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00:00 Passive investing often on this program, but today we're talking about passive investing with a twist and the focus is going to be on a
00:07 Particular strategy that has beaten the benchmark quite comfortably over the course of last year and indeed
00:14 Several times over the course of the last three years
00:17 Now this is only one strategy remember so first we're going to focus on what this
00:23 Twist in passive investing is all about and to tell you about that
00:27 I'm joined by Chintan Haria principal investment
00:31 Strategy at ICICI Prudential AMC Chintan. Thanks as always for taking the time and for speaking to us on NDTV Profit
00:38 Alex it's a pleasure to speak to NDTV Profit and wishing all the viewers a very happy 2024
00:46 Wish wish you and your team and your family a very very happy 2024 now. Let me start by asking you
00:53 What factor based investing because that essentially is what this is all about. Of course, it's been called various things
01:00 But ultimately it is it takes that plain vanilla
01:03 Passive strategy approach and it twists it a little bit. So, how would you describe it?
01:09 Yes, so essentially
01:11 Investors are well aware of active funds where the fund managers are choosing stocks on the basis of certain strategies
01:17 Someone may be value someone may be growth
01:20 Someone has a quality tilt and in the last five six years the passive funds as you mentioned have also grown
01:26 Traditionally passive funds were on the basis of market capitalization
01:30 So you had large cap my passive funds mid cap passive funds small cap passive funds now in between the market
01:37 capitalization based passive funds and active funds
01:40 Globally as well as in India, we've seen
01:43 significant interest increase
01:46 especially in the HMI segment and the corporate segment within smart beta strategies smart beta strategies is nothing but
01:53 Selection of stocks on the basis of a particular factor. So as you mentioned that can be many factors
02:01 So on the if you select the stocks and you have the weightages of stocks on the basis of a certain factor or a combination
02:09 Of factors it is essentially a well laid out methodology
02:12 It is called a smart beta of factor based indices and in indeed in India
02:17 Factor based indices are picking up in terms of interest. There are multiples of them
02:21 low wall and follow all momentum quality
02:25 These are popular in India
02:28 Internationally apart from these dividend yield is also popular, but in India, it's essentially these four which are more popular
02:33 Okay, so let's break that down for our viewers
02:36 And in fact Chintan let's keep the momentum strategy to the end because that's going to be the focus of today's conversation
02:43 Before we get to that. Could you break down the four primary strategies that are available in India and how they work?
02:51 Sure. So if you look at how a particular index is created or what the methodology is first is it's about the universe of stocks
03:01 So in the case of let's say low volatility funds
03:04 The universe of stocks is typically the top hundred names because low volatility as the name suggests are those stocks
03:11 Which are stable over the period of last six months or twelve months as the case may be and the portfolio selection happens basis
03:18 These 30 stocks which are most stable out of the hundred stock universe, which is essentially the large-cap universe
03:25 So those investors who are in some sense risk averse wants most a portfolio of most stable stocks
03:31 That's where the low volatility based product comes in handy
03:35 That's at one end then you have alpha low one
03:38 Which is essentially a combination of two products or two factors one being alpha one being low vol
03:44 And in that if you see what essentially an investor gets is 50% weightage to alpha
03:50 Now alpha is nothing but the stocks which have performed well in the past six months and twelve months and no one is
03:56 Stocks which are stable. So it's a combination of these two that is also quite becoming popular in India and
04:01 if I take one step ahead of that, that's where the
04:06 quality value all comes together
04:10 So quality as we know is essentially those set of stocks
04:14 Which are basically selected on the basis of high ROE, high ROC which is high return on equity, return on capital
04:19 and if you look at value, which is also I think value as a theme has played out very well in the last one and two years
04:27 Value is essentially those stocks which on the basis of price to go, price to earnings and price to sales are the cheapest
04:33 so these are the three to four strategies which are common in India and
04:37 Then the last one of course is momentum, but I'll come to that when we discuss momentum in detail, but these are few of the
04:45 Let's say smart beta strategies, which are quite popular, especially the low wall because most Indians being conservative investors are finding it a good fit
04:54 to their overall portfolio mix
04:56 Absolutely
04:57 and in fact
04:58 there are certain other strategies that I'm sure will emerge over a period of time because smart beta in India Shintan and we've spoken about
05:03 it over the last two or three years is
05:05 you know, it is in its very nascent stage compared with a country like the US which has a
05:13 very large number of such passive strategies
05:16 but let's delve a little deeper into the momentum strategy and the reason that I've chosen to speak about this now is that
05:22 Among the passive strategies this seems to have beaten the benchmark by leaps and bounds in 2023
05:30 Would it be safe to say that in a structural bull run?
05:36 This is one of the best passive strategies to play and why?
