This chart is very interesting. it shows the risks of investing in small caps.
Out of 250 small caps in 2014, 3 became large, 43 became mid, and 93 fell to micro
It might be a worthwhile to test it out for 2018-2019 timeframe. Microcap universe corrected by as much as 45% and infact more than 50% if you include the Covid dip. Wouldnt have been easier to handle a DIY momentum portfolio.
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@sandeep17 ,
Rather this is a popular misconception. Rank based momentum portfolio protects you from such severe drawdown, as it gets you out much much earlier. Those who buy and hold, they are impacted more as they couldnot summon the courage to sell. When bear market happens, Quant based momentum strategy, lets you out of market in orderly fashion, provided you follow the rules and dont bring in human bias.
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@ChaitanyaC ,
The worry that I had about DIY momentum stratgey to generate sufficient alpha over Momentum Mutual funds, given the STCG tax scenario…I gave it a thought…And I feel we are ignoring the larger picture here.
In last 3-4 years, market has been in momentum and hence momentum mutual funds appear superior tax wise compared to DIY, but that is so because their 6 month re-balancing and DIY’s weekly rebalancing is currently in same direction. Once market starts going down, then the real value of weekly rebalancing and going into cash will be seen. That time momentum mutual funds who rebalance after 6 months and cannot go into cash will become inferior. That time has not come yet. Momentum mutual funds will appear helpless then, when all their momentum stocks are going down, and they are unable to do anything as rebalance day is 6 months far away or they have to stay invested. That will give edge to DIY momentum PFs.
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Well, I am quite aware of that - I have both backtested and am a practitioner of a momentum strategy myself ( only on Nifty 500 though). I am particularly referring to the microcap universe here where volatility was quite high in the 2018-2019 timeframe. While theory suggests the portfolio would have gone into cash, its not always that straight-forward. Not all stocks came down at the same time so one would have churned quite a lot before cash positions built up. Also, do keep in mind the pain of churning a large number of stocks at a loss - not easy.
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Quant Mutual Funds under-performing most other funds from last 6 months…Mostly due to cash holdings upto 10% and into such stocks like Reliance etc, mostly due to their safe calls…Most funds have given 20-25% returns in last 6 months, while quant funds have given 11% returns. Even it has underperformed Index funds like Nifty 50 as well as by large margin to Nifty Next 50…
Has time come to reduce the exposure in Quant funds? As it is its 1 year returns are also going to suffer due to this?
What are opinions of respected members???
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