INTEGRATED PORTFOLIO CREATION

Firstly let us know about the meaning of Integrate,

Integrate means combining the aspects or things to form (or) create a wholeness Perspective.

Herewe,Integrate financial instruments fundamental analysis ( ECONOMIC, INDUSTRY, COMPANY) to form (or) Create a WORLD 🌎 CLASS INTEGRATED PORTFOLIOS PERSPECTIVE.

Financial instruments fundamental analysis

encompasses following three analysis that are :

1. ECONOMIC ANALYSIS

2. INDUSTRY ANALYSIS

3. COMPANY ANALYSIS

1. ECONOMIC ANALYSIS :

Macro - Economic Factors Such As ,

Historical performance of the economy in the past, present and expectations in future.

Growth of different sectors of the economy in future with signs of stagnation/degradation at present to be assessed while analyzing the overall economy.

Trends in peoples’ income and expenditure reflect the growth of a particular industry/company in future.

Consumption affects corporate profits, dividends and share prices in the market.

Factors Affecting Economic Analysis :

Some of the economy wide factors are discussed as under:

(a) Growth Rates of National Income and Related Measures:

For most purposes, what is important is the difference between the nominal growth rate quoted by GDP and the ‘real’ growth after taking inflation into account.

The estimated growth rate of the economy would be a pointer to the prospects for the industrial sector, and therefore to the returns investors can expect from investment in shares.

b) Growth Rates of Industrial Sector:

This can be further broken down into growth rates of various industries or groups of industries if required. The growth rates in various industries are

estimated based on the estimated demand for its products.

(c) Inflation:

Inflation is measured in terms of either wholesale prices (the Wholesale Price Index or WPI) or retail prices (Consumer Price Index or CPI). The demand in some industries, particularly the consumer products industries, is significantly influenced by the inflation rate.

Therefore, firms in these industries make continuous assessments about inflation rates likely to prevail in the near future so as to fine-tune their pricing, distribution and promotion policies to the anticipated impact of inflation on demand for their products.

(d) Monsoon:

Because of the strong forward and backward linkages, monsoon is of great concern to investors in the stock market too.

1.1 Techniques Used in Economic Analysis :

Economic analysis is used to forecast national income with its various components that have a bearing on the concerned industry and the company in particular.

Gross National Product (GNP) is used to measure national income as it reflects the growth rate in economic activities and has been regarded as a forecasting tool for analyzing the overall economy along with its various components during a particular period.

Some of the techniques used for economic analysis are:

(a) Anticipatory Surveys:

They help investors to form an opinion about the future state of the economy. It incorporates expert opinion on construction activities, expenditure on plant and machinery, levels of inventory – all having a definite bearing on economic activities. Also future spending habits of consumers are taken into account.

In spite of valuable inputs available through this method, it has certain drawbacks:

(i) Survey results do not guarantee that intentions surveyed would materialize.

(ii) They are not regarded as forecasts per se, as there can be a consensus approach by the

investor for exercising his opinion.

Continuous monitoring of this practice is called for to make this technique popular.

(b) Barometer/Indicator Approach:

Various indicators are used to find out how the economy shall perform in the future. The indicators have been classified as under:

(i) Leading Indicators:

They lead the economic activity in terms of their outcome. They relate to the time series data of the variables that reach high/low points in advance of economic activity.

(ii) Roughly Coincident Indicators:

They reach their peaks and troughs at approximately the same in the economy.

(iii) Lagging Indicators:

They are time series data of variables that lag behind in their consequences vis-a-vis the economy. They reach their turning points after the economy has reached its own already.

All these approaches suggest direction of change in the aggregate economic activity but nothing about its magnitude.

The various measures obtained from such indicators may give conflicting signals about the future direction of the economy.

To avoid this limitation, use of diffusion/composite index is suggested by combining several indicators into one index to measure the strength/weaknesses in the movement of a particular set of indicators.

Computation diffusion indices is no doubt difficult notwithstanding the fact it does not eliminate irregular movements.

