ESOPs : Time to dilute?

Concentrated wealth in a slowing sector poses a serious portfolio risk for Senior Professionals in the IT services sector.

Portfolio concentration is a tricky one. In times of high tides in the chosen sector, it delivers outsized returns. The same concentration can hurt deep during times when the sector goes through a soft patch. If the headwinds are structural, portfolio could be in for a serious risk of long-term under-performance.

Let us take the case of Employee Stock Options (ESOPs). In the early cycle of heady growth for the Industry/Sector, options work wonder as they create value by superior returns. Over time, size of the options portfolio grows, both on account of performance as well as on accrual of annual new options. Consequently, it grows to form a significant part of the employee’s overall wealth. So far, it is good. The challenge comes when the Industry transitions from the heady growth phase to a more mature phase as it happens in much of the sectors. That is when the concentrated options start hurting the overall returns.

The industry which advertised the virtues of India to the world is probably in one such a transition now. With prospects turning patchy for the IT services sector, ESOP stock performance could be in for a long-term under-performance. Concentration in such times could deeply upset the overall returns for senior professionals in this sector, given their large exposure to ESOPs.

It is time for dilution, esp for professionals in the traditional IT services sector. Below chart captures certain key data points in terms of how a well diversified high qualify small and mid cap portfolio has performed viz-a-viz tier-1 IT stocks over last five years.

TOI

As explained in detail in our campaign link http://trustlineindia.com/esop-campaign/index.php , the ESOP diversification strategy will help achieving following objectives:

  •  Risk diversification
  • Mitigate sector risks
  • Returns maximization

With real estate in bear market, options for such diversifications are not wide. Diversified equity schemes such as mutual funds and PMS ( portfolio management schemes) offer an attractive opportunity for ESOP dilution, given the robust long-term outlook for Indian equities.

 

Click below banner to know more on ESOP diversification:

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Happy Value Investing!

ArunaGiri . N

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