Smallcap momentum portfolio

Hello everyone. I have created a momentum portfolio comprising of 20 top stocks from NSE’s Smallcap 250 index. This pf is based on highest momentum on price change and reduced volatility. I rebalance every week. It has been a year since I have been running this portfolio and my XIRR is around 40% (I am aware that XIRR is valid above 1 year only, but posting this number as I am a week short of 1 year). My trades are done through a discount broker, hence no brokerage is applicable. I have not included statutory or depository charges. I know this will bring down the returns number slightly, but I guess these numbers are still ok. Portfolio started of as equal weighted, but since then I have let the winners run without trimming their size. This means that any new entry will have the same weightage as the stocks going out.

Rebalance is done every Monday following certain rules. If a stock is out of the top 20, but is still within the top 25, it does not get removed. This is done to reduce the churning and associated costs a little bit. Any new name that appears can enter if there is a vacancy only. If the number of entrants are more than the actual exits, then entry will be done on the basis of their ranking.

Portfolio valid for coming Monday, 27th Nov 2023.

  1. ANGELONE
  2. APARINDS
  3. BSE
  4. BSOFT
  5. GPIL
  6. IRCON
  7. ITI
  8. JINDALSAW
  9. JYOTHYLAB
  10. KALYANKJIL
  11. KAYNES
  12. MAPMYINDIA
  13. MCX
  14. MEDANTA
  15. NAM-INDIA
  16. SAFARI
  17. SONATSOFTW
  18. SUZLON
  19. WELCORP
  20. ZENSARTECH*
    • ZENSARTECH is will not be able to enter coming Monday as there is no vacancy. MRPL is still within the top 25 and still part of the portfolio.

If people are interested I can post the updates every weekend. Please note that I am doing this as a hobby and there might be some delay in changing my base list compared to when NSE does the changes on the index.

Views are welcome. Thanks.

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@visuarchie Hello, Thanks for sharing your knowledge. I have couple of questions. Hope ok to ask.

Selection of stock - is that based on high return in the last one week?
Is there any back test being done to understand how this strategy has performed in the past?

Thanks Much.

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Combination of returns over 1 year and 6 months. Equal importance is given to both.

No back testing done. I am a small time investor and hence don’t have access to many tools. But the results have been impressive over one year. These are actual results from my investment journey.

I remain invested always. Never go to cash.

Future - I am certain to catch the strongest stocks in the index even if the market / index goes down. No guarantee of future returns though.

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Hello Viswanath
Thank you for starting this thread. I’m really interested in rule based investing/trading but I haven’t done any consistent effort on this side.
However I’d like to track the progress you make and how your portfolio turns out. I’d very much appreciate if you can keep updating this thread at a frequency of your choice. I have a few observations

The returns over 1 years are 40% where as the whole Nifty Smallcap index itself is up 36%. That’s 4% extra return and if one can get this consistently that’s a great outcome as per me. However the effect of fees and charges may eat into the returns you make
Let me ask a few questions

  1. How many stocks goes out of the portfolio evey week (rough estimate) ?
  2. How do you track the returns over 6 months and 12 months. Is this data readily available on any website ?
  3. From your broker you can see the total charges you’ve paid in a period ( may be one year). Could you check this and update what percentage of your portfolio went into charges ?

Questions on the strategy

  1. Is there any specific reason for selecting this index ? and also for selecting average of 6 month and 1 year average returns ?
  2. What percentage of your equity portfolio is invested in this momentum strategy ?
  3. Do you have any stop loss or do you exit only at the end of each week if necessary ?

Thanks
Praveen

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Has it been documented/proven that one stock selection criterion is superior over the other for such a quant assortment? ATH/Volume action/Gainers list over multiple time periods/quarterly results etc

Do we know which screening criterion is the best?

Hello
I will be happy to update this every weekend with the clear understanding that this is for educational purposes only where I am sharing my experience. The returns are significantly over 40% and even with the fees, the returns are superior.

