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A rollercoaster June, a late surge and a reminder


June 2021 Monthly Update for the Capitalmind Momentum Portfolio

We, turns out presciently, had the Mike Tyson ‘Goodnight’ gif in the May 2021 Momentum note about how markets surprise when you least expect them to. Surprise they did, but courtesy of a small set of stocks that had found their way into every momentum portfolio over the last year. The Adani pack, following some interesting developments, caused a flutter by reversing course. The solitary stock in the CM Momentum portfolio allowed a fortuitous exit mid-month and with a late surge, we still ended up +5% compared to +1.9% for the CNX500 and a +1.1% for the NIFTY.

Read on for the June 2021 wrap-up.

Capitalmind Momentum Portfolio Performance since inception

Chart shows performance (annualized returns, annualized volatility, and maximum drawdown from peak) since inception in January 2019.

A rollercoaster June, a late surge and a reminder

Reading this chart: Returns, higher the better (obviously), Volatility: lower the better, and Maximum Drawdown: measured as falls from previous peak, lesser the better, i.e. the smallest negative value, the best possible value is zero only possible for FDs.

The Momentum portfolio tries to outperform the NIFTY while suffering lower drawdowns in corrections. The smallcase version of the portfolio has been live since Jan 2019, and even with adjustment for realistic returns, has comfortably outpaced the benchmarks with lower volatility.

June 2021 Returns Update

Chart shows Capitalmind Momentum smallcase returns versus the NIFTY 50 and the CNX 500.

A rollercoaster June, a late surge and a reminder

It was an eventful month for momentum investors, especially new investors.

Adani stocks of which the CM Momentum portfolio held one (ATGL) hit a series of lower circuits on the back of news about three FPIs who hold large amounts of Adani stocks. We executed a rebalance on 21st June exiting ATGL with an explainer email. We mentioned the possibility of not being able to exit the stock immediately because the stock had been hitting 5% lower circuits the prior week. Fortunately, the stock had buyers on 21st June allowing exits on the day of the rebalance. By the middle of the trading day, ATGL hit its upper circuit as there were only buyers and no sellers even prompting a query asking if we had made a mistake by exiting the stock.

Even outside of Adani stocks, there was broader market volatility which, going by incoming queries, had a lot of new investors holding on in white-knuckled terror.

A rollercoaster June, a late surge and a reminder

But here’s the thing. Nothing unexpected happened in June.

Yes, Adani stocks reversing course and more importantly running out of buyers was certainly inconvenient. But that’s why the portfolio holds 15+ stocks and does not load up on just 2-3 fast-movers. In fact, when the previous round of volatility hit Adani stocks in April, we exit ADANITRANS completely and reduced allocation to ATGL significantly.

Excerpt from June 18th rebalance note:

CM Momentum smallcase held two, ATGL and ADANITRANS at one point. When Adani stocks corrected in April 2021, we:

  • exited ADANITRANS at ₹ 971 (having entered at ₹ 446). Since our exit, the stock went to ₹ 1,628 and is now at ₹ 1,240
  • reduced ATGL at ₹ 1,092 (entered at ₹ 294) to keep its weight under max limit. Since we reduced, went to ₹ 1,666 and is now at ₹ 1,258

At the time of the ATGL exit, we had just under 5% allocated to the stock. This means, in the absolute worst case, if the stock were to not give a single opportunity to exit and had gone to zero, the portfolio-level loss would be all of 5%. And if the prospect of a 5% loss seems unthinkable, then equities of any kind, let alone an actively managed strategy is not the right place to be.

Outlook for July and repeating a reminder

For context, table below shows NIFTY Total Returns Index along with the return for the year.A rollercoaster June, a late surge and a reminder

Note the deep red cells showing monthly declines. Those used to be fairly common till 2008. That’s when the US Fed printing machine switched on in response to the Global Financial Crisis. After that central banks the world over never really stopped. The pandemic sent those printers into overdrive which is why 2020 after the Covid crash, turned out to be one of the best years for equity markets worldwide.

Switch back to the outlook for the Momentum portfolio. After more than a year of spectacular returns from momentum-based strategies, it’s easy to imagine them to be the norm and not the exception. We said in our March 2021 note after another great month that these have been extraordinary times and one should not be surprised to see momentum underperforming the indices and seeing down months.

Take a moment to read the chart below plotting rolling 1-year returns from Jan 2018 to the present. Note the gray shaded area where momentum underperformed the indices and had a generally lackluster time.

A rollercoaster June, a late surge and a reminder

Momentum still continues to outperform the index by a distance and as of June end, the overall breadth of stocks showing positive momentum continues to be robust.

But if you expect outperformance 100% of the time, you will be disappointed. Momentum investing offers the potential to outperform net of costs and taxes. But only if one thinks of a long-term allocation and stays with it over 36 months and longer, and through the inevitable periods of underperformance because the outperformance does not announce itself before showing up.

As always, we’ll look to react over trying to predict the direction of the market.

A rollercoaster June, a late surge and a reminder

Other Reading:

Frequently asked questions about the Capitalmind Momentum Portfolio

Momentum May 2021 Update (with the legendary Tyson knockout punch gif)


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