Market Portfolio at Capitalmind Wealth

At Capitalmind Wealth, we’re excited to launch a portfolio that we’ve been monitoring for nearly a decade and it’s now finally ready for prime time — the Market Portfolio. The Market Portfolio invests in the stock market through strategies like the Nifty 50 (India’s largest 50 companies), Nifty Next 50 (the next 50 largest companies) and the Nasdaq 100 (100 largest US Technology stocks).

The Rise of Passive Investing

The Market Portfolio represents a passive form of investing that is quite different from the actively managed Long Term and Momentum Portfolios that we already offer on Capitalmind Wealth. Passive Investing ETFs managed by Vanguard and Blackrock are now among the largest and best performing investment products worldwide (read more here, here and here).

Our research shows the Market Portfolio has been a steadily strong performer over the last few years and has particularly done well during the 2018–19 market downturns. We are confident that this is not an aberration and for nearly all our customers the market portfolio deserves to be an increasingly large part of your overall holdings.

How it’s Different from Our Other Portfolios

Active investing involves stock picking and subsequent tracking of news and updates that impact the stock. The most obvious goal of Active Investing is to outperform the benchmark index or market returns. Inefficiencies in the market (information arbitrage, behavioral factors etc) offer opportunities and portfolio managers aim to identify these inefficiencies to generate better returns than the average.

Passive investing follows a more formula driven approach — the most popular approach is to buy an Index. Because the stocks enter and exit the Index on the basis of some pre-set criterion like size, you or the fund manager doesn’t have to actively track individual stock. Investing in Index ensures you stay invested in stocks that continue to perform and exit the ones that don’t.

In our analysis, we found index funds offer a much-needed anchor that you need to build your portfolio. The passive investments you hold are the benchmark that your other investments should be measured against so that you can judge if the active investment are worth their higher fees.

The underperformance of Actively Managed Mutual Funds

The increasing outperformance of Index Portfolios is based on structural and regulatory changes over the past few years:

• SEBI has restricted large cap mutual funds from investing beyond the top 100 stocks. Only 20% of portfolios can be outside of the top 100, and mutual funds must keep some cash for redemptions so the “outside” stock contribution is practically even lesser.
• There’s decreasing information arbitrage in the top 100 stocks. Everyone tracks them, and it’s difficult to outperform if you only have these stocks to buy.
• Pension funds in India like the EPFO (Provident Fund) have started investing in stocks through index-based ETFs like the SBI Nifty 50. This regular inflow provides a significant measure of price support to Index stocks.
• Average regular mutual fund fees charge about 2% while index direct counterparts are at say 0.5%. This eats into returns — mutual funds have to beat the indexes by at least 1.5% just to be on par with them.
• In a large cap fund, with no info arbitrage, with money going to index funds from pensions, with restricted ability to stray beyond the top 100, outperformance is super-difficult. And it’s beginning to show.

Key Features of The Capitalmind Market Strategy

At Capitalmind Wealth, our strategy is to invest in combination of Nifty50, NiftyNext50 and Nasdaq100 via ETFs to give you exposure to best stocks in India and US.

We see the following benefits in the strategy:

1) Well diversified — The top 100 stocks in India and abroad is well diversified into various sectors and in companies that are stable and have steady growth.

2) Low Cost — Investing via ETFs not only brings down the cost of investing but also the management cost charged on your portfolio. This is because there is no research cost involved or a need to pay a premium for any insider information or fund manager’s ability or time.

3) No fund manager or Stock picker risk — When you buy index, there is no analysis or stock picking at play. You directly buy all the stocks in the Index. Your investment strategy is no longer dependent on a fund manager or human rationale and biases. This is a good diversification and cushion to have, even in PMS, especially when such cushion comes at considerably lowered cost.

4) Auto exits bad stocks — Indexes are created on certain pre-set criterion. Any stock that fail these criteria exit the index automatically. Every time you buy into the Index, you get a re-balanced set of stocks as per their weightages in the index. The underperforming stocks reduce in weightage overtime.

Presentation

Performance analysis

We ran a back-test to analyse the past performance of this strategy — 40% Nifty50 , 40% NiftyNext50 and 20% Nasdaq100 — that show us that the combination has consistently beaten both the average of and 3/4ths of the top 12 mutual funds in India on rolling 3,5,10 year basis.

The Index is in some ways a Momentum product. Good (and large) stocks in Index continue to receive more and more funds thereby increasing their price and market capitalisation. The stocks that underperform or don’t receive more funds lose price momentum and market capitalisation; this reduces their weightage in Index until they automatically exit.

How much to allocate

Index investing works well as a standalone strategy for anyone looking at equity returns from their investment. To use index investing as an anchor portfolio, it is good to have 40% of your equity allocation into Index. The balance 60% can then be diversified into CMW Long Term and Momentum portfolios to add alpha over the long term.

We strongly believe that you should allocate some portion of portfolio to this strategy and monitor the performance over your other investments . Overtime, you will be able to make a comparison in different strategies and make an informed decision on where to allocate more funds. You can invest in this strategy outside of PMS also. Capitalmind Wealth PMS offers a benefit of tying this strategy to a financial goal.

Either way, stay invested and keep investing. The magic of Index portfolio is that a consistent above average yearly performance can translate into a phenomenal long term performance.