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Capitalmind Momentum Portfolio

All you need to know about Capitalmind Momentum

Capitalmind Momentum is a quantitative investment strategy built on the momentum factor, suitable for building long-term wealth.

With a live track record of over four and a half years, it is the longest-running momentum smallcase on the platform and continues to be one of the most trusted investment strategies available.

Capitalmind Momentum smallcase by Capitalmind

Learn more the Capitalmind PMS Adaptive Momentum Strategy.

Five reasons why the Capitalmind Momentum portfolio can be a long-term wealth builder

Reason #1 – The Momentum factor has been globally proven

Momentum as a factor enabling excess returns goes back over a century. It is one of the most researched quantitative factors by academics and practitioners. The seminal paper that brought momentum investing into the limelight was published in 1993 by two University of California (UCLA) professors, Prof. Jegadees Narasimhan and Prof. Sheridan Titman, titled “Returns to buying winners and selling losers: Implications for stock market efficiency”.

Several papers have since been published on the topic. An exhaustive validation of momentum as an investment strategy was undertaken by the quantitative hedge fund AQR, called “Fact, Fiction and Momentum Investing”, which examined the prevalence of momentum across asset classes and countries going back two centuries.

The existence of momentum is a well-established empirical fact. The return premium is evident in 212 years of U.S. equity data (from 1801 to 2012) — as well as U.K. equity data dating back to the Victorian age in over 20 years of out-of-sample evidence from its original discovery, in 40 other countries and in more than a dozen other asset classes. Some of this evidence predates academic research in financial economics, suggesting that the momentum premium has been a part of markets for as long as there have been markets.

Reason #2 – Momentum investing works in India

At Capitalmind, we started examining the prevalence of the momentum factor in Indian markets way back in 2017. We published our research on what we found in the paper titled “Does momentum investing work in Indian equities?“.

In a nutshell, over a 15-year period, even a basic strategy we call “naive momentum” that buys stocks with strong price momentum outperforms the benchmark by a decent margin even after considering costs and taxes.

Reason #3 –  Rigorously backtested implementation

The naive momentum model of buying stocks with relatively higher absolute price returns offers excess returns but has its drawbacks. We set about improving the measurement of the momentum factor by incorporating modifications. Adjusting raw return for price volatility, incorporating absolute and trending traded volume, risk-weighted allocation, and other signals to qualify inclusion candidate stocks are examples of a few modifications we have examined.

Quantitative investing is an ever-evolving field of exploration, so the ability to go back to the drawing board to test various hypotheses and incorporate what works into the model is a key component of how we look at our investment models.

Reason #4 – Paying attention to the downside

Historically equity markets trend up nearly 70% of the time. However, they go through deep corrections of 50% or more every now and then. While no equity investment strategy is immune to corrections, a strategy that can limit its downside to the extent of or slightly better than benchmark has a significant chance of outperforming over the long term.

The presence of inclusion criteria has worked, in real market conditions, to reduce exposure to equities in times of broad market corrections allowing for reduced exposure at the time markets are at their weakest.

Reason #5 – Hard-won real-world track record

In theory, there is no difference between theory and practice. In practice there is. – Yogi Berra

There is a saying that the backtest is never the strategy. Capitalmind Momentum has been live on smallcase since Jan 2019. Through the indifferent first year, the sudden crash in 2020 and the subsequent recovery. Real-world experience of contrasting conditions have served to improve the way it works and more importantly, establish its credibility as a long-term wealth builder.

It is not a silver bullet offering unrealistic visions of daily outperformance, but a tried, tested and disciplined method of investing meant for the long term.

And here are five reasons NOT to invest in Capitalmind Momentum

Reason #1 not to – Momentum investing is high(er) churn. As a rule-based investing approach, it buys the stocks that meet the criteria while selling those that do not. So the average turnover of the portfolio is higher compared to traditional fundamental bottom-up investment strategies.

Reason #2 not to – Have to get used to being wrong. Nearly half of all positions in a momentum investing portfolio exit at losses, which means it is wrong half the time. The potential for excess returns over longer holding periods comes from losing less on the losers and winning big on the winners.

Reason #3 not to – Can sometimes hold “ugly” stocks. Ugly stocks are the opposite of story stocks. Companies that no fund manager likes to talk about because they are unfashionable. Since Momentum investing does not consider the narrative and only the price return, it sometimes holds stocks that do not offer bragging rights.

Reason #4 not to – Momentum will get written off. From time to time, it will seem like momentum has “stopped working”. This is most felt by investors who don’t completely understand the underlying concept before entering. Like for any investment style, there will be times when it is declared as ineffective.