Money supply in the economy also affects investment decisions. Rate of change in money supply in the economy affects GNP, corporate profits, interest rates and financial instruments prices. Increase in money supply fuels inflation. As investment in financial instruments is considered as a hedge against inflation, financial instruments prices go up during inflationary periods.

(c) Economic Model Building Approach:

In this approach, a precise and clear relationship between dependent and independent variables is determined. GNP model building or sectoral analysis is used in practice through the use of a national accounting framework.

The steps used are as follows:

(i) Hypothesize total economic demand by measuring total income (GNP) based on political stability, rate of inflation, changes in economic levels.

(ii) Forecasting the GNP by estimating levels of various components viz. consumption expenditure, gross private domestic investment, government purchases of goods/services, net exports.

(iii) After forecasting individual components of GNP, add them up to obtain the forecasted GNP.

(iv) Comparison is made of total GNP thus arrived at with that from an independent agency for the forecast of GNP and then the overall forecast is tested for consistency. This is carried out for ensuring that both the total forecast and the component wise forecast fit together in a reasonable manner.

2.1 INDUSTRY ANALYSIS :

When an economy grows, it is very unlikely that all industries in the economy would grow at the same rate. So it is necessary to examine industry specific factors, in addition to economy-wide factors.

First of all, an assessment has to be made regarding all the conditions and factors relating to

demand of the particular product, cost structure of the industry and other economic and Government constraints on the same.

Since the basic profitability of any company depends upon the economic prospects of the industry to which it belongs, an appraisal of the particular industry's prospects are essential.

2.1 Factors Affecting Industry Analysis:

The following factors may particularly be kept in mind while assessing the factors relating to an industry.

(a) Product Life-Cycle:

An industry usually exhibits high profitability in the initial and growth stages, medium but steady profitability in the maturity stage and a sharp decline in profitability in the last stage of growth.

(b) Demand Supply Gap:

Excess supply reduces the profitability of the industry because of the decline in the unit price realization, while insufficient supply tends to improve the profitability because of higher unit price realization.

(c) Barriers to Entry:

Any industry with high profitability would attract fresh investments. The potential entrants to the industry, however, face different types of barriers to entry. Some of these barriers are innate to the product and the technology of production, while other barriers are created by existing firms in the industry.

(d) Government Attitude:

The attitude of the government towards an industry is a crucial determinant of its prospects.

(e) State of Competition in the Industry:

Factors to be noted are- firms with leadership

capability and the nature of competition amongst them in foreign and domestic market, type of products manufactured viz. homogeneous or highly differentiated, demand prospects through classification viz customer-wise/area-wise, changes in demand patterns in the long/immediate/ short run, type of industry the firm is placed viz. growth, cyclical, defensive or decline.

(f) Cost Conditions and Profitability:

The price of a share depends on its return, which in turn depends on profitability of the firm. Profitability depends on the state of competition in the industry, cost control measures adopted by its units and

growth in demand for its products.

Factors to be considered are:

(i) Cost allocation among various heads e.g. raw material, labours and overheads and their controllability. Overhead cost for some may be higher while for others labour may be so. Labour cost which depends on wage level and productivity needs close scrutiny.

(ii) Product price.

(iii) Production capacity in terms of installation, idle and operating.

(iv) Level of capital expenditure required for maintenance / increase in productive efficiency.

Investors are required to make a thorough analysis of profitability. This is carried out by the study of certain ratios such as G.P. Ratio, Operating Profit Margin Ratio, R.O.E., Return on Total Capital etc.

(g) Technology and Research:

They play a vital role in the growth and survival of a particular industry. Technology is subject to change very fast leading to obsolescence. Industries which update themselves have a competitive advantage over others in terms of quality, price etc.

Things to be probed in this regard are:

(i) Nature and type of technology used.

(ii) Expected changes in technology for new products leading to increase in sales.

(iii) Relationship of capital expenditure and sales over time. More capital expenditure means increase in sales.

(iv) Money spent in research and development. Whether this amount relates to redundancy or not?

