Four new innovative smallcases by Windmill Capital!

At Windmill Capital, our mission is to be a one-stop-shop for all the investment needs of retail investors. We understand that different investors have different financial goals and hence have varied appetite for risk tolerance.

Thus, the smallcases that we have on offer are of various types — asset allocation, thematic, fundamental/quantitative strategies etc. Since we started building smallcases in 2016, these smallcases have been investor favourites. These smallcases are based on a set of parameters that are used to select stocks at the time of rebalance/review. The aim is to try and find stocks that are not fairly priced, and generally, such cases are more prevalent in the midcap and smallcap sections of the market. Thus, these smallcases have been a high return, high-risk affair for most investors.

Our team has been researching to come up with a solution that can significantly reduce the risk — volatility of these smallcases while maintaining the high returns. The solution, as we explored, lay in mixing different types of smallcases with varying asset allocation!

You see, pure equity-based smallcases have a higher risk because the portfolio invests only in a single asset class, which is equities. Hence, an equity market meltdown or some negative news in the broad equity market can adversely affect the performance of pure-equity smallcases. This problem gets aggravated in the midcap and smallcap sections of the market, as they are inherently more volatile. This made such smallcases out of reach of some investors, even though they believed in the underlying strategy.

Thus, we came up with the asset allocation version of these pure equity-based curated smallcases. Basically, the portfolio would invest in equity as per the underlying theme/strategy of the smallcases, AND also invest some amount into other asset classes like debt, gold and cash. Diversifying the portfolio into different asset classes while also giving exposure to a particular strategy would help in superior risk-adjusted returns (high returns, without as much risk :)). If the equity markets crashed, the gold, debt, and cash portion of the portfolio would help protect the downside. This would not be the case had the portfolio only consisted of equities.

How does this work?

We built some proprietary strategies to understand the market outlook over the next few days/weeks. According to what this tells us, we help investors allocate funds to equities and the 3 other asset classes (gold, fixed income/debt, and liquid bees).

For example, if it suggests upcoming turmoil in the equity markets, the smallcase will move all the money from equities to the other 3 asset classes (divided in the same proportion). If the outlook in the equity markets looks bright, money will be invested into equities and will be removed from all the other asset classes. And the third and final scenario is one wherein 50% of the money will be invested in equities while the remaining 50% will be equally divided into the other 3 asset classes.

This way, we enable investors to get the underlying benefit of the pure-equity version of the smallcase while also improving the risk-adjusted returns. Such investments are suitable irrespective of stock market moods and investors need not worry about timing their investments and exits.

Now, without further ado, let’s look at the 4 smallcases that we are planning to launch under this unique regime.

Straight Flush — Asset Allocation Version

Straight Flush – Asset Allocation Version smallcase by Windmill Capital

This is an asset allocation version of the Straight Flush smallcase. The equity portion of the smallcase selects good quality smallcap growth companies to help create wealth steadily over the long term. Our proprietary strategy keeps realigning the portfolio value between different asset classes in the smallcase, to generate high returns with reduced portfolio volatility.

The below chart shows the performance comparison of the Straight Flush smallcase along with the newly created Asset Allocation version of that smallcase.

Below is the graph comparing the maximum drawdown of the asset allocation version of the Straight Flush smallcase with its pure-equity parent smallcase.

Growth at a fair price — Asset Allocation Version

Growth at a fair price- Asset Allocation Version smallcase by Windmill Capital

This is an asset allocation version of the Growth at a Fair Price smallcase. The equity portion of the smallcase consists of growing companies experiencing positive earnings growth and having a reasonable margin of safety. Our proprietary strategy keeps realigning the portfolio value between different asset classes in the smallcase, to generate high returns with reduced portfolio volatility.

The below chart shows the performance comparison of the Growth at a Fair Price smallcase along with the newly created Asset Allocation version of that smallcase.

Maximum Drawdown helps gauge a portfolio/stock’s downside risk. It measures the loss that would occur when someone invested in the peak and sold at the bottom before a new peak is attained. The smallcases’ max drawdown is lesser than the large-cap index. Below is the graph comparing the maximum drawdown of the asset allocation version of the smallcase with its pure-equity parent smallcase.

Value and Momentum — Asset Allocation Version

Value and Momentum – Asset Allocation Version smallcase by Windmill Capital

This is an asset allocation version of the Value and Momentum smallcase. Positive momentum stocks available at a discount to their peers, along with diversification benefits of gold, debt and liquid bees. Our proprietary strategy keeps realigning the portfolio value between different asset classes in the smallcase, to generate high returns with reduced portfolio volatility.

The below chart shows the performance comparison of the Value & Momentum smallcase along with the newly created Asset Allocation version of that smallcase.

Below is the graph comparing the maximum drawdown of the asset allocation version of the Value & Momentum smallcase with its pure-equity parent smallcase.

CANSLIM-esque — Asset Allocation Version

CANSLIM-esque – Asset Allocation Version smallcase by Windmill Capital

This is an asset allocation version of the CANSLIM-esque smallcase. Efficiently managed growing companies with positive momentum, along with diversification benefits of gold, debt and liquid bees. Our proprietary strategy keeps realigning the portfolio value between different asset classes in the smallcase, to generate high returns with reduced portfolio volatility.

The below chart shows the performance comparison of the CANSLIM-esque smallcase along with the newly created Asset Allocation version of that smallcase.

Below is the graph comparing the maximum drawdown of the asset allocation version of the CANSLIM-esque smallcase with its pure-equity parent smallcase.

Finally, we wanted to present you with a table that shows the historical backtested comparison of each pure-equity version smallcase along with its asset allocation version wherein we compare 3 metrics — CAGR, Standard Deviation or Volatility, and Maximum Drawdown.

It is worthy of taking note that these smallcases will be reviewed weekly by our team and the rebalance frequency of these smallcases will be higher than their respective parent (pure-equity versions) smallcases. It is important to note that the equity portion of the smallcase will only be reviewed on a quarterly basis, but the asset allocation will be reviewed on a weekly basis.

As we strive for transparency, we would like to point out that our strategies may not be accurate 100% of the time. They incorporate signals by using different parameters of an index. We have tested those signals historically and found out that it may not give accurate signals all the time. For example, in the case of the Straight Flush smallcase, the signal came around Jun ’19 to keep the entire portfolio in non-equity asset classes. However, the underlying equity portion performed good and gave a positive return.

These smallcases are exclusively available to the subscribers of the Windmill Capital paid plan. The existing subscribers need not pay any additional fee to access these smallcases as they come as a part of their subscription plan. Windmill subscription plan gives access to all the paid

smallcases created by Windmill Capital, as well as all the paid smallcases that Windmill Capital will launch in future.

Take care and happy investing! 🙂