Since there are numerous themes and strategies to choose from, the first thing that the smallcase Research Team evaluates is whether a theme has a large-enough investable universe to choose from, i.e. whether the theme has enough stocks to invest in. For example, even though many users have shown interest in a Green/Renewable Energy smallcase, we haven’t yet created one because there aren’t enough good listed companies that meet these criteria.

After this preliminary check, the smallcase Research Team sets out different rules based on the strategy or theme. To give you a better understanding, let’s analyse the various steps we used to create the Dividend Aristocrats smallcase:

1. Universe: All publicly-traded companies on the National Stock Exchange of India, covering 90% overall market capitalization, are included in the universe
2. Liquidity: Proprietary liquidity filters are applied to remove illiquid stocks from the universe, to ensure the portfolio stocks are tradable
3. Promoter Holdings: A special check is applied to remove stocks where a significant part of the promoter holdings are pledged–these companies tend to come under pressure when their stock prices fall since the pledged holdings are now worth less
4. Fundamental Strength: The main company’s dividends-per-share (DPS) for each of the previous 10 financial years has been greater than or equal to the previous year’s DPS
5. Pure Play Selection: Another check is done to ensure that all stocks in the selected sectors are a perfect fit to theme/strategy
6. Stock selection and weighting: Shortlisted companies are finally selected & weighted using a proprietary algorithm that considers many factors, including dividend yield
7. Rebalancing: Finally, the smallcase is rebalanced periodically to ensure that stocks that stop meeting the original criteria are removed, and the ones that do are added. The Dividend Aristocrats smallcase is rebalanced annually, mainly because most companies in India pay out dividends once in a year

Since each smallcase tracks a different theme/strategy, the exact methodology used to create every smallcase varies. While the Dividend Aristocrat smallcase might consider factors like EPS, the R&D Spenders smallcase, which has a different objective, will focus on metrics like growth in R&D spending, R&D budget as a percentage of sales, etc.

Advantages of investing the smallcase way

When you invest in a smallcase, you are investing in a portfolio that follows a systematic and rules-based approach using measurable data such as price, volatility, earnings, etc. and ignores any subjective opinions. This eliminates the effects of any biases, which impacts all investors including fund managers. In addition, a rules-driven strategy has no room to react to short-term news and events, keeping in mind just the long-term objective.

Eliminating biases & emotions by harnessing the power of data is the key benefit of a systematic approach to investing. We follow this approach to leverage modern technology and to ensure that our research doesn’t suffer from any element of vague subjectivity.