Summary
While headline Indian indices are down between 15-20% from their peak this year; 20% of all companies listed on the National Stock Exchange are down more than 50% and 85% are down more than 20%. Pain in the broader markets is much greater than the index would have us believe.
Our recent study suggests that such periods of wide-scale corrections are typically breeding grounds for outsized returns over a two-year period if one backs the right companies. In our study, we analyzed eight events since the year 2000 when the BSE SENSEX corrected by 20% or more from its recent peak. We find that over a two-year period, the top-1000 listed companies (by market cap) taken together delivered 24%
annualized returns on average post such corrections, while the top-quartile performers within this group delivered 88% average annualized returns. Moreover, a lion’s share (75%) of these top-quartile performers are small-caps that delivered 111% annualized returns on average.
Another interesting fact is that the top 0.75% trading days have almost entirely delivered the 10X gains BSE SENSEX has seen since the year 2000, showcasing how costly it is to stay out of the market.
Given the above and the strong fundamentals of the Indian economy, we believe this is an opportune time to start investing incrementally if one has at least a two-year time horizon.
Half-year portfolio performance update
We continue to outperform our key benchmarks by significant margins. Since inception, our portfolio has outperformed the BSE Smallcap, BSE Midcap, and BSE Sensex by 2,900, 4,200 and 4,300 bps respectively.
In the last 12 months while returns for BSE Smallcap, BSE Midcap and BSE Sensex are flat to negative, i.e. -1.8%, -3.7% and +1.0% respectively, we are up 32.7%.
In CY2022, while our portfolio is down driven by weak market conditions globally, it is down significantly less than all headline indices, especially our key benchmark BSE Small cap index (outperformance of close to 900bps).
Performance Snapshot
Notes:
• Portfolio inception date is Mar 23, 2021
• Sharpe and Sortino Ratios are since inception
Top-quartile stocks deliver strong returns in the period following market corrections
As part of our study we analyzed eight periods since 2000 where the key headline index BSE SENSEX corrected by 20% or more (current correction is about 18%). Some of these periods, especially 2000 and 2008, saw deep and prolonged market corrections, while the other periods saw more short-lived market corrections. The table below highlights the key characteristics of the periods under consideration
For each of these corrections we grouped the top-1000 companies by market capitalization into four quartiles and analyzed how each of these quartiles performed on an average across the eight periods.
Results from our analysis is shown in the tables below. In summary, Quartile 1 companies delivered exceptionally strong returns of 88% (annualized) on an average over a two-year period following the 20% correction.
The range of returns for these Quartile 1 companies varied from 22% to 257% over the periods. Even Quartile 2 companies delivered strong returns of 32%.
While the top quartiles displayed strong performance, even the 1,000 companies taken together delivered on an average 24% (annualized) returns over the two-year period following the 20% correction.
For the Quartile 1 companies, returns across periods is shown in the table below. It may be instructive to note that in none of the periods were returns less than 22% indicating the consistency of return performance.
Further, we split the Quartile 1 by SEBI’s market cap classification directions and found that small-caps form a large part of the top-quartiles and their returns across these periods are even stronger. Small-caps on an average returned 111% vs overall top-quartile returns of 88%.
The range of returns over the eight periods for small-cap companies in the top quartile is 28% to as high as 318%.
With respect to presence of companies in various Quartiles by market cap classification, there is not much to choose from. Each category’s respective presence in Quartiles is very similar to the proportion of companies in each category i.e. Large : Mid : Small is 100 : 150 : 750.
Overall, we believe that well-chosen small cap companies are likely to deliver outsized returns over a twoyear period and hence, we think it’s the right time to start deploying funds selectively