Value & Momentum

A factor is a broad and persistent driver of stock returns. For instance, investors with a greater risk appetite increase their exposure to smallcap stocks. This is because historical evidence suggests that stocks of smallcap companies provide greater returns compared to stocks of large-cap ones. This outperformance compensates for the increased risk of investing in companies that tend to have a lower customer base and ambiguous business models and whose share price is more volatile than that of large cap companies. 

The Value & Momentum smallcase is a multi-factor smallcase that provides exposure to 2 such factors : 

• Value: Inexpensive stocks (relative to their fundamentals) tend to outperform their more expensive peers over the long term. 
• Momentum: Stocks whose price has run up recently will continue to see further price rise.

 Let us jump into the specifics of the criteria:

1. Value 

The smallcase seeks fairly valued companies whose reported Earnings Per Share (EPS) for the previous financial year was greater than analyst estimates. One problem in selecting high-growth companies is that they usually have high valuations. To shortlist fairly valued entities, this smallcase selects only those companies whose PE ratio is lesser than the ratio of the industry in which the company is operating.  

2. Momentum

Momentum investing is the technique of buying/selling stocks based on the strength of recent stock market trends. It is based on the assumption that, if the price of a stock has enough momentum, it will continue to rise.

This smallcase only selects companies whose recent price rise is higher than the rise recorded by the Nifty 50 index.  

This multi cap strategy does not place any market cap restriction when selecting stocks. However since large cap stocks usually tend to be overvalued, mid and smallcap stocks are self selected into the smallcase.

Value & Momentum smallcase shortlists fairly valued, growing companies whose prices have been witnessing positive momentum. During times of market crisis, stocks of fairly valued growing companies do not drop too much and help steady the portfolio. During bullish phases, momentum kicks in and helps the smallcase beat the broader market. 

Pure-equity strategy like this one comes with the risk of significant drawdowns in the short-term and is suitable for long-term investors with a higher risk appetite.