smallcase in Focus, Aug 2024

Dividend Stars

In this edition of smallcase in focus, we will discuss the performance turnaround of Dividend Stars smallcase. The last time we discussed dividend smallcases was way back in the Mar ‘22 edition, where we deep-dived into all three dividend smallcases. For a detailed understanding, you can refer to the link. 

Performance:

 Let’s start off by talking about the performance of the smallcase. 

The table clearly indicates the strong performance of the smallcase with respect to Equity Smallcap. Even on a rolling returns basis, the strategy has managed to perform well. 

Methodology:

I am attaching the broad selection criteria for the Dividend Stars smallcase. 

While it does select stocks from the top 700 companies, the current smallcase composition slightly tilts more towards the smallcap stocks. Take a look at the holdings distribution. 

Now if we move further and talk about the holding behavior of this smallcase, you will see that this smallcase follows a stable way to go about things. In the past five years, the smallcase has only ventured into 22 stock positions which indicates the stability of the strategy. The smallcase follows annual rebalancing and hence the churn of the smallcase is on the lower side. To give perspective, the minimum holding period for any stock in the smallcase has been close to 1 year. This pattern also reflects the importance of having a long-term focus as far as investments are concerned. 

Holding Analysis:

Starting off with the basic analysis of the holding period stats. Take a look at the table below.

This set of information is handy for us to make a base case understanding of the dynamics of the smallcase and how it has been managed over the years. For the uninitiated –  

• Count – Refers to the total number of stock positions that have been a part of the smallcase (since inception).
• Mean – Refers to the average number of days a stock is held in this smallcase.
• Min/Max – Refers to the minimum/maximum number of days a stock was held in the smallcase.

The key takeaway from the above table is the fact that the minimum holding period for any stock position in this smallcase is close to a year (356 days) which indicates the long-term view with which this smallcase is designed.

Evaluation of Portfolio Positions: Returns and Holding Period::

Now if we move further and talk about the holding behavior of this smallcase, you will see that this smallcase follows a stable way to go about things. In the past five years, the smallcase has only ventured into 22 stock positions which indicates the stability of the strategy. Given the smallcase sticks with its company for a long phase, the average returns that the smallcase has made on the positive stocks are way higher as compared to the overall average. Take a look at the table below.

Out of the 22 positions we have had, 17 have returned positively or 77% of the total positions. When the strategy follows a long-term approach, the win-loss percentage heavily gets skewed in favour of the former. And if you look at the average returns these 17 positive positions have delivered a staggering 114.9%. The scatter plots will give you a clear picture of the way the strategy has dealt with all the winning and losing positions.

Churn Analysis:

Lastly, let’s talk about the portfolio churn or turnover. Portfolio churn refers to the rate at which investments within a portfolio are bought and sold over a certain period. It measures the turnover of the assets and indicates how frequently the portfolio manager is buying/selling.

The smallcase follows annual rebalancing and hence the churn of the smallcase is on the lower side.

Each bar above reflects the delta or the change in constituents for that particular rebalance period. While the red line indicates the average delta or churn that this smallcase has witnessed since 2019 which is approximately 50%. 

Conclusion:

A lot of this performance needs to be accredited to the way the strategy has been able to identify solid companies and be invested in them for a long time. While here we have only spoken about price returns, however, the dividend returns that these companies have generated for the investors have been the added kicker, which is currently not getting captured in our discussion. With low churn, stable strategy, and quality companies this smallcase fits well for someone who is looking to grow their wealth in a simple yet effective way with a long-term horizon. 

_{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.}