Embracing Financial Wisdom 📝: The Tale of Value & Momentum 🐢🐇

The timeless fable of the hare and the tortoise teaches us valuable lessons about agility and patience. These principles also hold true in the world of investing. In investing, momentum and value factors can be likened to the hare and the tortoise in the fable. The value factor takes a slow and steady approach, much like the tortoise, while the momentum strategy is swift and agile, much like the hare. Let’s delve deeper into this in this article.

A primer on factors

Factors are company-specific/macro quantifiable data points that affect the performance of the stock. There are two types of factors – macroeconomics and style. 

Macroeconomic Factors:

These factors encompass broader economic indicators that impact the overall market and industries. Examples include interest rates, inflation rates, GDP growth, and geopolitical events. Macroeconomic factors can have a significant influence on stock prices and market sentiment.

Style Factors:

Style factors focus on specific characteristics or attributes of individual stocks that have been shown to contribute to their performance. Windmill Capital typically employs style factors to curate smallcases. Style factors include:

Value Factor:

The value factor identifies stocks that are considered inexpensive relative to their fundamental metrics, such as earnings, book value, or cash flow. These stocks are often undervalued by the market and have the potential to outperform over the long term as their true value is recognized.

Momentum Factor:

Momentum stocks are those that have exhibited strong price performance in the recent past. According to the momentum factor, stocks that have been rising in price are more likely to continue rising, while those that have been declining are more likely to continue falling. This phenomenon is driven by investor psychology and market trends.

Volatility Factor:

Volatility measures the degree of variation in a stock’s price over time. High-volatility stocks tend to experience larger price swings, both up and down, while low-volatility stocks exhibit more stable price movements. Some investors prefer low-volatility stocks for their stability, while others may seek out high-volatility stocks for the potential for greater returns.

Quality Factor:

The quality factor focuses on stocks of companies with strong fundamentals, such as stable earnings, high profitability, low debt levels, and consistent dividend payments. Quality stocks are typically less volatile and may offer more reliable returns, especially during market downturns.

The Value & Momentum smallcase, as the name suggests, is a combination of value & momentum factors. By combining these factors, investors can benefit from the long-term growth potential while also taking advantage of short-term market opportunities. How exactly is this smallcase curated?

Inside the smallcase: The Windmill Touch

The model of the Value and Momentum smallcase shortlists fairly valued, growing companies whose prices have been witnessing positive momentum. The smallcase has a higher concentration of mid and small-cap stocks as the stock selection criteria filter out the large-cap stocks. You can read more about how model-based smallcases are created by Windmill Capital here.

During times of market crisis, stocks of fairly valued growing companies do not drop too much and help steady the portfolio. During bullish phases, momentum kicks in and helps the smallcase beat the broader market.

Apart from the model’s criteria itself, Windmill Capital has a rigorous screening process to ensure that only the most promising companies find their way into the smallcases. The negative list consists of five key parameters: market capitalization rank, promoter pledge, default probability, external investor holdings, and inclusion in the ASM/GSM list. By meticulously evaluating these factors, Windmill Capital mitigates risks associated with frothy companies and prioritizes stability and growth potential. Additionally, Windmill Capital also employs a ‘Fundamental Indicator’. It is a proprietary algorithm designed by Windmill Capital that assigns scores to stocks based on certain pre-decided factors. This indicator further refines the selection process and enables the identification of standout opportunities while avoiding potential pitfalls.

Inherent Risks

It is important to note that equity-only strategies like this one come with the risk of significant drawdowns in the short term and are suitable for long-term investors with a higher risk appetite. Therefore, it is always advisable to consult with a financial advisor to understand your risk tolerance and investment goals.

End Note

In conclusion, the Value & Momentum smallcase offers a compelling solution that is a testament to the enduring wisdom found in timeless tales. In finance, as in life, there’s merit in embracing diverse strategies and finding a balance between agility and patience.

Until our financial paths cross again! ✌️

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^{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.}