Author: shyam

Investing in Micro-caps

shyam July 14, 2016

The Size Factor

All things being equal, micro-caps outperform mega-caps in the long-run — investors are compensated for the higher systematic (business cycle) risk that they take when they invest in micro-cap stocks. One way to boost relative performance vs. a market-cap weighted index is to invest in an equal-weighted basket of stocks that are in the index. Alternately, investors can add a basket of micro-cap stocks to their portfolio to juice overall returns.

Market-cap Deciles

We had discussed how we can divide the universe of listed stocks in deciles based on their free-float market cap here. Given our ability to automate systematic investment strategies, we created an auto-rebalanced Theme each for every decile.

Investors can now gain exposure to an equal-weight portfolio of micro caps by investing in the Decile 9 Theme and mega-caps by investing in the Decile 0 Theme. Returns and risk go down as you climb up the market-cap ladder. Our Market Dashboard gives an idea of how returns have been distributed across the deciles:

decile returns

Notice how the drawdowns are deeper with micro-caps:
decile drawdown

Investors who whethered the steeper drawdowns of micro-caps have experienced returns an order of magnitude larger than mega-cap investors. Check out the ‘Size Factor’ in our Investment Themes page for other Market-cap based Themes.

Categories Investing Insight, Your Money Tags decile, quant, theme

Monthly Recap: JunExit

shyam July 3, 2016

Equities

Major
DAX(DEU)	-4.74%
CAC(FRA)	-5.14%
UKX(GBR)	+5.57%
NKY(JPN)	-9.01%
SPX(USA)	+0.66%

MINTs
JCI(IDN)	+3.64%
INMEX(MEX)	+0.84%
NGSEINDX(NGA)	+5.91%
XU030(TUR)	+0.49%

BRICS
IBOV(BRA)	+7.23%
SHCOMP(CHN)	+0.54%
NIFTY(IND)	+2.06%
INDEXCF(RUS)	-0.13%
TOP40(ZAF)	-4.08%

Commodities

Energy
Natural Gas	+30.17%
WTI Crude Oil	+0.16%
Ethanol	-1.09%
RBOB Gasoline	-5.50%
Heating Oil	+2.04%
Brent Crude Oil	+1.21%

Metals
Copper	+6.22%
Platinum	+8.45%
Silver 5000oz	+23.75%
Gold 100oz	+10.46%
Palladium	+10.93%

Currencies

USDEUR:+0.00% USDJPY:-7.26%

MINTs
USDIDR(IDN)	-3.91%
USDMXN(MEX)	-0.63%
USDNGN(NGA)	+41.74%
USDTRY(TUR)	-1.71%

BRICS
USDBRL(BRA)	-10.71%
USDCNY(CHN)	+1.13%
USDINR(IND)	+0.09%
USDRUB(RUS)	-3.88%
USDZAR(ZAF)	-7.32%

Agricultural
Cocoa	+7.39%
Soybean Meal	+2.12%
Soybeans	+8.41%
Cattle	-6.71%
Lean Hogs	+2.70%
Lumber	+1.68%
Wheat	-10.73%
Coffee (Robusta)	+4.29%
Corn	-12.72%
Cotton	-1.80%
White Sugar	+17.27%
Coffee (Arabica)	+19.34%
Feeder Cattle	-3.30%
Orange Juice	+19.45%
Sugar #11	+19.14%

Credit Indices

Index	Change
Markit CDX EM	+0.24%
Markit CDX NA HY	-0.98%
Markit CDX NA IG	+8.31%
Markit iTraxx Asia ex-Japan IG	+6.85%
Markit iTraxx Australia	+8.24%
Markit iTraxx Europe	+22.86%
Markit iTraxx Europe Crossover	+86.86%
Markit iTraxx Japan	+8.40%
Markit MCDX (Municipal CDS)	+5.17%

Brexit! Rexit! What, me worry?

International ETFs (USD)

Nifty Heatmap

Index Returns

Check out our dashboard here.

