Aug 2021 Monthly Update for the Capitalmind Momentum Portfolio
The Capitalmind Momentum portfolio took a pounding in August, down -3% compared to +8.6% for the NIFTY and 6.5% for the CNX500. After a broad decline across the board, large caps came roaring back even as mid and small caps struggled.
Read on for the August 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.
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.
August 2021 Returns Update
Chart shows Capitalmind Momentum smallcase returns versus the NIFTY 50 and the CNX 500.
Ouch! Aug 2021 was not a pretty month for Capitalmind Momentum. From its lifetime high on 3rd Aug, the portfolio went down as much as 7% by 23rd Aug before recovering mildly to finish the month at a 4% drawdown.
In numerical terms, this month’s decline is similar to April 2021, where the portfolio had an indifferent few weeks where the portfolio corrected 6% from its then peak. Psychologically, however, the current decline feels much worse because while everything including the index corrected in April, this time the index soared up and away with a whopping +8.7% month compared to a negative month for the momentum portfolio.
So, what happened?
Coming into August smallcaps were humming smoothly, while large caps had been largely subdued. But we mentioned in our July momentum note
“Smallcaps, in particular, continue to be strong, and as of July end, looks like even select large caps were starting to stir. But as always, we’re not predicting. Stay strapped in for turbulence.”
And turbulence there sure was. Consider the chart below.
How to read this chart. Each line represents a decile (1/10th of total stocks) of the market in terms of market cap. Higher the percentile, higher the market cap of the companies in that decile.
The y-axis shows the % of total stocks in that decile that showed positive momentum as defined by our set of rules.
The first half of the month saw momentum decline across the board. The downward trend changed mid-month but not all sections recovered similarly. The 90+ percentile stocks (red line) recovered the strongest. More stocks in this cohort show positive momentum at the end of August than did at the start of the month. The opposite is true of the remaining 90% of the market. More stocks outside the top 10% largest stocks by market cap were weaker at the end of August than at the start.
As stocks rapidly changed behaviour there were more than the usual number of changes in the portfolio. 9 stocks exit the portfolio in the course of the month. The 9 exits were replaced by 6 additions with the remaining allocation going to cash.
Negative returns and/or underperformance versus the index should not come as a surprise to those who have consistently read our commentary about momentum investing.
The only certain way to never have a negative month is to invest in Fixed Deposits and the only certain way to always outperform the index is to make up your results. Since we do neither, there will be stretches of time where performance doesn’t look great.
The question anyone invested in or about to in our momentum investing strategy is to ask yourself “What is the maximum stretch of underperformance (versus the index) that will make me lose faith in the strategy?” If that answer is anything shorter than 12 months, do not invest.
Outlook for September
Chart below shows monthly total returns of the NIFTY 50 since 1999. (Scroll right to see all columns)
August was an uncharacteristically blockbuster month for the index. Simplistic medians say Septembers tend to be relatively quiet. While the large caps seem to be going strong, the broader market seems subdued with specific stocks showing the right kind of energy.
We could try a weirdly complicated conditional prediction about what the markets are going to do. Instead, we’ll do what we usually do, admit that we have no idea. Our aim is to apply our time-tested set of rules to position ourselves and to react as things change.
Here’s to a better September.
Other Reading:
Frequently asked questions about the Capitalmind Momentum Portfolio
smallcase review: five things to consider before investing in a smallcase
