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Dealing with Adani-envy and the September effect


The Capitalmind Momentum August 2022 factsheet

August 2022 portfolio update

August was just the third up month of the year in eight completed months in 2022. After a spectacular July that brought the Nifty to even for the year, August has taken the Nifty Total Returns Index into the green for 2022 by 3.5%.

CM Momentum went from holding about 16% cash to being fully deployed early in the month and was up a little over 5% in August. Unlike the Nifty, we are still down for the year, with the 1-year rolling return now inching up to within a touching distance of turning green after a steady upward curve over the last three months. It’s been a while since the month-to-come did not embarrass the previous month’s outlook.

The chart shows Capitalmind Momentum returns versus the NIFTY 50 and the CNX 500 over the last 1 / 3 / 6 months and one year.

The year-to-date chart still looks ugly, but less so than it did in June, from where it has made steady progress.

The Next50, after a battering in June, is now up 4.5% YTD after two consecutive months of +12.2% and +7% advances.

Capitalmind Premium Momentum Portfolio Performance summary since inception

The chart below shows the cumulative return chart since inception. i.e. What ₹100 invested on day 1 in Jan 2019 be worth it at the end of August 2022?


The chart shows performance (annualised returns, annualised volatility, and maximum drawdown from peak) since inception in January 2019.

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

The Momentum portfolio tries to outperform the NIFTY while (hopefully) suffering lower drawdowns in deep corrections. The smallcase version of the portfolio has been live since Jan 2019; it still comfortably outpaces the benchmarks with lower volatility.

How about on a one-year rolling returns basis?

The chart below shows 1-year rolling returns, i.e. the 1-year returns as of any given date.

What next

First, dealing with “Adani Envy”

At ₹4.3L Crores, Adani Transmission is India’s 10th most valuable company. It trades at 37x TTM sales.

Dealing with Adani-envy and the September effect

Adani Total Gas, worth ₹3.98L Crores, trades at 111x sales (yes, sales), is the 14th most valuable Indian company and is within touching distance of ITC. For comparison, ITC generates 18x of ATGL revenue, 30x Net Profit, and 21x Cash Flow from Operations.

This chart shows how their market caps have grown this year (until Aug-end 2022).

Dealing with Adani-envy and the September effect

Not a surprise that some momentum portfolios (not ours) have over a quarter of their allocation to these stocks. There is now even a momentum smallcase (also not ours) that only owns Adani stocks.

A rule-based momentum strategy is not a place to be talking valuation. There always are stocks at egregious valuations that need excel gymnastics to justify, and then there are Adani stocks.

Yogi Berra’s said: “In theory, there is no difference between theory and practice, but in practice, there is.”

Do you go all-in on these stocks, counting on their market caps to keep defying common sense? If they do correct, shrug shoulders and move on, hoping at least one Mauritius-based FII is benevolent and provides liquidity on the way down.

Or do you stay away and risk looking like a chump for who knows how long as they keep rising and displacing companies in the Nifty, thus becoming representatives of India’s economy? At which point do the MSCI, Vanguards and Blackrocks of the world pretty much have to buy these stocks? Not an easy decision.

I recently found a decision-making tool in a newsletter that referenced the “waterline” principle from Jim Collin’s book: How the mighty fall: And why some companies never give in.

Dealing with Adani-envy and the September effect

A single stock falling 15-20% after you allocate, a high-probability scenario, is an “above-the-waterline” hole—overall negative, but not catastrophic. Four-five stocks falling 30-40% without offering an opportunity to exit would be holes “below the waterline”. The tricky part is knowing the applicable probability.

The perfect thing to have done will only be evident in hindsight. The right thing, among other things, is what won’t cost me sleep. At Capitalmind, we think of our version of the momentum strategy as a long-term allocation meant to be a sizable part of an investor’s equity allocation. This means letting go of some opportunities that don’t fit the risk-reward profile.

And so, at least for now, these stocks are not in the portfolio. I’m hoping the cost of “Adani Envy” is not too high.

Bracing for the September Effect

or why we shouldn’t.

Historically, September is the worst month for stocks, at least for the US markets. The crashes of 1927, 1987, and 2008 happened in September. Other reasons ascribed to September falls are mutual funds cleaning out their loss-making positions in preparation for their fiscal year-end,  corporate budgets undergoing cost-cutting, and investors returning from their summer breaks rejigging their portfolios.

Historically, September has been the third-worst month in India, only better than January and March. The Nifty was down in five of the last seven Septembers. The Nifty fell over 6% in Sep 2018, 10% in Sep 2008, 13% in 2011, and 9% in 2000. Of course, the 26% fall in October 2008 made September look good in comparison.

There is a hawkish Fed, surging inflation in Europe, and US midterm elections this time. Reasons to sell everything and batten down the hatches?

I don’t think so. September might well turn out to be a down month. But there’s no way to infer that from historical month-wise performance. Not when every year is so different from the last. In the seven Septembers before the previous seven, five were up months for the Nifty, i.e. ten up-months and four down months in the last 14. Over 22 years, the pattern looks suspiciously like a sequence of coin tosses with an “up” bias. Not something to base a market-timing decision on.

So I’ll instead end with that time-tested insight asset managers offer on financial tv “We think markets will see elevated levels of volatility.” or “Markets will go up unless they go down.”

Capitalmind Momentum smallcase by Capitalmind

Further Reading:

August Wealth Letter to PMS clients (excerpts): Change sometimes is invisible

All Past Momentum Factsheets: Capitalmind Momentum Factsheets

Frequently asked questions about the Capitalmind Momentum Portfolio


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