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smallcase in focus – Model smallcases Rebalance Edition (March ’23)

smallcase in focus – Model smallcases Rebalance Edition (March ’23)
Reading Time: 6 minutes

In March ‘23 we rebalanced a lot of our fee-based and free smallcases. If you have not rebalanced your smallcases, please do so now.

In an ever-evolving market, rebalancing helps ensure that the constituents of the portfolio align with the underlying idea of the smallcase. Rebalancing helps investors stay true to the original idea of the smallcase. If you skip the update, the composition & returns for your smallcase may vary from the original.

We will use this blog post to discuss changes made in fee-based model smallcases.

Model smallcases have a set of predetermined parameters; only stocks that meet all the parameters are included in the smallcase. Hence, logically, stocks that are already present in the smallcase should also be dropped if they do not meet even a single criterion. Windmill Capital’s focus has always been to keep the portfolio churn low and we include stocks with the motive of holding it for as long as possible. Hence buffer rules are applied to stocks that are already part of the curated portfolio to avoid unnecessary churn. This post will focus on stocks that have been dropped from the smallcase and explain why they were dropped.

Value & Momentum

This smallcase includes stocks that are undervalued compared to their peers but have been attracting attention off late as evidenced by their recent stock price movements.

NCC Ltd, Zensar Technologies, Zydus Lifesciences and HG Infra Engineering were added to the basket.

Bharat Electronics, Canara Bank, Kewal Kiran Clothing, and Gabriel India were dropped as they all failed to meet the required momentum criteria. The momentum criteria compare the relative price movement of a company’s stock against an equity large-cap market index for multiple specific periods. During the periods under consideration, the aforementioned companies all witnessed a substantial decline in stock prices as compared to the index’s performance. Although they still remain broadly undervalued as compared to their broader industry group peers, momentum criteria alone were sufficient to take them out of the basket. One thing to note is that if these companies again show strong price trends till Jun’23 when our next quarterly rebalance is due, we might include them back. This high churning is inbuilt into this strategy, which is compensated by its compounded returns of ~23% over the past 7 years. Needless to say that it can remain sideways or see bouts of underperformance for some time.

CANSLIM-esque

This smallcase incorporates both fundamental and technical analysis techniques and aims to identify growing companies. On the fundamental side, the model only selects those companies that have been able to record high earnings growth in recent years and have a high ROE. These companies are also expected to grow their earnings in future as per consensus analysts’ forecasts which we use as input to select stocks. This smallcase also focuses on strong price trends and select stocks which are also witnessed positive price momentum in recent years.

Mahindra CIE Automotive, Varun Beverages, ABB India and Siemens were added to the basket.

Uno Minda and Devyani International were both dropped from the basket after they failed to meet specific momentum criteria. Both of them weakened in their relative strength vs the broad equity large cap market’s performance. Devyani also saw a substantial decline from its 52-week high. While Action Construction Equipment passed all the required model criteria, it failed Windmill Capital’s proprietary red flags. This is a high churn, high risk smallcase and can witness sideways/underperformance for short to medium time frames. It selects stocks from all segments of the market.

Growth at a Fair Price

Growth at a Fair Price smallcase consists of growing stocks which are trading at fair valuations and have been witnessing an upward momentum in their price.

Sharda Cropchem and Siyaram Silk Mills both failed the momentum criteria and hence were dropped from the basket. While JK Paper Ltd passed all the required model criteria, it failed one of our proprietary red flags which checks the likelihood of the company defaulting in future. Hence it was excluded too.

HG Infra Engineering, CMS Info Systems, and Transport Corporation of India were added to the basket during March ‘23 rebalance as they satisfied all criteria and red flags. This is a high churn, high risk smallcase and can witness sideways/underperformance for short to medium time frames. It selects stocks from all segments of the market.

Straight Flush

Straight Flush smallcase selects stocks using growth, quality, and valuation criteria. The smallcase uses a combination of historical and future earnings growth rate, return on equity, continuous history of positive free cash flow, and low leverage to shortlist stocks exclusively from the smallcap universe. Furthermore, fair valued companies are given preference.

Computer Age Mgt Services, Birlasoft Ltd, Suprajit Engineering, Kajaria Ceramics and Eris Lifesciences were all dropped from the smallcase as the expected future earnings growth of these companies for the next financial year was revised down by the analysts after the recent quarterly results.

Sundram Fasteners, Mahindra CIE Automotive and Greenpanel Industries were added to the smallcase as they satisfied all criteria and red flags. This is also a high churn, high risk smallcase and can witness sideways/underperformance for short to medium time frames.

Low Risk – Smart Beta

The smallcase attempts to take advantage of “Low Risk Anomaly” which challenges the basic notion of risk-return trade off. Even though higher risk should ideally yield higher returns, research has shown that low-risk stocks have consistently outperformed high-risk stocks and provided higher returns.

Building on this underlying notion, this smallcase picks low volatility stocks from top 150 market cap stocks listed on NSE. Hence this strategy is more oriented towards large cap blue chip stocks.

ICICI Bank and Bharti Airtel were added to the smallcase during March ‘23 rebalance as they made their way into the top 15 least volatile stocks.

SBI Life Insurance Co. and Petronet LNG were dropped from the basket. Stocks of these companies saw an increase in price volatility during the previous year, leading to higher volatility rank and hence were dropped. As this smallcase selects mostly large cap companies, it is usually less risky and also the inherent stock selection criteria further pulls down the overall smallcase volatility. Also lower churn is expected as compared to other multicap models of Windmill Capital.

Dividend – Smart Beta

The smallcase selects companies, from the top 150 market cap stocks listed on NSE, that have consistently increased their dividends over the last 5 years. The final list of stocks are selected on the basis of high dividend yield.

L&T Technology Services was the only company that was dropped from the basket as it failed one of our proprietary red flags. HDFC Asset Management was added to the basket.

As this smallcase also selects mostly large cap companies, it is usually less risky. Very less churn overall.

The objective of providing a detailed explanation about these model smallcases rebalance is to maintain transparency and ensure investors understand our approach to rebalancing. If you still have any questions regarding our recent model rebalances or any stock, please feel free to reach out to us at- support@windmill.capital

Disclaimer: Investment in securities market are subject to market risks. Read all the related documents carefully before investing. The content in these posts/articles is for informational and educational purposes only and should not be construed as professional financial advice and nor to be construed as an offer to buy /sell or the solicitation of an offer to buy / sell any security or financial products.
Users must make their own investment decisions based on their specific investment objective and financial position and using such independent advisors as they believe necessary.

Windmill Capital Team

Windmill Capital Private Limited is a SEBI registered research analyst (Regn. No. INH200007645) based in Bengaluru at No 51 Le Parc Richmonde, Richmond Road, Shanthala Nagar, Bangalore, Karnataka – 560025 creating Thematic & Quantamental curated stock/ETF portfolios. Data analysis is the heart and soul behind our portfolio construction & with 50+ offerings, we have something for everyone. For more information and disclosures, visit our disclosures page here –https://windmillcapital.smallcase.com/#disclosures

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smallcase in focus – Model smallcases Rebalance Edition (March ’23)
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