Reason #5 not to – Momentum will underperform. Even our backtests show that on a one-year rolling basis, momentum investing trails the benchmark Nifty 30% of the time. Over longer holding periods, the probability of underperformance drops significantly, but that doesn’t change the fact that for nearly a third of the time returns will trail the index.

Some of the tactical questions about investing in Capitalmind Momentum:

 1. What is the universe of stocks considered?

All NSE-listed stocks meeting minimum criteria in daily traded volume and company market capitalization. This translates to nearly 90% of the total market cap trading in India.

2. How are stocks screened?

Our Quantitative model scores stocks based on a set of price and volume parameters. Stocks in the 90th percentile and above are candidates for inclusion in the portfolio. Stocks exit the portfolio in two scenarios, other stronger stocks emerge, or if existing stocks fail one of more criteria for retention in the portfolio

3. How are stocks weighted?

Stocks are weighted according to their rank and volatility compared to other candidates

 4. How often is the portfolio rebalanced?

The portfolio is reviewed weekly and changes, if any, are communicated before market open on Friday. Our estimate in the past two years is approximately 20% of the portfolio changes each month (this can and does change depending on prevailing market volatility).

 5. Doesn’t weekly rebalancing cause a high amount of portfolio churn?

Here, it’s important to make the distinction between portfolio reviews and rebalances. The Capitalmind Momentum portfolio is reviewed weekly but only the stocks that have been in the portfolio for atleast one month are considered for replacement. The exception to this is adverse stock-specific developments in which even the newer stocks are considered for replacement.

 6. Some stocks in the portfolio are up a lot since the time they were added. Should I avoid them?

No. The momentum portfolio is meant to be bought as a portfolio and not as individual stocks. Stocks are retained in the portfolio until they lose momentum. If a stock that is up 100%+ and still continues to be in the portfolio continues to show momentum and so should be bought in the target weight along with the other stocks in the portfolio.

 7. What is the likely tax impact on returns?

Momentum typically holds stocks for two to three months. Hence, most gains qualify as STCG (Short Term Capital Gains). Based on current taxation rules, assume 15% of portfolio gains will be paid as tax.

Hypothetical Taxation illustration: If the portfolio returns 25% in a financial year, the tax impact = 15% X 25% = 3.75% i.e. your after-tax return comes to 25% – 3.75% = 21.25%

Other costs to consider: Brokerage costs*, STT (Securities Transaction Tax) levied on every buy and sell, and DP charges. Assume another 1% of gains to be applicable for these costs.

* Brokerage costs vary depending on whether you use full-service brokers like ICICI Direct, HDFC Securities or low-cost / discount brokers like zerodha, upstoxx. We strongly recommend using a low-cost brokerage for investing in a momentum strategy given the significant difference in costs.

 8. Should I invest lumpsum or SIP into the portfolio?

Since Momentum as a strategy reviews and rebalances frequently, an SIP versus a lumpsum approach do not make a difference. However, if you are new to the concept of momentum investing, you should start small and scale up over time as you get more comfortable with the strategy.

Let’s say you plan to invest ₹ 5L into the strategy but are unsure about investing all of it at once. You can start with ₹1L and add the remaining in similar increments over the next four months.

On smallcase, they have built logic that allows SIPs less than the portfolio minimum amount. Snapshot below is from the smallcase blog about the SIP logic and how it works.

Capitalmind Momentum Portfolio

Source: smallcase blog

The link to the blog post: New SIP Improvements. In a nutshell, smallcase SIP logic allows for lower minimum SIP amounts by buying a subset of stocks and not all stocks each time. Please note we have not reviewed how well it works in buying the portfolio.

 9. How is the Momentum portfolio in the Capitalmind PMS different from the smallcase?

The Capitalmind PMS offers the Momentum Strategy for investors with ₹50L+ capital to invest. It is built on the same principles as the Capitalmind Momentum smallcase but there are certain differences.

Key differences are:

  • Do-it-yourself vs Do-it-for-me: In the PMS, the execution (buying, selling, performance-tracking and reporting) is all done by our systems and team.
  • Execution flexibility: We have more flexibility in the PMS to buy or sell partially and to enter or exit gradually.
  • Optimising execution: Also our buying and selling is done algorithmically, by slicing orders into small chunks and applying rules to either stop or reduce buying when stock price runs up intraday.
  • No restrictions on lot size: The smallcase portfolio ‘minimum investment amount’ tends to be limited to 90k – 1L, while there is no such restriction since the minimum investment amount in the PMS is 50L. This means stocks which high unit prices e.g. TATAELXSI, PAGEIND can be added to the PMS when they meet the criteria, but not to the smallcase

For additional information, please fill out this form and our team will get in touch.