  1. Typically 2 to 3 stocks go out. For example, this week there is no exit or entry. Though there is a new entrant, there is no vacancy as the weaker stock is still within my outer limit of 25.
  2. I have created a Google sheet to pull price data for every day. I use this to calculate price change and standard deviation of daily changes. I do this update during the weekend only.
  3. Will see if I can get this info. If this is available, will update.

Strategy:

  1. I have 3 momentum pls running on Midcap150 index, Smallcap250 index and Microcap250 index. Based on various reading material and videos, most people have chosen look back periods of 6 months and 1 year. We can have shorter periods also as long as we do it consistently.
  2. A small % as I have been doing this over 1 year only. Till now, I have been studying fundamentals. Was not very successful as I found exits very difficult to execute. With his rule based investing, I have peace of mind now.
  3. No stop losses. Exit at the end of the week only. As I do rebalance every week, even if there are losses, I exit very quickly. In the midcap momentum portfolio, I do rebalance once in a fortnight only (not weekly).
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@Garuna I have come across several discussions to compare different selection criteria but people have said price change is the best. I have added low volatility to price change.
According to experts any metric or parameter added to price change actually tones down the return.

To summarise, price change only is sufficient. This low volatility factor that I have added might reduce my returns but gives me stable stocks.

2 Likes

@visuarchie Hello, thanks for sharing. Your approach appears quite interesting. However, to start with, I have got a few questions as under. Will help if you could answer them.

  1. With my experience on trading with various approaches advocated by different people, I have come to the conclusion that cutting down ones losses in a timely manner is the most important aspect in any trading approach. How do you take care of this in your portfolio?

  2. Almost all small caps/micro caps have risen in the last one year or so. Can it be just a coincidence that you got into it at the right time? This is not to belittle but would like to know what is so different in your portfolio that will enable it to stand during a small cap/micro cap carnage.

  3. Regarding the time frame of 1 week and a fortnight for small cap and mid cap respectively, your’s probably is the smallest window I have come across so far. While it makes sense to me on a relative basis but any thoughts on why such a short period or why not 2 weeks and 3/4 weeks respectively?

  4. May I ask what was the highest return of the top performing stock and the maximum loss percentage of the inferior stock in your portfolio?

  5. On the replacement stratagem of the laggards, do you simply go with that available in the index or do you employ some screening criteria? On a similar note, how long do you allow the winners to run - is there any time frame?

  6. In the portfolio of 20 stocks what is the percentage of small cap vs micro cap vs mid cap maintained by you? Any thoughts around this?

  7. And lastly, do you plan to simply mirror the top ranking stocks of the index even beyond a year?

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@iyeron Hello, happy to provide answers to the queries that you have raised.

  1. This momentum portfolio moves on the basis of selecting the strongest stocks. Therefore, if any stock in the pf turns weak or another stock becomes stronger, it gets replaced automatically. Rebalance is done every week and hence response is very quick.

  2. You are right in terms of growth of small cap stocks. However, please note that this portfolio will mirror the market direction. If the market is moving upwards, the pf will also rise. On the contrary, if the market falls, this pf will fall.

  3. I measure strength of a stock and for smaller capitalisation, it is always better to do the rebalance at shorter intervals. For example, it is appropriate to rebalance Nifty 50 stocks on a monthly basis while for Microcaps or small caps, it is better to rebalance on a weekly basis. This is very normal for momentum portfolios.

  4. The pf is very dynamic and changes on virtually every week. As of now, the highest returns in this pf is BSE which is returned 159%, ie. 1.5 times gain over 3 months. The weaker stocks get removed automatically. I have not seen losses over 10%.

  5. This portfolio can be used for screening any market cap or any other formula. However, I have chosen to go with NiftySmallcap250 index and the stocks in the index. When the index get rejigged, the universe for me will also get changed appropriately. No other screening criteria. As long as the stock is strong relatively, it will remain in the portfolio.

