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CM Strategy

Tight-fisted markets

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A quick roundup of the Capitalmind Momentum portfolio in April 2022

April 2022 portfolio update

The chart shows Capitalmind Momentum smallcase returns versus the NIFTY 50 and the CNX 500 over the last 1 / 3 / 6 months and one year.

You see two separate calculations for CM Momentum. Until recently, the smallcase calculation used to assume close of day prices of the day before the rebalance as entry prices for new additions and exit prices for stocks being removed.

At various times in the past, we have mentioned how smallcase’s old index method to calculate NAVs can offer far-too-optimistic return expectations. That seems to have been fixed now as they have shifted to using the average price on date of rebalance. In past CM Momentum factsheets,  you’ll see larger differences between our reported number and the smallcase NAV. Our method assumes the end of day prices on the day of the rebalance as the entry and exit prices.

Here’s smallcase cofounder, Anugrah’s tweet announcing the changes 👇🏼

With the change in the smallcase methodology, smallcase NAV and CM NAV will likely be in a tighter range. Most real returns are most likely somewhere between these two estimates.

Coming into April 2022, markets seemed to have shrugged off the Russia-Ukraine conflict and digested impending rate hikes, with the NIFTY up 4%. That didn’t sustain in April; the NIFTY was down -1.3%, which means the NIFTY has given back its returns and is back to where it was three months ago.

CM Momentum was flat for the month and continues to be down for the year.

The chart below shows 2022 calendar year-to-date.

Capitalmind Premium Momentum Portfolio Performance summary since inception

The chart shows performance (annualized returns, annualized volatility, and maximum drawdown from peak) since inception in January 2019.

Reading this chart: Annualised Returns, higher the better (obviously), Volatility: lower the better, and Maximum Drawdown: measured as falls from the previous peak, lesser the better, i.e. the smallest negative value, the best possible value is zero only possible for Fixed Deposits.

The Momentum portfolio tries to outperform the NIFTY while (hopefully) suffering lower drawdowns in deep corrections. The smallcase version of the portfolio has been live since Jan 2019; it has comfortably outpaced the benchmarks with lower volatility.

The chart below shows the cumulative return chart since inception. i.e. What ₹100 invested on day 1 in Jan 2019 be worth at the end of April 2022.

The better way to visualise returns is to look at rolling returns over various periods. The chart below shows 1-year rolling returns, i.e. the 1-year returns as of any given date.

If that green line stays above the grey lines more or less consistently for, say, 5-10-15 years, it’ll be a job well done. As of April 2022, they’ve inched closer than they have been for a while. And guess what, the unthinkable will happen, and it will trail the NIFTY, at least for a while. So, we fret and tweak the system to avoid that, but it won’t always work. Remember, even backtests, with all their inherent limitations in representing reality shows 1 in 3 years of underperformance on a 1-year rolling returns basis.

Outlook for May 2022 and beyond

The graphic shows NIFTY Total Returns index monthly returns

Down 1.2% for the year is not great, but that’s a walk in the park compared to the battering of US tech stocks. The Nasdaq100 down 20% for the year.

Tight-fisted marketsThe long-term correlation (17 years) between the Nasdaq100 and the NIFTY 50 is 0.92, meaning they mostly move up and down together.

That’s not surprising, given equity markets tend to move in lockstep. That lockstep got tighter after the 2008 Global Financial Crisis, with five-year correlations consistently exceeding 0.90. This means you only had to see what one of them had been doing to have a fair idea of what the other was up to.

The chart below shows the five and one-year trailing correlation between the two indices.

The Nasdaq has fallen 20% in 2022 while the NIFTY is barely down, which is reflected in the lower-than-usual 1-year trailing correlation of 0.45 against the 0.66 median.

Maybe this is a continuation of the trend of domestic retail investors overtaking Foreign Institutional Investors as the primary source of volumes on Indian exchanges. Read OMG: The Retail Investor is the biggest player in the stock market.

Nothing about this tells us anything definite about what to expect in the near future. The world is even less predictable than it was a year or two ago, not necessarily in a way that keeps the adrenaline flowing.

New equity investors might have to mentally adjust to low or even sub-single-digit monthly portfolio movements, which, for a lot of folks, might be harder to do than seeing regular double-digit movements, even negative ones.

Markets look like they’re in the mood to be tight-fisted for a while, but who knows when that changes.

We’re still fully invested.

Capitalmind Momentum smallcase by Capitalmind


Further Reading:

All Past Momentum Factsheets: Capitalmind Momentum Factsheets

Investing in the best smallcase in 2022: Five things to consider

Frequently asked questions about the Capitalmind Momentum Portfolio

smallcase review: Five perils of momentum investing you cannot ignore

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