The Capitalmind Momentum Portfolio performance in the Capitalmind Wealth PMS has been really noteworthy recently. Momentum is one of the three equity portfolios we offer, and it’s based on investing in the top stocks by price performance, and then rebalancing often. It is managed by Anoop Vijaykumar (@CalmInvestor) at Capitalmind Wealth.
Now anyone can invest in all three portfolios (Momentum, Index and Multicap) and then have a debt allocation as well. I personally invest in all three + debt in my personal account – about 70% of my net worth is in Capitalmind Wealth.
SEBI has always required only a blended return including equity, debt and cash – across all your customers and our data captures and provides that on the SEBI reporting portal. We have about 40% to 50% allocation to debt (fixed-income) – some by design, some by tactical allocation. We also will have “cash” – a temporary move to cash when we sell something and wait for the next allocation – a PMS cannot buy the same day it sells, so it waits three days to get the money before it can be deployed. The SEBI report contains a weighted return of all the above blended together, inclusive of cash.
There are other PMS reporting companies that look at individual portfolio returns, and so far we used the equity component of each portfolio to report performance to such platforms. We ignored any cash or debt in the accounts, to reflect the pure equity component. But July’s returns, on a one year basis, looked a little too good at 63%. So we redid all the returns to include the impact of cash – and because of a certain quirk in March and April, which we’ll explain later in this post, the returns are more illustrative.
(This means if you have stocks worth Rs. 60 and cash worth Rs. 40, and your stocks go up 10%, you’re up by Rs. 6. You could look at the equity portion and show a 10% return. However if you look at the whole portfolio, it’s only 6%. This is the difference we have now accounted for, even considering that each person can have multiple different portfolio allocations between Momentum, Index and Multicap)
To summarize: As of End July 2020, 1 year Momentum returns are 28%, and the month of July 2020 alone gave us 18%.
This is also how SEBI’s new rules, effective in a few months, will expect returns to be displayed on the SEBI website (including the cash component) so this is how we will report individual portfolio returns going forward. As much as we would have liked to have caught this earlier – the divergence earlier was not significant for us to notice.
Let’s now go through the performance.
Actual Performance so far
Here is the annualised returns summary since inception (March 3, 2019):
The lower volatility and the lower drawdown has come from the momentum discipline of moving into cash when the markets crashed, which is why cash is such a critical component in volatile markets.
Here are the month-wise returns:
How CM Momentum handled the Covid fall in March 2020
Why is cash important? Check this chart shows three distinct phases of how Momentum fared during the COVID-fall starting in late Feb 2020.
Phase 1: The Fall
CM Momentum reviews the universe of stocks and invests in eligible stocks showing strong positive momentum. As the universe shrank rapidly in late Feb / early March, we went from 100% Equities to 20% Equities by mid-March. The rest of the portfolio was in Cash and Gold.
Note: When there are not enough stocks that meet the momentum filters, we move to cash proportionately. The March 2020 fall for Momentum was only -10% while Nifty fell 23%.
Takeaway: The strategy does not exit at the peak but looks at shorter term signals to exit decisively after a decline starts.
Phase 2: The Initial Bounce
As markets bounced from the lows, most stocks still did not pass our criteria and the portfolio continued to stay in Cash & Gold.
Takeaway: The strategy sits out the initial part of sharp recoveries as it looks for more sustained upward movement across the board.
Phase 3: Continued Bounce
Mid-May, more stocks started passing momentum criteria, and the portfolio progressively redeployed into equities from cash. As of June, we were fully redeployed into equities and continue to be as of early August.
We find that such a mechanism protects a portfolio from deep damage in a steep fall, by moving partially to cash when stocks lose momentum.Takeaway: The strategy doesn’t predict whether stocks are overvalued so stays invested where momentum is strongest.
Cash is a Position
In a long-only portfolio, you don’t have the ability to short the market. In this case, the only way to protect against a steep fall is to sell and go even partially to cash. The CM Momentum portfolio has between 20-30 stocks. So if a position cannot be filled because there are not that many stocks that qualify, that position is left open as cash. That cash can lower your return in case the market jumps up suddenly, but in a steep fall like March 2020, you often find that the protection it offers is invaluable.
Lowering volatility is a behavioural need, of course. But the ability to sleep better when markets are crashing is often undervalued too. Here’s a sample customer return who has been with us a year. They may be just lines, but they tell a story:
Given that this portfolio is driven by a systematic data-driven process, the main thing is discipline. Essentially, if the system tells you to go to cash, you go to cash.
Note: The Capitalmind Wealth PMS is a SEBI registered Portfolio Manager. The above is only a post of the past returns – and past data does not always predict the future. This is not advice.
