The Capitalmind Long Term Multicap was launched in Dec 2014. Since inception it had generated a CAGR of 9.2% compared to its benchmark Nifty 50 return of 8.7%. Let’s divide & analyze the portfolio into two time frames.
Dec 2014 to Jan 2018:
It was a stellar ride, where the portfolio was up 87.3% compared to 25.1% on Nifty 50. An outperformance of 62.2%!
The alpha was contributed by stocks like Supreme Petro (up 181%), Artemis Hospitals (up 164% including a demerger from PTL), Aegis Logistics (up 127%), PTL (up 106%) etc.
Feb 2018 to till date
This was a rough roller coaster ride. We had seen two major drawdowns during this time period.
- The small & mid cap crash in 2018: -38.19%
- Covid crash: -40.8%
The drawdown was largely due to stocks like Strides, Sintex, Jamna Auto, Indian Hume (all down 60%) etc.
The portfolio return is a function of high alpha & low drawdown. While everyone focuses on the former, very few emphasize the latter.
Over the last couple of months, we reflected on two fundamental questions:
- How to improve the returns?
- How to avoid major drawdowns?
We tried to address these questions with the following portfolio changes.
So, what’s going to change?
Deliberate position sizing
LT Multicap was an equal weighted portfolio. Equal weighted portfolios are more volatile & are vulnerable to huge drawdowns in bear markets. And we had witnessed it in 2018 & 2020. To handle such challenging times, we are introducing weightages for individual stocks.
- Initial allocation (3%): When we like a company and it fits our investment criteria, we will take an initial position of 3% of the portfolio.
- Standard allocation (6%): Our conviction on the company increases when:
- The company delivers on quarterly basis.
- The investment thesis plays out on expected lines
- Once these criteria are met, we increase our allocation to 6%.
- Highest allocation (9%): The longer we have actively stayed with the company, the higher our conviction will be. Over a period of time these companies will,
- Become an anchor in our portfolio
- They are main contributors to our alpha
- They have built enduring moats around it
- Exhibit strong long term growth prospects.
In such scenarios, we further increase our allocation to 9% to make it part of our core portfolio.
This gives us a flexibility to upsize & downsize the allocations as per the growth prospects of the company. It also allows us to move to cash as per market conditions.
*Click to enlarge
Technicals for Long Term Investing
- No matter how strong the business fundamentals are, if the stock is not bought & sold at right prices, the returns will be under pressure.
- Price/volume-based technicals as an additional factor in our portfolios. This helps us in portfolio sizing (weights), entry or exit prices & help avoid large drawdowns.
Focus on Growth & Opportunity cost
- We have tightened our growth filters. The company should deliver above industry growth. There should be a potential growth trigger in the next 3-5 years. We need to avoid value traps, but also clearly focus on growing companies.
- Opportunity cost refers to the cost of not opting for an alternative investment. It is a function of time. Holding on to an underperforming stock for months or years can lead to much higher opportunity cost. Being wrong is ok, staying wrong is not.
New approach, New identity, Same vision
- LT Multicap portfolio is undergoing a transformation. Hence we propose to change the portfolio name from LT Multicap to Capitalmind Focused Portfolio.
- Our new identity has been designed to represent our original vision of long term wealth creation, while simultaneously moving the portfolio towards an evolved investment thesis.
What’s staying the same?
- A good diversifier always beats a bad concentrator. We continue to diversify across 15-18 stocks as per the market conditions.
- Focus on sector leaders & companies gaining market share from the competitors.
- We continue to remain market cap agnostic.
- Management interest should be aligned with shareholders with good corporate governance.
- Strong or improving financials as a primary filter.
- We continue to like sustainable growth stories over one trick ponies.
Frequently Asked Questions
1) When do the new changes apply for CM Focused (erstwhile LT Multicap)?
The new changes will be applicable from Apr 1st, 2021.
2) What is the current portfolio?
You can access the CM Focused portfolio here
3) I am an investor in LT Multi cap from long time. My current allocations are different from the model portfolio. Should I rebalance?
There is no pressing need to rebalance the weightages of existing portfolio. The incremental allocation can be made as per model portfolio. Our suggested approach is to add money to this portfolio on a regular basis, which will bring weights in line over time.
However, if your highest allocation is more than 12% on any stock, we suggest it to trim it closer to the model portfolio.
4) When should I enter the mentioned stocks?
We would always suggest a portfolio approach – to have a position in all the stocks, and invest over time rather than all at once.
5) When should I exit the mentioned stocks, when there is an exit call?
There are two types of position changes that could signal an exit:
- One, where we remove the stock from the portfolio, in which case a full exit is the course of action to take.
- Second, where we reduce the weight. In such a case, a partial exit would be useful. If we bring down a stock from 6% to 3%, a corresponding action would be to reduce the quantity in your portfolio by half.
5) How frequently is the CM Focused portfolio rebalanced?
We closely track the companies & review our portfolios on regular basis. When a stock matches a pre-defined rebalancing criteria, we go for it. This will be communicated to our premium subscribers; on slack (#actionable) and on email.
6) Any change in the portfolio turnover?
This may result in a slightly increased number of transactions, but we don’t expect changes more than once a month or quarter.
Get immediate access to the Capitalmind Focused Portfolio
That’s not all. Premium Subscribers get exclusive access to:
- Our equity portfolios (CM Passive, CM Momentum, CM Focused)
- The CM Fixed Income Portfolio
- CM Chase: NIFTY + Futures trend-following strategy
- Short-term actionable ideas
- and the vibrant Capitalmind Premium slack community