(v) Assessment of industry in terms of sales and profitability in short, immediate and long run.

2.2 Techniques Used in Industry Analysis:

The techniques used for analyzing the industry wide factors are:

(a) Regression Analysis:

Investors diagnose the factors determining the demand for output of the industry through product demand analysis. Factors to be considered are GNP, disposable income, per capita consumption / income, price elasticity of demand.

For identifying factors affecting demand, statistical techniques like regression analysis and correlations are used.

(b) Input – Output Analysis:

It reflects the flow of goods and services through the economy, intermediate steps in the production process as goods proceed from the raw material stage through final consumption. This is carried out to detect changing patterns/trends indicating growth/decline of industries.

3.1 COMPANY ANALYSIS :

Economic and industry framework provides the investor with proper background against which shares of a particular company are purchased. This requires careful examination of the company's quantitative and qualitative fundamentals.

(a) Net Worth and Book Value:

Net Worth is the sum of equity share capital, preference share capital and free reserves, less intangible assets and any carry forward of losses.

The total net worth divided by the number of shares is the much talked about book value of a share.

Though the book value is often seen as an indication of the intrinsic worth of the share, this

may not be so for two major reasons.

First, the market price of the share reflects the future earnings potential of the firm which may have no relationship with the value of its assets.

Second, the book value is based upon the historical costs of the assets of the firm and these may be gross underestimates of the cost of the replacement or resale values of these

assets.

(b) Sources and Uses of Funds:

The identification of sources and uses of funds is known as Funds Flow Analysis. One of the major uses of funds flow analysis is to find out whether the firm has used short-term sources of funds to finance long-term investments.

Such financing increases the risk of liquidity crunch for the firm, as long-term investments, because of the gestation period involved, may not generate enough surpluses in time to meet the short-term liabilities incurred by the firm.

Many firms have come to grief because of this mismatch between the maturity periods of sources and uses of funds.

(c) Cross-Sectional and Time Series Analysis:

One of the main purposes of examining financial statements is to compare two firms, compare a firm against some benchmark figures for its industry and to analyze the performance of a firm over time. The techniques that are used to do such proper comparative analysis are: statement, and financial ratio analysis.

(d) Size and Ranking:

A rough idea regarding the size and ranking of the company within the economy, in general, and the industry, in particular, would help the investment manager in assessing the risk associated with the company.

In this regard the net capital employed, the net profits, the return on investment and the sales figures of the company under consideration may be compared with similar data of other companies in the same industry group.

It may also be useful to assess the position of the company in terms of technical know-how, research and development activity and price leadership.

(e) Growth Record:

The growth in sales, net income, net capital employed and earnings per shares of the company in the past few years should be examined.

The following three growth indicators may be particularly looked into:

(a) Price earnings ratio,

(b) Percentage growth rate of earnings per annum,

(c) Percentage growth rate of net block.

The price earnings ratio is an important indicator for the investment manager since it shows the number of times the earnings per share are covered by the market price of a share.

Theoretically, this ratio should be the same for two companies with similar features. However, this is not so in practice due to many factors.

Hence, by a comparison of this ratio pertaining to different companies the investment manager can have an idea about the image of the company and can determine whether the share is under-priced or overpriced.

In this context, an evaluation of future growth prospects of the company should be carefully made.

This requires an analysis of existing capacities and their utilisation, proposed expansion and diversification plans and the nature of the company's technology.

The existing capacity utilisation levels can be known from the quantitative information given in the published profit and loss accounts of the company.

The plans of the company, in terms of expansion or diversification, can be known from the Directors’ Reports, the Chairman’s statements and from the future capital commitments as shown by way of notes in the balance sheets.

The nature of technology of a company should be seen with reference to technological developments in the concerned fields, the possibility of its product being superseded or the possibility of emergence of a more effective method of manufacturing.

Growth is the single most important factor in company analysis for the purpose of investment management.

A company may have a good record of profits and performance in the past; but if it does not have growth potential, its shares cannot be rated high from the investment point of view.

