Category: Investing Insight

Investing insight to make you a better investor.

Market-Cap Deciles, Part II

shyam January 27, 2016July 16, 2016 0

We had introduced the concept of dividing the universe of stocks by market-cap deciles a while ago (StockViz.) Here are some observations.

Returns

The last year has been spectacular for small- and mid-cap stocks.

From August-2014 to Now:

For 2015:

So far in 2016:

Note: Deciles go from 1 (micro-cap) to 10 (mega-cap)

In 2015:

If you had blindly invested in an equal-weight portfolio of ~145 micro-cap stocks, you would have been up ~70%
Every other decile out-performed the mega-caps (decile #1)
Note how the standard-deviation of returns compress as you walk up the cap

Migrations

Free-float market-cap is a volatile measure in itself – when you use that to classify stocks, you end up with quite a bit of movement between deciles. Something to keep in mind while using deciles for analysis.

Market breadth indicator

The mega-cap decile (decile #1) can be used as a crude market-timing indicator. If you track the number of stocks in the decile that went up vs. the number that went down, you end up with a proxy for breadth.

Even though technically it beat the buy-and-hold NIFTY 50, the indicator produces too many trades and it doesn’t offer a large enough margin of out-performance to be useful in live trading.

Next steps

We will continue to poke around and share what we find!

Categories Investing Insight, Your Money Tags decile, quant

Definition: Drawdown

shyam January 20, 2016 0

Drawdown, of an investment, is the peak-to-trough decline during a specific period.

It is not uncommon for stock indices to drawdown 30% in a year. Here’s how we see it.

Nifty 50 Drawdowns

Nifty Midcap 100 Drawdowns

Explainer

Drawdowns take their time to form and can be identified into three distinct points:

The day from which the investment started going down. ‘From’ in the above images.
The day on which the investment stopped going down. ‘Trough’ in the above images.
The day on which the investment recouped all its losses from (1). ‘To’ in the above images.

The number of days the whole processes took is the ‘Length’ of the drawdown. ‘Recovery’ shows the number of days it took to get back to it initial value.

Path dependency

The yearly breakup shown above doesn’t give the real picture of how the investment actually performed during the entire stretch of time. For example, here’s NIFTY 50 vs. MIDCAP 100:

Depending on where your starting point is, you end up with different drawdown and return profiles. You can fool around with that here: svz.bz

Take-away

Returns go hand-in-hand with drawdowns. Seasoned investors wait for it (in bond funds) to enter, most long-term investors learn to ignore them and continue their dollar cost averaging (aka SIP.)

Categories Investing Insight, Your Money Tags returns

The Year 2015 in the Markets

shyam January 1, 2016 0

world.2014-12-31.2015-12-31

Equities

Major
DAX(DEU)	+9.56%
CAC(FRA)	+8.53%
UKX(GBR)	-4.93%
NKY(JPN)	+9.07%
SPX(USA)	-1.54%

MINTs
JCI(IDN)	-12.13%
INMEX(MEX)	-1.18%
NGSEINDX(NGA)	-17.36%
XU030(TUR)	-17.64%

BRICS
IBOV(BRA)	-13.31%
SHCOMP(CHN)	+9.41%
NIFTY(IND)	-4.06%
INDEXCF(RUS)	+26.12%
TOP40(ZAF)	+4.16%

Commodities

Energy
Ethanol	-13.17%
Brent Crude Oil	-33.76%
Heating Oil	-39.27%
Natural Gas	-20.45%
RBOB Gasoline	-11.49%
WTI Crude Oil	-29.88%

Metals
Silver 5000oz	-12.10%
Platinum	-26.40%
Gold 100oz	-10.86%
Copper	-25.00%
Palladium	-29.43%