05:42 Sure, so before I answer on momentum what you mentioned about various other strategies coming up surely there are so many other
05:49 Combinations which are possible and not just in terms of the factors but also in terms of the market capitalizations
05:56 Just in the case of momentum also and I'll explain momentum in detail
05:59 You can have large cap momentum index and is a mid cap momentum index also available in India today
06:05 So if I keep the focus on momentum, essentially you are right that in structural bull markets or in bull markets
06:12 Momentum as a strategy works and it's not only in India
06:15 We've seen even the experience in the US has been that momentum strategy has been one of the better performing strategies
06:21 Going all the way back 10 years as well
06:23 So if we go back 10 years and see which factors have done well momentum strategy comes on top one of the best in terms
06:31 Of returns even in the US and in the Indian context not only in 2023
06:35 If we look at the year prior basis, the momentum strategy has actually been able to deliver
06:41 Good returns the key reason of course is that one the universe and second is the selection of stocks itself
06:48 it is unbiased in terms of what is the
06:51 Underlying stock selection which happens. It's really focused on last six months and 12 months the stocks which have done
06:59 Well, they get filtered out and selected
07:02 They are adjusted for standard deviation without getting too technical essentially
07:05 These are stocks which in the last six months and 12 months have done well and in the top 100 universe and out of the top
07:12 100 or top 150 universe of 200 universe that's very common in India
07:16 So in India the top 100 names followed by the next hundred names is the top 200 names
07:21 Within the top 200 names if you select 30 stocks on the basis of ones which have done well in the last six months and 12
07:28 months
07:29 that's what momentum index is all about and as you mentioned because every six months this selection of
07:36 Portfolio is done by running the last six months and 12 months winners. It's a self-balancing
07:42 Mechanism wherein the winners keep coming while the losers get moving out
07:47 And of course, we've seen that when trend changes happen, you can see a potential downturn, but otherwise
07:54 We've seen longer trends emerge
07:56 for example today if you see and the reason why probably the momentum strategy has worked well in
08:01 2023 is that auto as a sector has done very well. And if you look at the momentum 230 index
08:08 Auto sector is one of the top most sector in terms of sectoral allocation. I think it's about 20 22 percent
08:15 So that essentially is something wherein being sector agnostic and selecting those stocks which have actually done
08:23 Well and forming part of the portfolio. There are risk measures in the book in the index construction itself
08:28 No stock was above 5% at the time of reconstitution. That is a good self
08:33 Buffer that is created and from an investor standpoint
08:37 That is what is probably drawing investors to this particular style because essentially you are investing in a party stock portfolio
08:44 where the stocks are the
08:47 Performers of the last six months and 12 months and that keeps continuing the only time probably this gets chain gets broken
08:53 Is when there is a big shift in terms of the style of investing or the market direction?
08:59 But otherwise we've seen three to four years of good secular bull run and in that the momentum strategy has done well
09:05 because of the selection methodology which is
09:08 teaching that don't stop yourself from
09:11 Using technical terms and explaining those technical terms because I'm sure that if I understand it my viewer will also understand it
09:19 But we will talk about that after the break. In fact, I've
09:22 listed out the three years CAGR the
09:24 per year growth also for this strategy versus the benchmark and I would like to
09:30 Discuss that with you the period of under performance and out performance, but we will do that after a very quick break do stay with us
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12:12 Welcome back you're watching the mutual fund show and we're speaking specifically about the momentum
12:17 Strategy and the fact that it is outperformed in a big way now
12:21 We will discuss periods of outperformance and under performance. I'm in conversation with Chintan Haria Chintan
12:28 the data suggests that
12:30 2023 the gain for the 200 momentum 30 index was over 50% in that same time
12:37 The nifty 200 index has gained about 29% and the nifty 50 is gained 23.42%
12:43 now the reason I'm pointing this out is that
12:46 The CAGR over the last three years has been about
12:50 25.8% and that CAGR has gotten affected by the performance in
12:55 2022 when the 200 momentum 30 index
12:59 Dropped 14% or thereabouts. So this is that period of under performance that you were talking about
13:07 Why is it that this happens?
