The Low Risk Anomaly

Exploiting market’s biggest anomaly

Investors expect higher returns from investments in high-risk instruments compared to lower risk instruments. This is called the risk-return trade-off principle. On the contrary, recent research has shown that in stock markets all over the world, low-risk stocks have consistently outperformed high-risk stocks.

This phenomenon is called “low-risk anomaly” and challenges our understanding of risk and returns associated with stock market investing.    

The Low Risk – Smart Beta smallcase provides investors with an opportunity to exploit the phenomenon of the low-risk anomaly.  The smallcase picks its constituents from top 150 market cap stocks listed on NSE. The portfolio is weighted in such a way that maximum diversification is achieved. With the returns of major benchmark indices like Nifty 50, Nifty 200, Nifty midcap and Nifty smallcap all in the negative over the previous 3 months, this smallcase provides a much better risk-reward ratio. 

The smallcase has returned 23.5% returns over the past 2 years compared to Nifty returns of 12.6%.

Furthermore, institutional investors hold at least 10% stake in all stocks in the smallcase. High institutional holding usually indicates high management quality, good performance track record and expectation of bullish performance going forward.

India rises in global innovation ranking

India improved its ranking in the global innovation index (GII) by 5 notches and bagged 52nd place amongst 129 countries ranked. The index has been created on the basis of more than 80 indicators measuring various aspects of innovation. India exhibited strengths in indicators such as graduates in science & engineering, global R&D companies’ expenditure, quality of universities and market sophistication.

Over the last 5 years, India has moved up 29 positions from 81st in 2015 to 52nd in 2019. It represented the second-largest upward movement by any economy in the GII. India has cut down heavily on the time required to issue patents and also made a number of changes in its IPR regime to increase efficiency.

In related news, Economic Advisory Council to the Prime Minister (EAC-PM) has recommended that growth in research & development (R&D) expenditure should be commensurate with the economy’s growth and should be targeted to reach at least 2% of the GDP by 2022.

The report also recommended that a minimum percentage of turn-over of medium and large companies registered in India may be invested in R&D. Noting that government expenditure on R&D is undertaken almost entirely by the central government, the report said, “There is a need for greater participation of state government and the private sector in overall R&D spending.”  

The R&D Spenders smallcase comprises of companies that are spending on R&D to build innovative, future-ready goods and services.

Markets update

Weak corporate earnings and sluggish economic outlook pulled benchmark indices down this week. Nifty and Sensex both closed down 1.18% at 11,284.3 and 37,882.8 respectively. 

Rise With India committee on ET Now

The curators of the Rise With India smallcase discuss the rationale behind what led them to select the stocks that best denote the Rise With India story. This smallcase is a unique portfolio which represents rising India, at a time when the country is aiming to achieve the $5 trillion in size of the economy.

Watch the discussion here.

Making smalltalk

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Between 1990-2018, the global stock market experienced tremendous growth & created wealth amounting to $US 44.7 trillion – but only 811 stocks out of approx. 62,000 listed stocks (1.3%) were responsible for this wealth creation. Read Issue #20 here.

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