Portfolio Insurance works! and works very well !

Posted On Monday, Nov 10, 2008

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The month of October has been tumultuous for the stock markets. The benchmark BSE SENSEX was down by 24% in October, taking its year to date fall to 52%. Some of the midcap stocks have witnessed a year to date market value erosion of almost 75%.

We offered investors a portfolio insurance in February 2008 by way of a new fund offer in the form of Quantum Gold Fund ( QGF ). The fund was launched with the Quantum philosophy viz "Low Cost and Direct to Investors model". It was a simple, low cost and hassle free way to take exposure to Gold

Quantum Gold Fund was launched with the belief that Gold works as a "Portfolio Insurance" - very similar to life or car insurance. It cushions or limits your losses from other asset classes in your portfolio such as stocks. You may or may not avail the benefits of an insurance policy every year; nevertheless the premiums are paid annually to keep the policy on, so that you are protected from losses that may occur any time, without notice.

Investors who had applied for QGF in the NFO in February 2008, may not have gained since the gold prices are a little lower now, but not as low as the SENSEX. Those who had allocated some money to QGF, would have been able to limit their losses from the stock markets which fell by nearly 44% since the QGF NFO. The table below gives an example on how Gold worked as a portfolio insurance under various asset allocation scenarios.


Table I: QGF works well as a Portfolio Insurance ; limiting overall losses from stocks.

 Scenario 1Scenario 2Scenario 2
 AllocationReturns AllocationReturnsAllocationReturns
SENSEX100%-43.6%90%-43.6%80%-43.6%
Quantum Gold Fund0%-2.7%10%-2.7%20%-2.7%
Portfolio Returns -43.6% -39.5% -35.4%
Savings due to QGF 0% 4.1% 8.2%
Domestic Price of Gold - 5.0% - 5.0% - 5.0%

Source: Bloomberg,
www.QuantumAMC.com

Notes: QGF - Returns for QGF NFO investors from the allotment price (Rs 592.8748) to 31st October 2008.
(Allotment date was 22nd Feb 2008)
SENSEX Returns are from 22nd Feb 2008 to 31st October 2008.
Past performance may or may not be sustained in the future.


It has also been historically true. When the stock markets suffered, gold could have limited your overall losses as seen in the table below.


Table II: SENSEX and Gold

YearSensexGold INR
19824%21%
1986-1%29%
1987-16%22%
1995-21%13%
1998-16%8%
2000-21%1%
2001-18%6%
20024%24%
2008*-52%9%

Source: Bloomberg,
* As on 31st October 2008


Above article is authored by Quantum.

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