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

OVERVIEW

communiqué

Eurozone problem postponed

Higher global liquidity

Q4 results are confirming industry growth trend

Signs of recovery in the U.S. economy

The Met department’s monsoon prediction

POSITIVES

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'.

FROM THE DESK OF SRIKANTH BHAGAVAT

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

OPPORTUNITIES IN MANAGED FUTURES

Performance of Hexagon's Model Portfolio

Suggested Asset Allocation Model portfolio composition Benchmark Portfolio composition

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.

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 Communiqué,

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

FundPerformance Analysis

All our fund picks have

outperformed the Nifty, a

few more than the others.

This is represented in the

table to the right:

Investment

Value,

5,000,000

Benchmark

Portfolio Value,

6,996,810

Hexagon’s

Portfolio Value,

7,524,550

Fund Allocation Corpus

HDFC Top 200 10.0% 500,000

DSPBR Top 100 10.0% 500,000

Birla SL Frontline Equity 10.0% 500,000

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

Templeton India Ultra Short Bond fund 12.5% 625,000

Templeton Floating rate – Long Term 12.5% 625,000

Templeton India Short Term Income Plan 12.5% 625,000

BSL Dynamic Bond Fund (Medium Term) 12.5% 625,000

100% 5,000,000

Nifty 2,500,000.00 50%

Crisil Short-term

Bond fund Index2,500,000.00 50%

Total 5,000,000.00

Benchmark Portfolio - Asset Allocation

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%

Performance of Model Portfolio v/s Benchmark Portfolio

Top contributors to benchmark outperformance

HDFC Top 200

Birla SL Frontline Equity

Reliance Growth

IDFC Premier Equity

Performance laggards

DSPBR Top 100

Franklin India Prima Plus

Let's Learn!

LL, is an initiative by Hexagon to enlighten our clients with basic financial concepts.

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.

Ll4: Understanding Fiscal Deficit – Part 1

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.

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.

Guest Speaker – Ms. Vinatha Reddy

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

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.

Fund Note

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: th ndHexagon Capital Advisors Pvt. Ltd. S-209, Suraj Ganga Arcade,332/7,15 cross, 2 Block Jayanagar, Bangalore-560011. Ph: (+91) (080) 26572852. E-mail: contactus@hexagononline.com

Low Moderate High a

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

Total Return 03/1996 through 03/2010

Superfund A Strategy* vs. 10 worst months of the

SENSEX Total Return 03/1996 through 03/2010

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

Ability to halve the portfolio risk and boost returns

Holding period of 3 years has delivered positive returns 100% of the time and

returns have averaged 121% (absolute)

Maximum drawdown on the fund is 41.5% lesser than the BSE- SENSEX

Long and short investment positions, broad asset and market exposure lends a

higher probability to perform in all market conditions

Completely automated trading system that takes calls on entry and exit points,

free from human emotion

Returns reported net of management fees

Asset management company is regulated, is transparent and has a 14 year track

record

Maximum stop loss of 1% on all transactions

Cons

Higher fee structure

Higher minimum investment (USD $5,000)

Less familiar asset class

No lock-in period but suggested holding period of 3 years for

optimum results

Volatility similar to equity funds

Full benefits accrued only if planted in a portfolio which

follows asset allocation

Currency risk hedging completely hinged on the inverse

correlation of the dollar and gold

SENSEX

Superfund A