  6. All 20 stocks in the pf are from NiftySmallcap250 index. I have separate portfolios for NiftyMidcap150 and NiftyMicrocap250 indices.

  7. This is a continuous process. I was waiting for one year duration before I published it.

Please note that this portfolio does not guarantee a positive return always. If the market goes down, the pf will also go down. If the market is in a secular downturn, pf will continue to go down. I never go to cash. Remain invested all the time.

The only consolation is that I will be holding the strongest stocks every week.

Viswanath

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Thanks Viswanath!

So, strongest stocks in this context would mean highest returns over last 6 months and 1 year time frames (helps guage the momentum of the stocks over two bigger time frames) and there is no technicals/fundamentals involved. Also I gather because of the frequent rebalancing there is no need to exit or be in cash rather stay invested at all times. Did I miss something here?

Nevertheless, there should still be an exit plan/mechanism to prevent portfolio erosion during a market fall. One would always want to book profits and atleast preserve the original capital at a portfolio level in such scenarios. Perhaps, the bigger challenge would be to identify such a downturn in advance and take prompt action.

@iyeron You got it right. Strongest means highest returns over 6 months and 1 year with low volatility. There are some momentum strategies where you would go to cash. However, with relative momentum strategy that I follow, I remain invested in the strongest stocks and never go to cash. Please note that in a falling market, the strongest stock in the index could still give negative returns, but would have fallen the lowest.

Once you start taking discretionary decisions, you are moving away from rule based investing, which is what I am following. With a weekly rebalance chances of excessive falls is generally low.

I faced such issues last year in another momentum portfolio tracking Nifty50 and Nifty Next50. The rebalance frequency was monthly. Adani stocks fell and there was no exit possible. Even when I decided to exit in between rebalances, the situation was so bad that there were no buyers, only sellers.

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Hi, this is very impressive. Please share your weekly updates to the PF as I would like to follow it and invest in it. Waiting for the Dec 4th update! :slight_smile:

Thank you. Will update.

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This is really incredible. I am also contemplating this strategy to adopt in a few weeks time. However, I am thinking to do these tweaks:

  1. Top NSE 750 stocks as universe.
  2. Monthly rebalancing or at least in 15 days
  3. I will do the asset allocation like 80% in equity and 20% in totally uncorrelated asset such as Gold.

Also, my criteria will be slightly different:

  1. I will rank the stocks based on weighted average return in last 12, 6 and 3 months and also on their Sharpe ratios.

  2. I will also select technically strong stocks such as stock above 200 SMA and 100 SMA and near to their 52 weeks high.

Though I am a fundamental investor by heart and will continue to be but I want to diversify my strategy to make extra alpha on my returns.

What do you think about this? Please suggest.

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Few things that could occur.

  1. since your universe is 750 stock (for @visuarchie it’s 250) so churn could be higher in your case. Need to compensate for it somehow. Monthly balancing is one option
  2. if you consider 3 months rerun as criteria, some low float hitting UC for one day would show up
  3. some of the stocks would be illiquid Nad more volatile, as you’re moving beyond Nifty 500.

Thanks
Praveen

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Thanks Praveen. Good points. Actually I want to select only top 10 stocks (instead of top 20 in Vishwanath case) based on return and volatility criteria and for a stock to exit, it has to fall outside top 20 (so a gap of 10 stocks instead 5 in case of Vishwanath). For the universe, I agree that top smallcap top 250 makes more sense.

I recommend you go with Viswanath’s approach. His approach by far makes sense from a risk vs return perspective.

Thanks! Will try, test and then expand. As of now, only want to experiment for 5-10% of my overall portfolio. Once I get confidence with my experiments, I will then gradually increase. Let’s see.

Filing your tax returns is going to be fun!

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Hey Abhi
Would love to follow your experiment.
May I ask you to share the updates on your PF thread or create a new topic?
I’ve seen people make good money and would like to follow your experiment live and would like to contribute if needed.

Thanks
Praveen

1 Like