New-age investing strategies and performance tracking have nuances galore around the world. Some of these have already acquired granular form, while others are just shaping up. A few stand out, thanks to a kind of uniqueness that is difficult to ignore.
Move over global
Investment performance in contemporary India is no longer defined only with the help of broad benchmarks. Yes, Nifty 50 or BSE Sensex or some of the other yardsticks are still absolutely popular, but plenty of newer performance measurements have come up.
In the past decade alone, a marked shift has been noticed — the advent of smart beta and thematic indices. These yardsticks track a path that is far less beaten, thanks to investors who now want both active and passive strategies. Many of them are warming up to the rule-based approach.
Yet the wide range of choices raises a tricky poser: Are ordinary investors prepared to handle the complexity involved? We will try to explain a few relevant points today. A simple way of addressing the issue of factors is to point towards specifics such as value, quality, low volatility or momentum — the latter gaining traction in recent times. Instead of merely weighing stocks by their market caps, selection is based on certain measurable features.
New-gen factors
Imagine a “quality” index, which chooses stocks of companies that have a decent return on equity and have low debt on their balance sheets. Or let us zero in on a “momentum” index, which selects stocks that are lately doing well. The rationale here is quite compelling — there is a blend of discipline and reasonable cost (the hallmark of passive investing, mind you). Add to this certain return-augmenting styles of management.
At this juncture a segment of the Indian market seems to be testing smart beta ideas. NSE’s own new-gen indices (Nifty 100 Low Volatility 30, for instance) can be mentioned in this context.
It is argued that such tactical inputs can at times outperform older, traditional benchmarks, while offering specific advantages (lower volatility, in our example) to investors.
Let us widen the angle to create a bigger impact. We have selected three new-age styles that investors should know about. In sum, these reflect the market’s evolving landscape:
Alpha 50
Stocks are chosen (from a broader universe, say, Nifty 200) on the basis of their ability to generate alpha. The latter is excess returns over benchmark. Some say that the style can be aggressive. Our understanding is that there is a distinct tilt toward mid and small caps.
Momentum 30
Here we have a sharp momentum strategy, courtesy a set of 30 stocks. The idea is to zero in on the strongest names based on their recent price performance. Momentum can potentially deliver solid gains, but reversals can also follow quickly.
Quality low-volatility 30
This is a two-factor stratagem, a combination of two critical inputs. The general plan is to deliver good returns by identifying fundamentally viable stocks (30 in number) especially ones with stable pricelines.
Actionable steps
A list of things to do will not be out of place. The average investor may begin his journey by acknowledging the importance of factors and themes. As for the latter, electric mobility or digital economy are specific angles that merit consideration. Similarly, investors must be broadly aware of opportunities unleashed by long-term narratives. Climate change, technology adoption or manufacturing shifts are good examples. These, you will admit, really align with global supertrends.
- There have been periods (say in the last 5 years), when certain smart ideas have trailed the broad market. Ergo, NSE Nifty 50, BSE Sensex 30 and other market cap based indices must not be entirely bypassed. Ditto for general portfolios based on market weightages and other more established considerations.
How to invest
ETFs are a smart way to allocate to these indices. These funds are traded on exchanges (like normal listed stocks), and are very easy to buy and sell. Even ordinary investors have taken to ETFs, and the trend is likely to amplify in the days to come.
The writer is director of Wishlist Capital