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CM Strategy

Momentum Factsheet May 2022: Ouch

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To quote Bezos from his 2000 letter to shareholders: “Ouch.”

May was a terrible month. CM Momentum had its worst month in a long time.

May 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.

Toward April-end, it had started to look like the markets had digested the war and impending rate hikes and were focusing on company-specific results. We could not have been more wrong in that assumption. The first three weeks of May were mayhem. Within the top 500 stocks, the median stock was down 6%. 83% of all NSE-listed stocks were down in May, with the median NSE-listed stock down 8.8%.

Chart below shows the breakdown of how stocks did in the month.

The year-to-date chart now looks ugly.

In Calendar-year 2022, the major indices are down between 5 and 6%, the Next50 a little more. But Momentum has taken a special pasting so far this year.

Capitalmind Premium Momentum Portfolio Performance summary since inception

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 May 2022.

The chart shows performance (annualised returns, annualised 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 with 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 still comfortably outpaces the benchmarks with lower volatility.

How about on a one-year rolling returns basis.

The chart below shows 1-year rolling returns, i.e. the 1-year returns as of any given date.

We’re now trailing the NIFTY and the CNX500 on a 1-year trailing basis.

What next

Back when the Capitalmind momentum portfolio was having one of its best months, in Five perils of Momentum Investing, we wrote:

“This brings me to the bad news. Momentum strategies will underperform from time to time, especially in the short term. Just like any and every equity strategy underperforms for different periods of time. If they didn’t they would be called “Holy Grail” strategies and there aren’t any that we know of.”

Maybe there are other quantitative fund managers who, at such times, shrug their shoulders, point to the decade and a half of backtests, and say, “Hey, this happens, but it outperforms in the long term”. Maybe they reiterate that the portfolio gets picked using quantitative rules meant to win over the long term while taking short-term hits. And are unperturbed while making those (factual) observations.

Sure, when only our family’s portfolios are involved. But when there are client portfolios involved, it feels different.

Make no mistake, this hurts. Like what Michael explains to Tom:

“Tom, don’t let anybody kid you. It’s all personal, every bit of business. Every piece of shit every man has to eat every day of his life is personal. They call it business. OK. But it’s personal as hell. You know where I learned that from? The Don. My old man. The Godfather. If a bolt of lightning hit a friend of his the old man would take it personal. He took my going into the Marines personal. That’s what makes him great. The Great Don.” – Mario Puzo

So yes, this hurts. But not in a way that makes us question the core principles.

Ok so, what next?

Markets continue to be weak, notwithstanding the mild rebound in the last week. Whether that leads to sustained recovery is anybody’s guess and remains to be seen. We can’t say how much more bashing momentum-led strategies have left. We certainly aren’t going to make daft predictions about future returns.

We know the momentum factor has endured; across markets and out of sample. So we’ll focus on the process and continue refining the strategy and, in our PMS, its implementation as well. The outcomes should then take care of themselves.

Capitalmind Momentum smallcase by Capitalmind


Further Reading:

All Past Momentum Factsheets: Capitalmind Momentum Factsheets

Frequently asked questions about the Capitalmind Momentum Portfolio

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