4 interesting questions asked during our Bengaluru Meetup

On Jun 29, 2024, we had the pleasure of organizing a meetup with our clients. During the meetup, we addressed various questions and concerns commonly shared among our clients. Based on our recollections, we have compiled this blog article to summarize some of the key questions and our responses.

This article offers a broad overview and may not cover all the details discussed.

Before we continue, please take a moment to watch this testimonial shared by one of our users. This heartfelt testimonial provides insight into our dedication to providing outstanding investment solutions.

1. Free vs. Paid Smallcases: What’s the Difference?

The Windmill Capital team has spent significant time in conceiving and creating specific smallcases by consulting multiple research papers and extensive backtesting. For the uninitiated, backtesting an investment strategy involves applying the strategy to historical market data to see how it would have performed in the past. This helps evaluate the potential effectiveness of the strategy by simulating past buy and sell decisions and analyzing the results. It is only fair that we monetise this effort and hence, a fee structure was introduced creating fee and free smallcases. Identifying companies that meet these stricter criteria requires more research and effort. This additional complexity is why some smallcases are fee-based.

The returns on any smallcase, regardless of its cost, are primarily driven by the underlying theme and overall market performance. Windmill Capital prioritizes the success of all our smallcases, free, or fee-based.

2. Explain the concept behind the asset allocation version of smallcases.

Of all the smallcases Windmill Capital offers, Value & Momentum, Growth at a Fair Price, Straight Flush, and CANSLIM-esque were among the most popular and yet volatile as the underlying model self-selects small and mid-cap stocks, which hold the potential for higher returns but also carry inherent volatility.

We created asset allocation versions of these four models to address this volatility and cater to investors seeking a more balanced approach. Here’s how it works:

Asset Allocation smallcases have a weekly rebalance frequency. The primary aim of the rebalancing process is to gauge market signals – buy or sell, which in turn decides the allocation. We first consider pricing data of large-cap, midcap and smallcap indices. We use this data to calculate the respective indices’ exponential true range and then find the resistance and support level. We do this for all three indices to get the respective buy or sell signal for each market cap index. We then calculate the weighted average of the signals, and the weights are derived from the proportion of market cap distribution of the respective pure equity smallcase. The number so derived is compared against a predetermined threshold value. If the score is below the threshold value, the smallcase will move away from stocks to the alternate asset class (gold & liquid). If the score is above the threshold value, the stocks of pure equity strategy are retained in the smallcase. 

This approach aims to deliver similar returns as the original smallcase while offering a more controlled risk profile by incorporating defensive assets. Essentially, the asset allocation version provides a smoother investment journey for those who appreciate the core strategy but prefer a less volatile experience by incorporating a safety net to mitigate potential losses during market turbulence.

3. Picking the Right Consumption Smallcase: “Bringing the Bling” vs. “Brand Value” vs. “The Great Indian Middle Class”

Here’s a breakdown of each smallcase to help you choose the one that aligns best with your investment goals:

• Bringing the Bling: This smallcase focuses on discretionary consumer goods like luxury brands, jewelry, and high-end apparel. It targets investors seeking exposure to the growing demand for these premium products.
• Brand Value: This smallcase concentrates on established companies (predominantly large-cap) with strong brand recognition across various consumer sectors. It caters to investors who value brand stability and potential for long-term growth.
• The Great Indian Middle Class: This smallcase invests in companies catering to the needs and aspirations of India’s growing middle class. It targets investors who believe in the rising spending power of this demographic segment.

Choosing the right smallcase depends on your specific investment goals and risk tolerance:

• Risk Appetite: The Bringing the Bling smallcase also makes for a good satellite investment, which is defined as the risk-seeking/aggressive part of the overall portfolio. So if you believe that the Indian luxury segment will see phenomenal growth in recent years, then this smallcase is an ideal way to invest in the growth of the Indian luxury market. “Brand Value” and “The Great Indian Middle Class” could potentially offer a more balanced approach.
• Investment Horizon: If you have a longer investment horizon, “Brand Value” and “The Great Indian Middle Class” might be suitable.

4. Why do model smallcases not involve analyst intervention?

This is a great question that dives into the core philosophy behind our model smallcases. Let’s take the CANSLIM-esque smallcase as an example. While the CANSLIM-esque philosophy focuses on identifying companies meeting specific criteria represented by the 7 letters, applying it directly to the Indian market presents unique challenges. 

Imagine removing a stock simply because of a short-term dip in price. This could be a knee-jerk reaction, especially when the broader market itself is experiencing a downturn. Our model smallcases are rebalanced periodically based on predefined parameters, ensuring the portfolio stays aligned with the strategy and removes significantly underperforming stocks – all without emotional bias.

Despite a robust creation process (which is formulated by analysts at Windmill Capital), some stocks in our portfolio might underperform if the broader market itself is falling. In such situations, analyst intervention wouldn’t necessarily save the portfolio.

The Choice is Yours: Analyst-driven strategies offer flexibility but can introduce subjectivity. Our model smallcases prioritize a data-driven approach with clear rules, transparency, and regular rebalancing with an objective lens. 

If you prefer smallcases that incorporate analyst expertise alongside data, consider exploring our thematic smallcases here. These smallcases undergo the same rigorous screening process as all our smallcases but with an added layer of analyst evaluation. Our analysts assess the suitability of each stock within the chosen theme, providing an additional layer of insight to guide your investment decisions. Ultimately, the choice between these approaches depends on your individual preferences as an investor. 

Taking control: It’s important to remember that you have flexibility within your smallcase investments. The smallcase platform offers a “Manage” feature that allows you to add or remove a stock from your smallcase after investing. This can help manage your portfolio and cut losses if necessary. Note that, once stocks/weights deviate from the original portfolio, the returns also will deviate. Also, keep in mind that investment decisions should be based on your overall strategy and risk tolerance, not just short-term market fluctuations.

By understanding the strengths of both analyst-driven and data-driven approaches, combined with the flexibility to manage your holdings, you can make informed decisions that align with your investment goals.

We Heard You and We Want More!

The Bengaluru Investor Meetup was a valuable opportunity to connect with you. We believe these questions were relevant to many users, so we decided to share them in this blog post. Windmill Capital is committed to fostering a vibrant investment community, and this is just the beginning! We’re planning more meetups in different cities to bring the world of smallcase investing closer to you. Stay tuned for announcements on the “Updates” tab within the smallcase app for any Windmill Capital smallcase to learn about upcoming events and ensure you don’t miss out.

Happy Investing!

Disclaimer: Investment in securities market are subject to market risks. Read all the related documents carefully before investing.  Registration granted by SEBI, membership of a SEBI recognized supervisory body (if any) and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.

The content in these posts/articles is for informational and educational purposes only and should not be construed as professional financial advice and nor to be construed as an offer to buy /sell or the solicitation of an offer to buy/sell any security or financial products.Users must make their own investment decisions based on their specific investment objective and financial position and using such independent advisors as they believe necessary.

Windmill Capital Team: Windmill Capital Private Limited is a SEBI registered research analyst (Regn. No. INH200007645) based in Bengaluru at No 51 Le Parc Richmonde, Richmond Road, Shanthala Nagar, Bangalore, Karnataka – 560025 creating Thematic & Quantamental curated stock/ETF portfolios. Data analysis is the heart and soul behind our portfolio construction & with 50+ offerings, we have something for everyone. CIN of the company is U74999KA2020PTC132398. For more information and disclosures, visit our disclosures page here.