13:09 So if we look at it closely and just to refresh investors
13:13 The viewers memory the selection methodology in the momentum index is past six months and 12 months
13:20 The stocks which have performed
13:23 When you rank them the top 30 names out of the 200 names
13:27 You pick them up and you give them the weightage which is based on the default market capitalization
13:33 Multiplied by the factor weight. So you have a 30 stock index created where the weightages are also decided by the factor of momentum
13:41 If we go back in time to 2021-22
13:45 There was a big shift in the market
13:48 direction in terms of growth stocks underperforming and value stocks outperforming
13:54 if you look at what I had mentioned the top performing sector and the reason why
13:59 Let's say momentum index would have done well in 22 and 23 is that the shift started to happen in favor of the top
14:06 Three sectors if I look at it today each almost 20 percentage essentially autos
14:11 capital goods and
14:14 Pharmaceutical now think of it in nifty the weight of auto capital goods and pharmaceuticals is probably the index
14:20 Underlying index of the 200 index. It will not be more than maybe 20% but
14:27 Relatively in the case of nifty momentum index it ended up being 60%
14:31 So the performance comes from the high sector tilt which comes in
14:36 2022 if we go back what had happened was that the then performing sectors which were essentially let's say FMCG
14:43 IT they ended up underperforming and
14:48 The other sector started to perform and because this index is rebalanced at a particular time period
14:54 let's say in six-month life you had a time period where probably there was an
14:58 underperformance because those sectors which were falling out of favor was still part of the momentum index and
15:05 that when the rebalance happens those
15:07 sectors went out and the sectors like auto cap goods and
15:12 Pharmaceuticals came in because they had started to perform well
15:16 So it's this intervening period where the underperformance happens because arguably maybe tech
15:21 led to a certain underperformance because tech stocks had done well prior to that and
15:26 Maybe even the high quality names and FMCG would have let down performance
15:31 So there is a chance that this shift led to an underperformance in
15:35 2022 and our performance in 2023 is on account of the sector rotation which happened in 2022
15:42 So this is essentially why you see that there are times
15:45 When there is a markable shift in the market from we saw that happening from growth to value
15:50 Yeah in 2022 that led to the outperformance
15:53 So underperformance in 2022 and the subsequent outperformance in 2023
15:57 Got it. Got it
15:58 Now my last question on this and and I think we've discussed the the significant outperformance in
16:03 2023 as well as 2021 now my last question on this is in terms of the construction
16:10 Why is it six months because I would think that in certain situations what you've pointed out
16:15 It can prove to be a bit of a you can can hamper the strategy
16:19 So it is essentially a combination of six months and 12 months and this is a globally accepted standard
16:25 Globally whenever a momentum index is being created
16:28 It is six months and 12 months the reason being that there is a some change which happens in
16:34 Near term and then 12 months is slightly longer term and because it is a momentum index
16:39 You're basically trying to capture the stocks which are running well
16:42 So six months and 12 months as a combination
16:45 I'm sure a lot of research would have gone into it whenever
16:47 These indices were created many many years ago in the West and that same formula has been used when the Indian index providers are also
16:54 Creating these indices. So six months looks like a short period of time
16:58 But as we have seen in 2022
17:00 Even if for six months you are with the sectors which are falling out of favor that can be a significant underperformance
17:07 So in fact the theory suggests that the shorter you keep the rebalance period it is potentially a
17:13 Return which can be higher, but then there is a lot of churn which is possible
17:17 There is a lot of impact cost which is possible and your scalability of the product to that extent becomes
17:22 Scalability and applicability becomes difficult
17:25 so three month and rather the rebalancing happening every six months on the basis of six month and 12 month is a
17:31 Proper fit in terms of the scalability and the applicability of the product understood
17:36 Thank you so much in turn for joining in and for breaking down the product for us always a pleasure speaking with you
17:41 Thank you so much. All right now viewers. We've talked about what this strategy is all about
17:45 But where does it fit in your portfolio and is it indeed a fit for you?
17:49 We'll ask our next set of guests after this short break to stay tuned
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20:01 Welcome back you're watching the mutual fund show we've spoken about the momentum strategy and how it works
20:06 The question is does it work for you?
20:08 We're joined by Himanshu Kohli co-founder client associates and Anant Ladda founder of invest aaj for cult
20:14 Thank you so much gentlemen for taking the time without delaying too much. I won't go to toss straight to you Himanshu
20:19 What do you think one about this strategy and what are the risks involved? Is it a fit for everybody?
20:25 So Alex, I would say momentum strategy tends to do better when it's a trending market
20:34 Either it's a trending market upwards or a trending market downwards. Now in a sideways markets, it does not do very well
20:43 And typically they take a 50 day or a 200 day moving average and basis that they allocate the money to certain stocks or certain sectors
20:54 So I would say it has let's say if we look at the data for last 13 years, 10 out of 13 years it has done better than nifty 50 total return index out of 13 years
21:08 Now there is a space for something like this, but it is comes with slightly higher volatility because imagine if you start buying a particular stock
21:18 Once it crosses a 50 day moving average or a 200 day moving average and all of a sudden the stock comes starts coming down
21:25 Unless the 50 or 200 days moving average is lower, they will not sell it. So it increases the volatility
21:33 Especially in a downward market or in a side based market. But yes, there is a space for something like this
21:41 And we do recommend our clients to hold a certain percentage as a part of their satellite portfolio into momentum strategy funds
21:49 So rather than stocks, we recommend them to go through momentum strategy funds, which makes it far far better for them
21:56 Anant, I'll come to you on the risks. To a certain extent, I think we've captured some of those risks, but would you like to elucidate that further?