Currencies

USDEUR:+11.51% USDJPY:+0.59%

MINTs
USDIDR(IDN)	+11.64%
USDMXN(MEX)	+17.00%
USDNGN(NGA)	+8.49%
USDTRY(TUR)	+24.88%

BRICS
USDBRL(BRA)	+49.03%
USDCNY(CHN)	+4.64%
USDINR(IND)	+4.93%
USDRUB(RUS)	+24.64%
USDZAR(ZAF)	+34.63%

Agricultural
Lean Hogs	-26.84%
Sugar #11	+4.32%
Cattle	-18.04%
Coffee (Arabica)	-25.53%
Cotton	+4.21%
Lumber	-21.95%
White Sugar	+7.86%
Cocoa	+14.74%
Corn	-10.56%
Feeder Cattle	-23.82%
Orange Juice	-0.04%
Soybeans	-14.65%
Wheat	-20.25%
Coffee (Robusta)	-21.25%
Soybean Meal	-27.19%

Nifty Heatmap

Index Returns

Market Cap Decile Performance

Decile	Mkt. Cap.	Adv/Decl
1 (micro)	+83.07%	95/39
2	+64.59%	104/29
3	+40.56%	91/42
4	+31.75%	80/53
5	+28.26%	82/51
6	+27.95%	85/48
7	+14.75%	76/57
8	+19.85%	75/58
9	+5.53%	68/65
10 (mega)	+0.91%	68/66

It was the year of the small-caps – vastly out-performing the NIFTY 50.

Top Winners and Losers

HINDPETRO	+52.74%
IBULHSGFIN	+60.20%
BRITANNIA	+61.20%
BANKINDIA	-61.91%
VEDL	-57.86%
CANBK	-48.08%

Commodities and public sector bank stocks got pummeled…

ETF Performance

JUNIORBEES	+7.87%
NIFTYBEES	-4.26%
GOLDBEES	-7.50%
INFRABEES	-9.11%
BANKBEES	-10.32%
CPSEETF	-14.07%
PSUBNKBEES	-31.65%

Broad-based indices had very little to offer…

Yield Curve

Bond Indices

Sub Index	Change in YTM	Total Return(%)
0 5	-0.50	+9.21%
5 10	-0.14	+8.78%
10 15	+0.01	+7.83%
15 20	+0.09	+7.02%
20 30	+0.13	+6.10%

On a total return basis, the long-bonds barely kept up with inflation.

Spread between US Treasuries and Indian Gilts

Investment Theme Performance

Momentum	+45.89%
Financial Strength Value	+43.02%
Quality to Price	+35.28%
Magic Formula	+16.15%
Low Volatility	+6.41%
Enterprise Yield	+6.06%
Balance Sheet Strength	+4.59%
Tactical CNX 100	-1.10%
High Beta	-30.34%

Most investment strategies came out ahead…

Equity Mutual Funds

Best
DSP BlackRock Micro Cap Fund – Regular – Growth	+19.67%
SBI Smal & Midcap – Regular Plan – Growth	+19.56%
Escorts High Yield Equity Plan – Growth Option	+18.07%
Escorts Leading Sectors Fund – Growth Option	+17.50%
Birla Sun Life MNC Fund-Plan B (Growth)	+17.11%
MOSt Focused Midcap 30-Regular Plan-Growth Option	+15.81%
BNP Paribas Mid Cap Fund-Growth Option	+14.94%

Worst
LIC NOMURA MF Balanced Fund-Growth	-6.96%
Sahara Growth Fund-Growth	-7.25%
Union KBC Equity Fund – Growth Option	-7.65%
LIC NOMURA MF Equity Fund-Growth	-7.89%
Baroda Pioneer PSU Equity Fund- Plan A – Growth Option	-16.20%
Sundaram Growth Fund-Growth	-16.23%
Mirae Asset Global Commodity Stocks – Growth Option	-23.36%

Bond Mutual Funds

Best
ICICI Prudential Very Cautious – Regular Plan – Growth	+11.03%
Franklin India Dynamic Accrual Fund-Growth	+10.28%
Escorts Income Plan-Growth	+9.20%
Reliance Corporate Bond Fund – Growth Option	+8.96%
HDFC Gilt Fund-Short Term-Growth	+8.78%
ICICI Prudential Dynamic Bond Fund – Premium Plus Growth	+8.69%
Sundaram Flexible Fund -Flexible Income Plan Regular – Growth	+8.59%