(f) Financial Analysis:

An analysis of its financial statements for the past few years would help the investment manager in understanding the financial solvency and liquidity, the efficiency with which the funds are used, the profitability, the operating efficiency and the financial and operating leverages of the company. For this purpose, certain fundamental ratios have to be calculated.

From the investment point of view, the most important figures are earnings per share, price

earning ratios, yield, book value and the intrinsic value of the share.

These five elements may be calculated for the past 10 years or so and compared with similar ratios computed from the financial accounts of other companies in the industry and with the average ratios for the industry as a whole.

The yield and the asset backing of a share are important considerations in a decision regarding whether the particular market price of the share is proper or not.

Various other ratios to measure profitability, operating efficiency and turnover efficiency of the

company may also be calculated.

The return on owners' investment, capital turnover ratio and the cost structure ratios may also be worked out.

To examine the financial solvency or liquidity of the company, the investment manager may work out current ratio, liquidity ratio, debt-equity ratio, etc.

These ratios will provide an overall view of the company to the investment analyst. He can analyse its strengths and weaknesses and see whether it is worth the risk or not.

(g) Competitive Advantage:

Another business consideration for investors is competitive advantage. A company's long-term success is driven largely by its ability to maintain its

competitive advantage.

Powerful competitive advantages, such as Apple’s brand name and Samsung’s domination of the mobile market, create a shield around a business that allows it to keep competitors at a distance.

(h) Quality of Management:

This is an intangible factor. Yet it has a very important bearing on the value of the shares. Every investment manager knows that the shares of certain business houses command a higher premium than those of similar companies managed by other business houses.

This is because of the quality of management, the confidence that investors have in a particular business house, its policy vis-a-vis its relationship with the investors, dividend and financial performance record of other companies in the same group, etc.

This is perhaps the reason that an investment manager always gives a close look to the management of a company in whose shares he is to invest. Quality of management has to be seen with reference to the experience, skills and integrity of the persons at the helm of affairs of the company.

The policy of the management regarding relationship with the shareholders is an important factor since certain business houses believe in very generous dividend and bonus distributions while others are rather conservative.

However, an average investor is at a disadvantage when compared with a large investor. They do

not get the facility to meet the top executives of the company, but the fund managers interested in

investing huge amounts of money generally gets to meet the top brasses of an organization.

It is true that every listed company gives detailed information about its management.But,the information they give is always positive. This is because; no company will host any negative information about its company.

So, the question is how to find the dirt inside the management. The remedy is to have a look out for the conference calls hosted by the company’s CEO and CFO.

After reading the company’s financial results, they take question and answers sessions from the investors. That’s where one can pick something that can indicate about the true position about the

company.

Some other ways to judge the management of the company is to read the Management Discussion

and Analysis Report.

Further, it helps when top management people are also the shareholders. If the large-scale unloading of their shares is taking place and something else is communicated to the media, then it is a sign that something is wrong.

Another way to judge the effectiveness of the management is to see the past performance of the executives, say, for five years.

(i) Corporate Governance:

Following factors are to be kept in mind while judging the effectiveness of corporate governance of an organization:

• Whether the company is complying with all aspects of SEBI (LODR) Regulations 2015?

• How well corporate governance policies serve stakeholders?

• Quality and timeliness of company financial disclosures.

• Whether quality independent directors are inducted.

(j) Regulation:

Regulations play an important role in maintaining the sanctity of the corporate form of organization. In Indian listed companies, Companies Act, Securities Contract and Regulation Act and SEBI Act basically look after the regulatory aspects of a company. A listed company is also continuously monitored by SEBI which through its guidelines and regulations

protect the interest of investors.

Further, a company which is dealing with companies outside India, needs to comply with Foreign Exchange Management Act (FEMA) also. In this scenario, the Reserve Bank of India (RBI) does continuous monitoring.

(k) Location and Labour-Management Relations:

The locations of the company's manufacturing facilities determines its economic viability which depends on the availability of crucial inputs like power, skilled labour and raw-materials, etc. Nearness to markets is also a factor to be considered.

