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How smallcases Are Created–A Deep Dive into Our Research

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How smallcases Are Created–A Deep Dive into Our Research

Author Vikas Bardia
Published December 24, 2018
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Dividend Aristocrats
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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.

A smallcase follows a rules-driven strategy that has no room to react to short-term news and events, keeping in mind just the long-term objective. Click To Tweet

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.

Author

  • Vikas Bardia

    Investor + startup guy who loves to chase rooftop & sunset views. Go long and prosper! 🖖🏼

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dividend aristocratslong term investingpassive investingr&d spenderssmallcasesmallcase research
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Vikas Bardia

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Investor + startup guy who loves to chase rooftop & sunset views. Go long and prosper! 🖖🏼

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8 thoughts on “How smallcases Are Created–A Deep Dive into Our Research”

  1. jinesh says:
    August 26, 2019 at 3:41 pm

    How can i integrate smallcase with our Mobile application

    Reply
    1. Bala says:
      August 30, 2019 at 5:05 pm

      Hi Jinesh, could you please elaborate? Additionally you can drop us an email about this to help@smallcase.com

      Reply
  2. Raj Kumari Kabra says:
    September 20, 2019 at 4:42 pm

    Hello,
    I am investing in Low Risk-Smart Beta. As per your recommendation rebalancing was done on 16/09/19. The following shares were sold
    Hindustan Lever 1 Share
    ITC 2 Share
    Infosys 2 Share
    Wipro 4 Share

    However I made a fresh purchase in the above SmallCase on 19/09/2019
    The following shares were bought
    Hindustan Lever 1 Share
    ITC 5 Share
    Infosys 3 Share
    Wipro 11 Share

    I fail to understand the said logic. What changed in 3 Trading days that the shares were sold on rebalancing and were a part of the same when fresh purchase was made?

    Reply
    1. Rahul Satish says:
      September 24, 2019 at 10:12 am

      Hi Raj – When you rebalanced your smallcase, only a certain number of shares were sold from your smallcase to change the weightage of these stocks to ensure that the smallcase remains true to its underlying strategy/model criteria. So, these stocks were not completely sold and hence you still retain some shares of the same in your smallcase.

      Now that a fresh purchase has been made – considering an Invest more order, all stocks currently present in the smallcase will be purchased again in the required weightage to maintain the weighting scheme and hence this will include the above mentioned stocks as well as they have not been completely sold off. Had you placed this Invest more order even after a month (considering no stocks were sold/bought in between), the same set of stocks present in your smallcase will have been purchased with the right weights.

      Hope this clarifies!

      Reply
  3. Vijaykumar says:
    October 27, 2019 at 5:55 pm

    What is the liquidity & broking charges.

    Reply
    1. Rahul Satish says:
      November 7, 2019 at 10:35 am

      Hi Vijaykumar! We use proprietary filters to ensure all stocks in the smallcase are liquid. The charges would depend on which broker you hold an account with. Please write to help@smallcase.com with and we can help you with the details.

      Reply
  4. Ramesh says:
    November 7, 2019 at 10:37 pm

    Hi, I am opening an account with Axis Direct> Kindly let me know if I will have to pay any fee or charges to smallcase in addition to what I have to pay to AxisDirect? If yes, what are the charges to be paid. Thanks.

    Reply
    1. Rahul Satish says:
      November 11, 2019 at 12:24 pm

      Hi Ramesh – for smallcases on AxisDirect, you can take a look at this article for details on the fees: https://smallcasehelp.axisdirect.in/en/articles/2031666-charges-for-smallcases

      Reply

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