Long-term Equity Appreciation Product (LEAP)
Before going into LEAP let’s take a health report of our existing products:
1. Have expectations set on the products been reached?
Products have outperformed expectations set in most cases!
2. Have the products outperformed Nifty, offering comfort to clients?
Comfort is an understatement!!
To prove that these are not just statements, the collective performances of all investments made by our clients (taken as and when investments were made) have been plotted against NIFTY. Not only did the performance beat NIFTY, they also show that the outperformance improved with time.
Be it BIO-Growth:
Or be it SMILES-Growth:
Even though the performance of Products is far ahead of most mutual funds in India, we strove hard for ways of improving the returns further and become tax friendly in the hands of investors. Two areas are identified with scope for improvement.
1. Many stocks were seen appreciating further post sale. There were 330 unique recommendations made in the last two years and 107 out of them are still considered investment grade and are being held in portfolios. Out of 223 remaining stocks, that were suggested to be sold, 171 stocks have appreciated by an average 73% after a sale suggestion was generated.
Ex: Relaxo Footwear recommended on 29 Oct 2013 at 85.70, sold on 2nd Jan 2014 at 124.10. By 27th July 2015, it touched 614.95. There were many such examples.
- 2. Over 90% of the gains seen in clients’ accounts are in the nature of short term capital gains and attract an Income tax of 15%. Because stocks are held in individual account, and not grouped like in mutual fund, tax treatment of the gains is not favourable to clients. In the above example gains were short term in nature. Instead, if the strategy waited the gains would have become tax free and a lot more.
We focused all our energies on finding a lasting solution that addresses both the above issues without compromising on the appeal of the product or the underlying reasoning. And hence,
Longterm Equity Appreciation Product(LEAP)
After several rounds of brain storming sessions followed by thousands of back tested data tables, we developed the latest variant “LEAP” that has the ability to address both the stated points effectively. In LEAP product, the approach to identifying undervalued growth stocks will be somewhat similar to that of BIO Growth but the target prices to sell will vary significantly. When a company turns around, the profits may be small in first few quarters followed by a big surge later on. By giving weight to the underlying growth in profitability, the target price will be revised upwards till such time the growth in prices catches up with growing trend in profits. This has two distinct advantages. First, the average holding period of good stocks gets extended and the resulting capital gains are more likely to be long term in nature saving a further 15% income tax that would have been levied otherwise. Second, target prices attempt to capture the full potential of the company’s performance and should result in larger absolute profits. As always, Vivekam carried out extensive analysis to validate LEAP THEORY and gathered the possible working results on the old data spanning across 15 years. The numbers have been very satisfactory with the net gains (after income tax) to the client being far higher than BIO Growth product. In order to facilitate existing clients opt for LEAP PRODUCT, we wish to provide a smooth shift in product at no additional cost. LEAP is a product characterized by a low churn (saving brokerage costs) and tax efficient long-term capital gains in majority cases.
While building the table above we have considered an initial investment of 25 lacs with a tax rate of 15% on short-term capital gains and 0% on long-term capital gains. From the table above, one can notice that the net gains (resulting out of closed transactions) appear to be higher in first and second year under BIO Growth. However, the year-end portfolios under LEAP continue to be higher than in BIO Growth. From the third year onwards, both average net gains and year-end portfolio values are higher under LEAP. From the back tested results it can be safely inferred that wealth of investors will be several times higher under LEAP because of 0% tax on long-term capital gains and larger absolute profits on stocks.