Market Cap Decile Performance

Top Winners and Losers

VEDL	+21.56%
BAJAJFINSV	+27.51%
PNB	+34.05%
ASHOKLEY	-9.73%
INFRATEL	-7.88%
UPL	-7.62%

Have commodities bottomed out? Is the government’s bank capitalization and merger plan a “game changer?”

ETF Performance

PSUBNKBEES	+10.71%
GOLDBEES	+4.98%
CPSEETF	+4.70%
JUNIORBEES	+3.98%
BANKBEES	+2.69%
NIFTYBEES	+1.96%
INFRABEES	+1.52%

PSU banks – because tax payer money is free!

Yield Curve

Bond Indices

Sub Index	Change in YTM	Total Return(%)
0 5	-0.07	+0.83%
5 10	-0.07	+0.98%
10 15	-0.01	+0.71%
15 20	-0.08	+1.37%
20 30	-0.12	+1.88%

Bonds rallied across the board. Note the shift in the yield curve.

Investment Theme Performance

Velocity	+19.26%
Acceleration	+17.23%
Momentum	+10.11%
Enterprise Yield	+7.24%
Quality to Price	+7.04%
Financial Strength Value	+6.45%
High Beta	+5.34%
Low Beta	+4.90%
Balance Sheet Strength	+4.51%
Magic Formula	+3.96%
High Alpha	+3.43%
Low Volatility	+3.32%
High Sharpe	+3.27%
HighIR Momentum	+2.99%
Tactical CNX 100	+2.97%

Momentum strategies regained their thrones after spending months in the boondocks…

Equity Mutual Funds

Best
Kotak World Gold Fund – Standard Plan – Growth Option	+23.13%
DSP BlackRock World Gold Fund – Regular Plan – Growth	+22.66%
HSBC Brazil Fund-Growth	+17.64%
DSP BlackRock World Mining Fund – Regular Plan – Growth	+12.39%
Edelweiss Emerging Leaders Fund – Growth	+9.99%
Sundaram PSU Opportunities Growth Option	+8.90%
DSP BlackRock Small and Mid Cap Fund – Regular Plan – Growth	+7.98%

Worst
Birla Sun Life Commodity Equities Fund – Global Agri Plan – Growth – Regular Plan	-3.07%
Reliance Japan Equity Fund- Growth Plan- Growth Option	-3.18%
Franklin India Feeder – Franklin European Growth Fund – Growth	-4.26%
Birla Sun Life International Equity Fund – Plan A – Growth – Regular Plan	-4.54%
Invesco India Global Equity Income Fund – Regular Plan – Growth	-5.33%
JPMorgan Europe Dynamic Equity Offshore Fund – Growth Option – Regular Plan	-6.05%
Invesco India Pan European Equity Fund – Regular Plan – Growth Option	-10.19%

Bond Mutual Funds

Best
SBI Dynamic Bond Fund – REGULAR PLAN – Growth (Previously Magnum NRI – LTP Upto 22/11/09)	+1.69%
JM G-Sec Fund – Growth Option	+1.67%
Invesco India GILT Fund – Long Duration Plan – Growth	+1.61%
ICICI Prudential Long Term Gilt Fund – Growth	+1.58%
Franklin India Govt.Sec. Fund-Long Term Plan – Growth	+1.58%
Franklin India Govt.Sec. Fund-PF Plan – Growth	+1.57%
Franklin India Govt.Sec. Fund-Composite Plan – Growth	+1.57%

Worst
Invesco India Bank Debt Fund – Growth Option	+0.65%
Kotak Corporate Bond Fund- Standard Plan-Growth Option	+0.65%
Kotak Coporate Bond Fund- Retail Plan-Growth Option	+0.64%
JPMorgan India Active Bond Fund – Retail Plan – Growth Option	+0.59%
IIFL Dynamic Bond Fund – Regular Plan – Growth Option	+0.58%
ICICI Prudential Income Opportunities Fund – Growth	+0.57%
Taurus Dynamic Income Fund – Growth Option	+0.47%

Institutional flows

FIIs sold out bonds and bought into equities. DIIs did the opposite…

US Treasuries

Looks like Indian bonds are no where near overbought compared to US Treasuries.