In the past few years, the investment manager has begun looking into the state of labour-management relations in the company under consideration and the area where it is located.

(l) Pattern of Existing Stock Holding:

An analysis of the pattern of existing stock holdings of the company would also be relevant. This would show the stake of various parties in the company.

An interesting case in this regard is that of the Punjab National Bank in which the Life Insurance

Corporation and other financial institutions had substantial holdings.

When the bank was nationalised, the residual company proposed a scheme whereby those shareholders, who wished to opt out, could receive a certain amount as compensation in cash.

It was only at the instance and the bargaining strength of institutional investors that the compensation offered to the shareholders, who wished to opt out of the company, were raised considerably.

(m) Marketability of the Shares:

Another important consideration for an investment manager is the marketability of the shares of the company.

Mere listing of a share on the financial instruments exchange does not automatically mean that the share can be sold or purchased at will.

There are many shares which remain inactive for long periods with no transactions being affected. To purchase or sell such scrips is a difficult task. In this regard, dispersal of shareholding with special reference to the extent of public holding should be seen.

The other relevant factors are the speculative interest in the particular financial instrument, the particular financial instruments exchange where it is traded and the volume of trading.

3.2 Techniques Used in Company Analysis:

Through the use of statistical techniques the company wide factors can be analyzed. Some of the techniques are discussed as under:

(a) Correlation & Regression Analysis:

Simple regression is used when inter relationship

covers two variables. For more than two variables, multiple regression analysis is followed.

Here the inter relationship between variables belonging to economy, industry and company are found out. The main advantage in such analysis is the determination of the forecasted values along with testing the reliability of the estimates.

(b) Trend Analysis:

The relationship of one variable is tested over time using regression analysis. It gives an insight to the historical behavior of the variable.

(c) Decision Tree Analysis:

Information relating to the probability of occurrence of the forecasted value is considered useful. A range of values of the variable with probabilities of occurrence of each value is taken up. The limitations are reduced through decision tree analysis and use of simulation techniques.

In decision tree analysis, the decision is taken sequentially with probabilities attached to each

sequence. To obtain the probability of final outcome, various sequential decisions given along with probabilities, the probabilities of each sequence is to be multiplied and then summed up.

Thus, fundamental analysis is basically an examination of the economic and financial aspects of a company with the aim of estimating future earnings and dividend prospects.

It includes an analysis of the macro-economic and political factors which will have an impact on the performance of the company.

After having analysed all the relevant information about the company and its relative strength vis-a-vis other companies in the industry, the investor is expected to decide whether he should buy or sell the financial instruments.

Apart from these, Group Analysis has also become an important factor.

SEBI, in particular, emphasizes the need for disclosure, in public offer documents, of all relevant parameters – especially the financial health and promise versus performance of the group companies.

RBI has also been focusing more and more on the Group Exposure Norms of commercial Banks.

After the above three (3) ( Economy Industry, Company) financial instruments fundamental analysis,

we Integrate these three(3) fundamental analysis in ratios such as:

One (1) ECONOMY IS TO (:)

TWO (2) INDUSTRIES IS TO (:)

FOUR (4) COMPANIES .

TWO (2) ECONOMIES IS TO (:)

FOUR (4) INDUSTRIES IS TO(:)

EIGHT (8) COMPANIES .

And So many other ratios can be created based on the growth rates on which Portfolios weights or Proportions are decided.

Economies growth rates & Positions of the countries in the world ,

Industry growth rates & Positions of the economies in the countries ,

Companies growth rates & Positions of the Industry.

And also consider E S G Norms of the companies as

Environmental Norms (E)

Social Norms (S)

Governance Norms (G)

Some times E S G Norms Investing also known as

IMPACT Investing ( or )

Social Responsibility Investing .

These Ratios , Growth rates , Norms are

Considered to Create -

WORLD 🌎 CLASS INTEGRATED PORTFOLIOS.