Weathering the Storm: How Asset Allocation smallcases Help You Navigate Market Volatility

In today’s unpredictable market environment, investors are increasingly seeking ways to safeguard their portfolios while still capitalizing on growth opportunities. This quest for balance is where asset allocation strategies come into play. By spreading investments across various asset classes—such as equities, debt, and gold—asset allocation smallcases offer a dynamic approach to managing risk and enhancing returns. This strategy is particularly valuable during volatile market conditions, providing a cushion against downturns and the flexibility to shift focus as markets change. Let’s explore how these smallcases can help you navigate market volatility and achieve your financial goals with confidence.

Navigating Market Cycles with Asset Allocation

Markets naturally cycle between growth and downturns, and timing these shifts is challenging—even for seasoned investors. For instance, a high-risk pure-equity smallcase may shine during a bull run but suffer significant drawdowns in a downturn, highlighting the risks of relying solely on equities. To address this, we created asset allocation versions of some of our model smallcases. 

The Strategy Behind Asset Allocation

Asset allocation is a strategy designed to spread investments across various asset classes—such as equity, debt, and gold—to manage risk and enhance risk-adjusted returns. By diversifying, asset allocation smallcases provide a cushion against market volatility. When equity markets face volatility and sell-off, the smallcase shifts its allocation to safer asset classes like gold and debt which helps absorb losses and preserve capital.

How It Works: Your Guide to Asset Allocation smallcases

Our proprietary strategy involves a dynamic asset allocation model that adjusts based on market signals. The process begins by analyzing data from the previous five weeks to identify market trends using proprietary technical calculations. The switching algorithm aims to be 100% in equity during uptrends and shift to safer assets like gold and debt when no volatility is evident. This strategy reduces drawdowns during bearish phases and generates strong returns during bullish phases. This flexible approach ensures that investors are well-positioned regardless of market conditions.

Simply put, these asset allocation smallcases are designed to mirror their original counterparts with an added layer of risk management. The key difference lies in the strategic reallocation of funds to gold and fixed income during turbulent times, offering a safety net while preserving the potential for growth during favorable market conditions.

Performance in Action: A Case Study

To illustrate the effectiveness of our asset allocation smallcases, let’s examine their performance through two distinct phases, the first phase from Dec ‘21 to Apr ‘23 and the second phase from May ‘23 to July ‘24 :

Phase 1 (Turbulent Market): During this period of market turbulence, asset allocation smallcases effectively shielded investors by shifting the weightage toward safer assets like gold and debt. This proactive strategy helped mitigate losses compared to pure-equity smallcases, which were more exposed to market declines.

While this has been the case with all four asset allocation smallcases, as an example, take a look at the way CANSLIM-esque – Asset Allocation smallcase has performed during the turbulent phase. Extremely flattish, underperforming Equity Small Cap for the majority of the time. The smallcase was in risk management mode. Remember, the Equity Small Cap line also runs flat through the period. Therefore, the asset allocation version smallcases did not materially miss out on any potential gains. (PS: These are model portfolio returns.)

Phase 2 (Bullish Market): As the market recovered and entered a bullish phase, the asset allocation smallcases shifted their focus back to equities, capturing the market’s upswing. The result was a performance that closely mirrored the pure-equity smallcases during this positive phase, but with added stability during the preceding downturn.

To conclude, during the turbulent phase return metrics for asset allocation smallcases are poor however risk metrics are superior. Conversely, in the bullish phase, the asset allocation smallcases have delivered par returns as compared to the underlying smallcases. Another way to look at it is, that asset allocation smallcases allow investors to cash out on their profits and move towards safer asset classes once the market sentiment turns negative.

Beyond Performance: The Advantages of Asset Allocation smallcases

While performance is crucial, asset allocation smallcases offer additional benefits that extend beyond mere returns. These smallcases aim to provide a smoother investment experience by reducing volatility and drawdowns. This is achieved through a strategy designed to deliver favorable risk-adjusted returns, offering investors a balance of good returns with minimized risk.

It’s important to note that asset allocation smallcases might experience higher churn during sideways markets due to frequent rebalancing. However, this is a strategic move to manage risk and should not overshadow the overall advantages of this approach.

Closing Thoughts

Asset allocation smallcases represent a powerful tool for investors, offering a unique solution to navigate the current market highs while safeguarding against potential downturns. They blend the growth potential of equity investments with the stability of other asset classes, providing a balanced strategy to achieve financial goals amidst market volatility. By investing in these asset allocation smallcases, you can enjoy peace of mind with a diversified portfolio, designed to weather the storm of market fluctuations.

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.