Mi 25 – Our Flagship Smallcap Strategy

Mi 25 is an absolute momentum strategy which aims to outperform the Smallcap index. This product is suitable for use in all stages of the market cycles as it is designed to either remain invested in the strongest 25 stocks or go to cash in weak markets.

Why Smallcaps – you might wonder !

Smallcaps have an extraordinary alpha quotient compared to any other benchmark index. When there’s an uptrend in the overall markets, Smallcaps often lead the rally displaying exceptional relative strength.

As you can see from the image above, Smallcap 100 index clocked a massive 608% post global financial crisis & a superb 273% post covid too. Now you may wonder what the issue is & what we are trying to solve ?

The downside can look quite small from the above charts but let me quickly showcase the kind of falls that this index has seen.

The index in itself is a high risk high reward proposition with meaty gains and mighty falls. 75% fall during the global financial crisis, 66% fall in the 2018-19 smallcap crash coinciding with the covid fall & a 34% fall during the 2021 correction. Drawdowns are extremely bad from both portfolio perspective and also psychology perspective. If you wish to understand more about why drawdowns are harmful, please go through the article linked below.

The simple analogy we give is that if you fall into a ditch that is 5 feet deep, you can climb back up quite comfortably. What if you fell into a ditch that was 15 feet deep ? It would’ve been to be extremely difficult to climb back up right ? The same analogy works with your portfolio. Lower the drawdowns, easier will it be to get back up. I’m sure you must have understood this better if you went through blog that was linked above. If not, we have another table to drill this concept deeper.

A 60% drawdown (as we have seen in case of the smallcap index) will require a mammoth 150% to recover the same. So irrespective of the kind of gains you may have pocketed during bull markets, the trick lies in keeping your downside minimal when markets go through a downtrend.

How does Mi 25 solve this though ?

Let us consider a few case studies from the real journey of Mi 25 to help you understand how Mi 25 outperformed the benchmark in various phases of the markets since 2016.

Case (a) : 2016-17 Bull Rally

In this period of 2016-17 bull rally, let us see how Mi 25 performed compared to it’s benchmark, the Smallcap 250 index

Sticking to the strongest 25 stocks from it’s universe helped the strategy outperform the Smallcap 250 index by a very wide margin. During this period between April 2016 and Jan 2018, Mi 25 clocked a fantastic 218% compared to 80% on the Smallcap 250 index.

But here’s the best part where we see how we outperformed on the downside too.

Case (b) : 2018 – 20 Bear Markets

Starting from Jan 2018 untill the covid crash in March 2020 was a very bad phase for Smallcaps. Lets see what happened during this period.

Mi 25 started going down in sync with the benchmark till about September 2020 but can you notice that the former’s curve flattened since then ? This is promarily due to the exposure to CASH. Mi 25 is an absolute momentum strategy that will allocate to cash during scenarios when markets are weak. This inbuilt design feature helped the strategy fall much lesser at 29% compared to the massive 55% fall on the Smallcap 250 index. Remember we spoke about the importance of falling lesser ?

Case (c) : Post Covid Bull Rally

Between Apr 2020 and Mar 2022, smallcaps had a tremendous run. Mi 25 managed to mirror the Smallcap 250 during this fantastic up trend.

Having seen all these phases, let us also look at the complete picture to see the overall impact of outperformance on the upside and downside.

Between Apr 2016 to Jan 2023, the strategy has clocked a massive 506% compared 134% on the benmchmark making this a remarkable option if you are considering some smallcap exposure in your portfolio.

Absolute Return Metrics

Rs 100 invested in Mi 25 back in Apr 2016 would now be worth 606 (in Jan 2023) compared to Rs 234 in Smallcap 250 index. This kind of a massive outperformance was possible because of holding on to winners , getting rid of losers early and moving to cash when markets present no opportunity.

Rolling Returns Comparison

The most important aspect we’d like to point out from the 3 year rolling returns analysis is the way a downtrend was negotiated very well by Mi 25. The 3 year returns ending 31 Mar 2020 (bottom of Covid Fall) in Smallcap 250 index was (-42%) while Mi 25 was still up a handsome (+32%). The sheer ability of the strategy to avoid the downside pain by moving to cash when markets started going down is one of the biggest USP’s we want to highlight here.

CAGR Metrics

Mi 25’s CAGR has been quite stable between 25% during the Covid fall to a max of 42% in Jul 2021 before the market began consolidating. At the end of almost 7 years, the strategy’s CAGR stands at a solid 30.2%.

The 3 year rolling CAGR of the strategy never went into the negative territory while the Smallcap 250 index had spent a considerable period below the zero zone.

Other Performance Metrics

Stock Stories from Mi 25

To Summarize . .

Mi 25 can be a superb Smallcap addition to your equities portfolio.

• Upto 25 trending stocks from the high alpha Smallcap universe.
• Tries to outperform when the markets trend on the upside thus extracting alpha while keeping the drawdowns minimal when the markets trend on the downside.
• Superior performance & significantly lower drawdowns compared to Smallcap 250 index.

Come in with a mindset to stay for as long as possible (preferably 4+ years) and have a phenomenal journey !Hope to see you in WeekendInvesting Family soon.