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Mi 35 – Extracting Alpha from Smallcaps !

Reading Time: 4 minutes

Mi 35 is an upto 35 stock – weekly rebalanced – rotational momentum strategy that tries to extract alpha from the Smallcap 250 universe. Before we get started, here’s a quick table depicting Mi 35’s outperformance (vs) the Smallcap 250 Index since 01 Apr 2016.

But why Smallcap exposure ?

We are using Smallcap 100 index for reference as there's more data attached. You can notice the absolutely massive outperformance post the 2008 Global Financial Crisis Fall. The outperformance compared to Nifty is almost 2x.

Similar kind of outperformance is also visible in the post COVID rally. But if you zoom out and see the long term comparison, the performances of Smallcap 100 index and Nifty 50 are almost similar as you can observe from the chart below

Surprising right ? with an almost 2x performance in bull rallies, Smallcaps have managed to only equal Nifty 50 in the long term (2004 to 2022). Why do you think that happened ?

Yes - you may have guessed it right. Uncontrollably high drawdowns. Afterall - High reward usually is associated with high risk, right ?

Smallcaps (v) Nifty During Market Falls

As you can see from the chart above, Smallcap100 fell much harder than Nifty 50 during the global financial crises crash (2008) & also the Covid crash (2020). If you are wondering what harsh drawdowns can do to your portfolio, we fully got you covered in the article below.

Long story short

  • We know very well that Smallcaps have the potential to give you a fantastic return over the long term
  • But massive drawdowns during market falls is a major impediment.
  • Effectively - The impact of drawdowns have always shadowed the big gains made during bull runs

Introducing Mi 35

We designed Mi 35 to effectively try and extract alpha from the smallcaps when markets trend on the upside while trying to outperform (or) restrict the drawdowns as much as possible when markets trend on the downside. Take a look at some of the performance metrics of the strategy.

A massive outperformance against it's benchmark - the smallcap 250 index since 01 Apr 2016 primarily as a result of outperformance both on the upside and downside.

Rolling Returns Comparison

CAGR Metrics

CAGR of Mi 35 as on 31 Mar 2020 (covid crash) starting from 01 Apr 2016 stood at an encouraging 9.7% while it's benchmark - the Smallcap 250 index's CAGR was a negative 9%.

A highlight from the above chart is the 3 year rolling CAGR outperformance during Covid crash. At the lowest point, around end of March 2020, Mi 35's 3 year CAGR was still positive at 1.8% compared to (-17%) on the smallcap 250 index.

Other Performance Metrics

Biggest Winners / Losers

To Summarize . .

Mi 35 can be a superb Smallcap focused addition to your portfolio to provide you with that extra bit of alpha.

  • 35 trending stocks from the smallcap 250 index
  • Tries to outperform when the markets trend on the upside thus extracting alpha while keeping the drawdowns minimal when the markets trend on the downside.
  • Phenomenal CAGR compared to Smallcap 250 index
  • Almost 50% lower drawdowns compared to Smallcap 250 index

Come in with a mindset to stay for as long as possible (preferably 4+ years) and have a phenomenal journey !Hope to see you in WeekendInvesting Family soon.

If you have any questions, please send an email to support@weeekendinvesting.com and we'll get back in a jiffy.

Author

  • Alok is the founder of weekendinvesting.com He is a veteran with over 25 years of experience in the India markets first as a member of the National Stock Exchange and in the last half a decade as a SEBI registered manager specializing in momentum based non discretionary portfolio strategies for retail investors. He is usually found on twitter at @weekendinvestng

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Alok Jain

Alok is the founder of weekendinvesting.com He is a veteran with over 25 years of experience in the India markets first as a member of the National Stock Exchange and in the last half a decade as a SEBI registered manager specializing in momentum based non discretionary portfolio strategies for retail investors. He is usually found on twitter at @weekendinvestng

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Alok Jain

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