Worst
Kotak Bond-Deposit-Growth	+4.56%
L&T Triple Ace Bond Fund-Growth Plan	+4.48%
IDBI Gilt Fund Growth	+4.36%
Religare Invesco GILT Fund – Long Duration Plan – Growth	+4.31%
JM Income Fund-Growth Plan – Growth Option	+4.28%
SBI INFLATION INDEXED BOND FUND – REGULAR PLAN – GROWTH	+3.24%
DWS Inflation Indexed Bond Fund- Regular Plan- Growth	+2.24%

Institutional fund flows

Commentary

It was a year that saw record inflows of retail money into mutual funds and record outflow of foreign investors out of Indian markets. There were taper tantrums, Greece, GST #fail and so many worries. But the systematic and patient investor was rewarded for keeping a cool head.

Categories Investing Insight, Your Money Tags annual

Cliff Asness on Momentum Investing

shyam November 21, 2015 0

In a wide ranging interview with Tyler Cowen, Cliff Asness discussed momentum and value investing strategies, disagreeing with Eugene Fama, the economics of Ayn Rand, bubble logic etc. The first half of the conversation was mostly about momentum investing and how it works.

Excepts on momentum:

Intro
A momentum investing strategy is the rather insane proposition that you can buy a portfolio of what’s been going up for the last 6 to 12 months, sell a portfolio of what’s been going down for the last 6 to 12 months, and you beat the market. Unfortunately for sanity, that seems to be true.

To some, it’s very intuitive. Just buy what’s going up.

Drawdowns
It has horrible streaks within that of not working. If your car worked like this, you’d fire your mechanic, if it worked like I use that word. I think it is harder than you might guess, even if something works long term, to have it go away because a lot of investors can’t live through the bad periods. They decide why it’s never going to work again at the wrong time.

Why it works
Underreation: News comes out. Price moves but not all the way. People update their priors but not fully efficiently. Therefore, just observing the price move is not going to move the same amount again but there’s some statistical tendency to continue.

Overreaction: People in fact do chase prices.

How to make it work
If you’re going to be momentum, you’ve got to really do it. You’ve got to be disciplined. You’ve got to come in every day, and you’ve got to count on these under- and overreaction things.

Momentum strategies on StockViz

We have been offering the Momentum Theme for more than two years now. It implements a relative momentum strategy where you compare the strengths of a universe of stocks to each other. 2014 returns were +90% and +36% so far this year (Compare.)

This year, we have introduced Velocity – an absolute momentum strategy – and Acceleration – a strategy that tracks changes in momentum.

If you are interested in momentum investing, please get in touch with us!

Source: A Conversation with Cliff Asness
Related: Small Cap Momentum Style Fund

Categories Investing Insight, Your Money Tags acceleration, investing, momentum, Velocity

Equity Returns at the Turn of the Month

shyam November 4, 2015 0

The Turn of the Month Effect

A recent paper in the Financial Analysts Journal looks at the Turn of the Month effect on equities. Equity Returns at the Turn of the Month, John J. McConnell and Wei Xu:

The turn-of-the-month effect in U.S. equities is found to be so powerful in the 1926–2005 period that, on average, investors received no reward for bearing market risk except at turns of the month. The effect is not confined to small-capitalization or low-price stocks, to calendar year-ends or quarter ends, or to the United States: This study finds that it occurs in 31 of the 35 countries examined. Furthermore, it is not caused by month-end buying pressure as measured by trading volume or net flows to equity funds. This persistent peculiarity in returns remains a puzzle in search of an answer.

Does it apply to Indian markets?

The study skips over the Indian markets. So we did a quick test on the CNX 100 index to check if the effect holds. Here’s the cumulative return chart between a Buy-and-Hold CNX 100 strategy (B&H, black) and a Turn-of-the-Month CNX 100 strategy (TOM, red):

Although the TOM strategy has lower-drawdowns, the B&H wins – both in terms of tax advantage and trading costs. The Turn-of-the-Month effect doesn’t seem to apply to Indian equities.

Categories Investing Insight, Your Money Tags quant