Talk to any investment guru and you will hear from him that low risk comes with low returns and high risk comes with high returns. While this may be true till a year back but with emergence of Artificial intelligence a new category has evolved which is low risk and high return. AI is the new warren buffet of capital markets and if used carefully it can create some new products which human intelligence can’t.
It has unique ability to analyze large number of stocks in a completely unbiased manner based on data. We all know that data driven decisions have much higher probability (mostly defined) of success. All this is something which human with all their experience and knowledge may not achieve. If you look at the average performance of a small cap fund over a long period of time (5+ years), the return will be similar to a large cap fund. This is because most aggressively managed (At least the good ones) small cap funds perform really well in bull market but in bear market they tend to give up most of their gains. This is typically what happens in a high risk and high return scenario.
Our ” Momentum with safety” portfolio tries address this concern leveraging AI algorithms. The objective is to build a portfolio which can give you returns similar to smallcap index in bull market but in bear market it should outperform the index (small cap or even Nifty) by good margin. So, in the longer term the returns are much higher than most conventional portfolios (Aggressive or safe) and that too with a much lesser risk. This eliminates the need to worry about market fluctuations (especially after big bull run) , timing he market or returns generated over a longer period of time. The portfolio is highly dynamic in nature and considers the future return and risk potential of a stocks. This will keep changing and hence it will need periodic rebalancing which may be 10-12 times a year.
Let’s understand the stock selection process with an example. Abbott India or HUL are considered safest stocks however they are not a part of our portfolio since April 2020. Reason is that our algorithm considered their medium-term return potential as “low” and even with a lower risk which they carry it could not justify their selection. The portfolio is not only about low risk only but high returns as well.
Now let’s have a look on the portfolio performance as on 10th Jan 2021
|Portfolio/Index||1 month||3 months||6 Month||1 year|
|our MWS portfolio||13%||28%||47.30%||80%|
|Small cap 100||10%||26%||54.17%||26.53%|
From this table it’s clear that outperformance of our portfolio becomes bigger in 1 year. This can be attributed to the fact that we had covid 19 driven market crash in march 2020 where all the indices fell heavily but our portfolio had limited fall due to its unique algorithm-based limited risk selection criteria. This led to widening of performance gap further.
To explore more about our portfolio visit : prudentcap.smallcase.com