The CAGR return from the NIFTY50 index is close to 13% over the last 20 years. This is very attractive given relatively lower risk of larger companies in general as they have well-established businesses. Larger companies also experience relatively lower volatility during periods of slower economic growth. With a high degree of research coverage in the top 100 companies, one would imagine all stocks being valued appropriately by the market. On an average, 35 recommendations are given for a single large cap company. In such an environment, there should be no information asymmetry with all investors having access to similar information to make an investment decision and as a corollary, large cap stocks should be efficiently priced by the market. This in turn would imply that owning the index is the best way to capture the return from large cap stocks, not to mention the low cost that comes with an ETF. However, contrary to expectations, the large cap index has shown a divergence of returns within the constituents, with several companies giving significantly higher returns versus the index. This implies how the unfolding growth for a large cap company may not have been fully priced in by the market every year. This inefficiency can be utilized to an investor’s advantage. The graph below shows the return of NIFTY vs the top 5 stocks.
The smallcase V.E.C Growth Explorer aims to tap into this opportunity by creating a well-structured and concentrated portfolio within the top 100 companies in India. This is accomplished by a fundamental strategy driven by a contrarian / value approach across the index. With 100 companies and several sectors available to choose from, high levels of governance, strong balance sheets as well as well-established business franchises one is spoilt for choice. The portfolio is constructed by varying the number of holdings and adjusting the concentration of the individual holdings to achieve the desired return. Starting with high conviction market beta, the portfolio is built with several components capturing returns across the index.
The overall objective of V.E.C Growth Explorer is relative and absolute outperformance versus the index with a lower cost structure. From launch the Growth Explorer is up 21% percentage points ahead of the Nifty100 and 32% in absolute terms. smallcase is a very efficient and low cost way to give retail investors access to high quality and independent research to achieve their financial goals.