How to Invest Through One of the Toughest Years of the Financial Market?

Smallcases are model portfolios of stocks/ETFs based on a theme, idea, or strategy. It is a modern investment instrument for investors to build long-term diversified portfolios.

By The smallcase Managers

The last financial year was quite a rough time. We’re still fighting the Coronavirus pandemic. And, times are still tough. But, this article isn’t about grief.

This article is about overcoming the innumerable hurdles that we overcame last year and how to overcome the ones that lie ahead.

We recently sat down with six managers on smallcase to talk about their experiences, strategies, challenges and mistakes and how to prepare better for what the future holds in the realm of the Indian Financial Markets.

We talked to Green Portfolio, Upside AI, Piper Serica, Prescient Capital, Wright Research and 21G Investments.

smallcases are model portfolios of stocks/ETFs based on a theme, idea, or strategy. It is a modern investment instrument for investors to build long-term diversified portfolios.

smallcases are created by SEBI registered professionals. smallcases have brought a lot of flavor to investing as they are created across various strategies, market segments, sectors, and risk profiles.

Smallcase: How has the year gone by for you/the firm? Challenging or rewarding? How much was your churn rate last year or were you sitting tight with your conviction or did you buy more?

Green Portfolio took a very cautious approach during allocation while dealing with the troubled financial times of last year.

FY21 has turned out to be highly rewarding for our investors with our smallcases actually doubling the investors’ wealth. Green Portfolio also witnessed substantial addition in its PMS AUM and has continued its outstanding performance to rank as top-performing PMS in the country.

This has been a very rewarding year for the stock market investors overall. We believe that we are in the middle of a massive bull run which will continue for the next 2-3 years.

The churn rates in our portfolios have been around 20% which is the standard yearly rate. We were cautious in our allocations and were sitting on 10-20% cash at the beginning of the financial year, but as we started getting into unlock phases, Government announced Aatmanirbhar Bharat packages, and performance commentaries from our portfolio companies started improving, we committed further capital allocations.

‘High-Quality Right Price’ smallcase by Green Portfolio

Smallcase: How many mistakes have you made, which you realized and that could have been avoided? What are your learnings for the future (2021 & beyond)? How have you performed throughout a complete market cycle? Have you seen such cycles earlier?

Upside AI: Upside AI was built to essentially remove human biases and emotions from the decision-making process. This should reduce the “mistakes” you make in your investing framework.

Our most critical learning was to “Always stick to the framework.” If you have built a process that works, don’t let emotions corrode it just because times are tough. Market cycles have been shrinking over the last two decades.

We have been live in the markets since Jul-19 and returned 48% vs 29% for the NIFTY 500 TRI during that period. I don’t think we are done with this market cycle yet – it’s been a great couple of years for us but we have to see how the next 1-2 years play out to see a complete cycle”

‘Upside 250’ smallcase by Upside AI

Smallcase: When was the last time your investment process failed? What were your core market beliefs that the pandemic has forced you to change? Were you scared?

Piper Serica: FY 2021 has been an amazing experience for our firm. It tested and then rewarded our temperament, discipline and investment process. While March 2020 was a month of extreme uncertainty the recovery from thereon was something that none of us expected.

We normally do not take cash calls but when we realized by mid-March that Covid-19 was becoming a serious threat we exited some of our holdings like InterGlobe, PVR, Phoenix Mills, Jubilant FoodWorks and VIP that we thought were most exposed to lockdown related slowdown.

As a result, by the end of March and for most of April our cash holding was more than 30%. Interestingly, our investment process did not fail even once.

In fact, the only mistake we made was when we did not adhere to it fully at times of panic. Our biggest learning over the last year is that we should not try to override our investment process that has a built-in risk management system and which has worked so well for us for more than a decade.

‘Emerging Dominators plus (ED+)’ smallcase by Piper Serica

Smallcase: How did you manage or minimize the risk associated with investing clients’ money in Indian stock markets? How did you deal with the ~30% drawdown in Mar 2020? How did you deal with the ensuing rally till year-end?21G Investments:  Once we managed to exit in time with cash in hand, the next step was to re-invest predicting bottom and prepare for a fresh start.

But, we had an advantage here against the counterparts – starting with more cash at Nifty’s most vulnerable level. Finding sectors who will possibly outperform (e.g.- Pharma) ahead worked perfectly and the stocks started to show movement upward with the trend.

In a few months, the bull rally flared the entire portfolio, and we decreased debt ETF% (keeping Risk in control) in the smallcase and increased equity allocation.

With this forward-looking approach, proper risk management strategy, careful selection of stocks and segment products in the early phase, we were able to ride the Bull market in the right time.

‘21G Trend Rider’ smallcase by 21G Investments

Smllcase: How did you manage to understand a good business amidst challenging times and did it shake up your conviction? How do you manage your emotions at market extremes across cycles?

Wright Research: As researchers, we use multiple factors to evaluate a business – not just quality of earnings but volatility, growth, value, and even momentum.

We stuck true to our multi-factor approach to be in line with the market. Keeping your skin thick and avoiding panic for yourself, and the client is crucial to managing money.

I have had my fair share of panic moments, sleepless nights, and times where I have turned my whole research upside down.

But, I have survived to learn to trust the model and focus on keeping the model correct and transparent as the base priority.

‘Wright Momentum’ smallcase by Wright Research

Smllcase: Sitting in March ‘20, how long did you think it would take for the market to go back to the February ’21 levels and why?

Prescient Capital: Our belief was that it would take 2 years at least for the benchmark indices especially small-cap and mid-cap indices to deliver the kind of returns from March 2020 lows that it has.

Especially at individual stock levels, the rally has been very sharp with some of the companies delivering 3-4x or even higher returns from their March 2020 lows.

Sitting in March 2020, we expected this type of return only in 2-3 years of time. As always, we were proven wrong by the market, which only strengthens our belief that it is futile to try to time the market.

As a long-term fundamental driven investor, we should focus on identifying and investing in high-quality businesses at attractive valuations and then remain invested to wait for our thesis to play out.

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