Book of the month

Black Box Thinking: Why Most People Never Learn from Their Mistakes–But Some Do (Amazon)

The only way to improve decision making is to record everything and use the telemetry to deconstruct failure. Once we know why something went wrong, we can go back to improving the decision making process. Much like how every airline crash is an opportunity to learn and improve flight safety. Investors will find a lot of takeaways from this book.

Categories Your Money Tags monthly

Systematic Buy-the-Dip

shyam June 25, 2016October 4, 2018

Introduction

We often hear the term “buy-the-dip” whenever the markets are correcting. However, here are some questions that face an investor:

What exactly is a “dip?”
Where does the cash come from?
How much should I buy?

The answers to these questions will determine how much alpha you will generate by employing this strategy.

What is a “dip?”

A dip is a percentage loss from a near-time peak (also called a drawdown.) For example, if the NIFTY posts a 50-day cumulative loss of 5%, then that is a 5% dip over where the NIFTY closed 50-days ago. To get a sense for how these 50-day dips/drawdowns are distributed, we do a density plot.

As we can see, most of the NIFTY dips are at around 5%. A more than 10% dip is a “back the truck up” event where we deploy all our cash. For MIDCAPs, it is around 10% and 15%.

The back test

Every day, an investor has Rs. 1 that he needs needs to invest. He can either buy the NIFTY/MIDCAP or he can park it a short-term bond fund/savings account. Additionally, if it is a “back the truck up” dip, he can liquidate the bond fund and buy the NIFTY/MIDCAP. Let’s tag this as DIP.

In a DIP, the investor only buys NIFTY/MIDCAP if it is in a dip. Otherwise, he buys Rs. 1 worth of bonds.

The base case is that the investor buys Rs. 1 worth of NIFTY/MIDCAP every day. Let’s tag this as SIP.

Should you buy the dip?

Yes, buying the dip allows you to build a bigger corpus, if your transaction costs are zero. Here are the NIFTY and NIFTY MIDCAP buy the dip (DIP) vs. daily purchase (SIP) final corpus:

Given how small the alpha is, net of fees/commissions/slippage/taxes, this is a losing proposition. You are better off with a SIP.

Categories Investing Insight Tags investing, sip

Internal Bar Strength

shyam June 22, 2016June 22, 2016

Definition

Internal Bar Strength (IBS) is based on the position of the day’s close in relation to the day’s range: it takes a value of 0 if the closing price is the lowest price of the day, and 1 if the closing price is the highest price of the day. The IBS effect may be related to intraday over-reactions to news or market movements, which are then “corrected” the next day.

IBS = (Close – Low)/(High – Low)

It is a mean-reversion strategy.

Back test

The paper from Alexander Soffronow Pagonidis claims that low IBS values are associated with high returns, while high IBS values are associated with low returns. Average returns when IBS is below 0.20 are .35% while average returns when IBS is above 0.80 are -0.13%.

We put this to the test on 16 NSE indices. Calculating IBS and trading at the close. To keep things simple, we assumed that we can trade at closing prices. Buy at the close if IBS is below 0.2, and sell at the close if IBS exceeds 0.8, exit the position at the following market close. If a back test on indices proved promising, we figured we would try this out on individual stocks next. However, IBS returns trailed buy-and-hold by a significant margin.

Using IBS to trade mean reversion, as the author intended, is a losing proposition. What if we do the reverse?

It “works” for about half the indices – could be pure luck.

Conclusion

It looks like IBS either doesn’t hold for Indian markets or for the indices we tested.

Source: The IBS Effect: Mean Reversion in Equity ETFs (pdf)

Equity curves: IBS Mean Reversion (pdf)

Categories Investing Insight, Your Money Tags mean reversion, quant

Trading turnover throughout the day

shyam June 20, 2016

Turnover, defined as volume over total number of shares outstanding, is not constant throughout the day. If you plot turnover over a trading day, it typically traces a ‘U’ shaped plot.

Notice how turnover is the highest in the first half-hour and the last-half hour of trading? Turns out, it is a global phenomena. It follows that if you want liquidity, then it is enough if you show up for the last half-hour of trading.

Categories Investing Insight, Your Money Tags quant