Why We Added a Safety Net to the CANSLIM-esque smallcase

CANSLIM is an acronym for the investment model developed by William O’Neil, an American stockbroker and investor. This model incorporates both fundamental and technical analysis techniques and aims to identify growing companies.

Windmill Capital adapted the CANSLIM strategy to Indian markets, blending fundamental and technical analysis to identify high-growth stocks. The stock selection of CANSLIM-esque Model smallcase focuses on aspects like earnings growth, management efficiency and positive price momentum. 

The CANSLIM-esque model is a pure equity-based smallcase, which inherently carries higher risk as it focuses solely on equities. This makes it more vulnerable to broad market corrections or negative sentiment. Due to its selection criteria, the smallcase leans heavily towards mid and small-cap stocks, currently comprising around 60% of the portfolio, which further amplifies volatility. As a result, despite confidence in the strategy, such smallcases may not suit all investors. You can read in detail about this smallcase here.

To address this, we introduced an asset allocation version of the pure equity-based smallcase, CANSLIM-esque – Asset Allocation Model. This asset allocation (AA) model follows the same core strategy but also allocates a portion to other asset classes like gold and cash. This diversification helps improve risk-adjusted returns, aiming for strong performance while reducing downside risk. In the event of an equity market correction, the non-equity components act as a buffer, offering protection that a fully equity-focused portfolio wouldn’t provide.

The chart below shows the performance of the CANSLIM-esque smallcase alongside its Asset Allocation variant. The grey-shaded area highlights the periods when the AA model held a non-equity allocation, split equally between the Zerodha Nifty 1D Rate Liquid ETF and the Zerodha Gold ETF.

Let’s look at the risk and return data to drive home the narrative.

You’ll notice that while the return metrics for asset allocation smallcases may be lower, their risk metrics—such as annualised volatility and maximum drawdown—are significantly better. In essence, these smallcases allow investors to lock in gains and shift to safer asset classes when market sentiment weakens. It’s this balance of risk and return that sets asset allocation smallcases apart.

Takeaway

The CANSLIM-esque Asset Allocation smallcase doesn’t try to chase the highest return, it’s built to keep more of it.

When markets are strong, it rides the momentum. When sentiment weakens, it shifts gears, adding cash or gold to cushion the fall. The result?
Lower drawdowns, calmer volatility, and better odds of staying invested through the cycle.

If you liked the growth engine of the original CANSLIM-esque model but found the ride too bumpy,
this one’s tuned for resilience without giving up the edge.

Please note: This information is only for consumption by the investor, and such material should not be redistributed.

Disclaimer: Investment in securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL (in case of IAs) 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.