setting up Grameen Koota was fascinating to say the least. Her inspiration was a little boy whose poverty-ridden condition moved her
enough to feel that something had to be done.

Reading a book on microfinance stirred her to write to the author.

When she received a reply, it was all the inspiration she needed to
quit as a Montessori teacher and take on the daunting task of setting
up an institution to help relieve poverty. Grameen Koota started in
1999 with seed capital from none other than Grameen Trust of
Bangladesh, on whose model the institution is also based.

The journey was not without challenges but she and the institution
have prevailed to make a difference in the lives of thousands of
people. (they aim to extend their reach to 1 million people by 2014).
 Fund of the month Superfund Gold A

Fund Manager

Low Moderate
aHigh
Fund Note
A fund whose model is built to combat the fact that nobody can predict the market seems set to find popular appeal after the 2008 shock,
and this is exactly what Superfund Gold A brings to the table. Superfund is the Asset management company (AMC) and it is incorporated in
Vienna. It has been in the business for 14 years and is one of the first AMCs to bring alternative investments within reach of the retail
investor. Superfund Gold A is a managed futures fund (refer to our cover story to know more about managed futures), which invests in
exchange traded futures contracts in over 150 markets around the world.

The chart to the left shows the breadth of asset classes the fund has exposure to. The fund has
given an absolute return of 114.10% and an annualized return of 18.60% since inception in
2005. One of the biggest risks for an Indian investor while investing in overseas funds is the
possibility of the rupee appreciating. To counter this risk, Superfund has made some changes
in its flagship product Superfund Q-AG by hedging the entire portfolio with gold, giving us
Superfund Gold A. 30 years of data has shown that for a 10 year, 5 year, 3 year and 2 year
holding period, a situation where gold has depreciated and the rupee has appreciated, has
never happened. Hence hedging with gold is the best strategy to combat the currency risk.

Superfund A Strategy* vs. 10 best months of the SENSEX Superfund A Strategy* vs. 10 worst months of the
Total Return 03/1996 through 03/2010 SENSEX Total Return 03/1996 through 03/2010

SENSEX
Superfund A

The principal advantage of having this fund in your portfolio is that it has no correlation with other asset classes. The two charts to the right plot
the performance of the fund with the 10 best and 10 worst months of the BSE- Sensex since 1996. As can be seen, no discernable pattern of
behaviour emerges from the charts.

Pros
No performance correlation with other asset classes
Exposure to 150 futures markets around the world
Cons
Ability to halve the portfolio risk and boost returns Higher fee structure
Holding period of 3 years has delivered positive returns 100% of the time and Higher minimum investment (USD $5,000)
returns have averaged 121% (absolute) Less familiar asset class
Maximum drawdown on the fund is 41.5% lesser than the BSE- SENSEX No lock-in period but suggested holding period of 3 years for
Long and short investment positions, broad asset and market exposure lends a optimum results
higher probability to perform in all market conditions Volatility similar to equity funds
Completely automated trading system that takes calls on entry and exit points, Full benefits accrued only if planted in a portfolio which
free from human emotion follows asset allocation
Returns reported net of management fees Currency risk hedging completely hinged on the inverse
Asset management company is regulated, is transparent and has a 14 year track correlation of the dollar and gold
record
Maximum stop loss of 1% on all transactions

Please contact:
Aravind Thondan: 9008355222, Sumaiya Fathima: 9880460405 or Pramod Shinde: 9880460411, if you would like to know more

Disclaimer: Hexagon Capital Advisors Pvt. Ltd. Has prepared this document and is meant for sole use by the recipient and not for circulation. This document is not to be reported or copied
or made available to others. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. The information contained herein is from sources believed to be
reliable. We strongly recommend that you contact us before making any investment decisions. Hexagon's clients can access the research report at www.hexagononline.com. Contact us at:
Hexagon Capital Advisors Pvt. Ltd. S-209, Suraj Ganga Arcade,332/7,15th cross, 2nd Block Jayanagar, Bangalore-560011. Ph: (+91) (080) 26572852. E-mail: contactus@hexagononline.com