22:05 Sure Alex. Firstly, I would like to discuss a bit about this strategy in a bit of technical language. Can I do that or should I directly?
22:13 Like I said, if I understand it, then my viewers will understand it.
22:16 100%. So if I divide momentum strategy, it is divided into three parts. First, not picking the bottom, not picking the top and finally riding the trend
22:25 When we go in a bit of technicals, momentum is of two types. First is time series momentum, which is the absolute momentum or the absolute returns, which we are tracking
22:35 If I compare it with cricket, for example, in IPL, we suddenly have a player who performs excellent in a match and that is a breakout stock or a breakout player
22:46 In the similar way, there is something known as cross-sectional momentum. In cross-sectional momentum, we look out stock performance
22:53 vis-a-vis comparison to all the other stocks. Here we are probably looking at the man of the series and looking out the player or the stock which is performing throughout the series
23:03 And in any momentum strategy, they tend to combine both of these momentum and finally take out the top 30 or top 50 stocks, which are in momentum right now
23:15 So this is the basis of momentum strategy. If I talk about the client's perspective, if there is a client who is already investing in multi-cap funds or who is actively investing in
23:25 small caps or mid-cap mutual funds, especially the mutual funds, which are already investing in an aggressive momentum portfolio, then probably he might not need an index fund
23:35 which is doing the same. But if there is a know-nothing investor who wants to invest only via mutual funds, then absolutely yes, Nifty 200, Momentum 30 and Mid-cap 150, Momentum 50
23:48 index funds make sense. If we talk about risk, first and the biggest risk is you are heavily relying on the trend. In momentum strategy, you are looking at the stocks which have outperformed
23:58 in recent past and you have a thesis that the stocks or the sectors which have outperformed in recent past will continue to outperform in the forthcoming future
24:08 which might not be true as we saw in 2022. Even in the last 5 years, if we check out the data of MSCI value versus momentum, we find that value has been outperforming
24:19 from last few years. That is why data is slightly in favour of value funds. But will it always sustain? Absolutely not. If we check out 15 years data, we find out that
24:30 momentum has outperformed value and normal index by a large margin. So what I personally feel is combining both makes sense.
24:38 Okay, combining both. Last question in this one is for you Himanshu. In terms of why 10 to 15% of a portfolio and why not more than that?
24:48 Is that because of the risk factor that you identified and can that change in a certain scenario? Like for example, if you are talking about the scenario
24:56 where we are in right now and you are talking about over the next year, if bond yields fall, technically you are expecting to have an upside for risk assets globally
25:05 notwithstanding other factors of course that play out. So one would assume that we are in a structural bull run. In that scenario, shouldn't you have a little bit more towards momentum?
25:14 So I would say it also depends on the risk appetite of the client. So a moderate profile investor could have 10 to 15%. An aggressive profile can go up to 20%
25:26 and a conservative profile can go up to 5%. Yes, there is a higher risk which is involved in the momentum strategy and the best way to mitigate that risk is to keep these limits
25:37 and go through a fund strategy. Also Alex, there is a higher churn which happens. So if someone is buying stocks or investing through a PMS in this, there is a higher cost which also comes into this.
25:51 So I would say it is not a core part of our model portfolio, it is a satellite part of our model portfolio and typically the core and satellite is 70 to 30 ratio.
26:02 So in satellite, maybe one can also have a particular sector view and one can also have a view on the momentum strategy. So it fits in well over there.
26:11 Emanchu, last question. Emanchu, last view. Sorry, I am so sorry to cut you off but we are running out of time. Would it matter which fund house you choose and what are the factors that would affect that choice?
26:23 So I would say one can go through an index also. One can also go through a fund house. If there is a fund manager who has the ability to create an alpha and has demonstrated that over and over again,
26:36 I think then maybe going through a mutual fund over there where there is an alpha track record which has been demonstrated and there is a good fund manager, one can also tilt a part of this momentum strategy through that fund house also.
26:49 Got it. Thank you so much gentlemen for joining in and I must point out to the viewers, if you have got any questions about this strategy, do write to us and we will reach out to both Emanchu as well as Anant and I am sure they will be happy to help.
27:00 But thank you so much gentlemen much more. Viewers, that's a wrap on this particular edition of the Mutual Fund Show. Thanks so much for tuning in. This is NDTV Profit.
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