 10. Is there a minimum investment amount suited for the Capitalmind Momentum smallcase?

There is no technical minimum that you can invest. However, you should care about the returns net of all costs. We wrote about things to consider when looking for the best smallcase to invest in. In short, the amount you pay should not exceed 3% of the total amount you invest. This means you should consider a target amount of ₹5L when investing in the Capitalmind Momentum smallcase. Even if you don’t invest it all at once, you should consider scaling up to that amount over a few months.

 11. Is there a maximum investment amount suited for the Momentum portfolio?

There is no maximum amount for the Capitalmind Momentum Portfolio. However, there IS a maximum amount suited for the Capitalmind Momentum smallcase, not because the strategy is not scalable, but because smallcase platform only supports market orders. The difference is the method of execution.

Because smallcase places market orders, and not limit orders, there is a real possibility of slippage negatively impacting the price at which you buy or sell, especially for large volume orders.

Think of a market order as saying “get me 10 shares of this stock at whatever is the available price”, while a limit order is like saying “get me 10 shares of this stock, but do not pay more than this price I specify”.

Execution slippage on smallcase can be a problem for large portfolios, i.e. where you buy / sell individual stocks worth 2-3L or more i.e. portfolio sizes greater than  50+ L could be susceptible to slippage impacts on smallcase. Once you cross a portfolio size of 25 or 30 lacs, be mindful of how your market orders are getting filled and if there is any significant execution slippage.

If you intend to invest larger amounts, consider executing yourself using limit orders or for amounts > 50L, invest in the Capitalmind PMS Momentum Portfolio.

 12. What returns can I expect from investing in Capitalmind Momentum?

Do not invest in Capitalmind Momentum without understanding that like any equity strategy, it will go through periods of underperformance. Such periods of underperformance can last for months at a time. So don’t be surprised to see negative returns a month or two after entering the strategy for the first time. Momentum investing is expected to outperform the index over the longer run and will certainly underperform from time to time.

 13. If you expect 30%+ annual returns irrespective of broad market conditions, you will almost certainly be disappointed.

The performance of the Momentum Portfolio

Capitalmind Momentum smallcase by Capitalmind

 14. My smallcase investment is down in the last 1 week / 1 month / 3 months – Can I get a refund?

No, there are no refunds. Equity strategies are risky and will see drawdowns from time to time and only make sense if you can stay invested over the long term. If you can not tolerate drawdowns, do not invest in this smallcase.

Please make sure to read:

How can I invest in the Capitalmind Momentum Portfolio?

There are two ways to invest in the Capitalmind Momentum Portfolio

  • Option 1 to invest in Capitalmind Momentum Portfolio: By subscribing to Capitalmind Premium: This is our flagship subscription offering with over 1,400 members. Members get access to four model portfolios including the Capitalmind Momentum portfolio, actionable strategies, premium research, and the Capitalmind slack forum.

Sign up for Capitalmind Premium here

Capitalmind Momentum Portfolio

  • Option 2 to invest in Capitalmind Momentum Portfolio: By subscribing to the Capitalmind Momentum smallcase: Subscribing to the smallcase gives access to the momentum smallcase only and not the other portfolios or features included in Capitalmind Premium.

Subscribe to the Capitalmind Momentum smallcase here

Capitalmind Momentum Portfolio

We also offer the Momentum Strategy in the Capitalmind Wealth PMS. Note the SEBI-mandated minimum ticket size is INR 50L. Connect with us @capitalmind_in or write to premium [at] capitalmind [dot] in to have our team get in touch.

More about Momentum as an investment strategy

Momentum is a rule-based investing system that buys and sells based upon past returns.  Momentum investors buy outperforming securities and avoid – or sell short – underperforming ones.

Understanding Momentum Investing: A compendium of the best research on Momentum

Check out our other smallcases: Capitalmind LowVol and Capitalmind Focused.

For further questions about the Capitalmind Momentum Portfolio, write to us at premium [at] capitalmind [dot] in or on twitter @CapitalmindRA

How to implement changes in the momentum portfolio

The Momentum portfolio gets reviewed weekly and stocks that have spent more than 1 month in the portfolio get rebalanced.

The update is shared with Premium subscribers in two ways:

  1. Update on the slack #actionable channel acccessible to Capitalmind Premium subscribers
  2. Email update with the details goes out the previous evening

For queries, reach out to us on #helpdesk (Capitalmind Premium users). Else reach out to us on email premium [at] capitalmind [dot] in.


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