Craving Alpha Sector Advantage
Download Factsheet:
Risk Involved
Rebalances: Monthly | #Stocks: 24
Suitable- for those investing less than 30% of liquid net worth with no plan to liquidate within at-least SIX MONTHS
Investment Rationale:
We choose the strongest company across sectors and use proprietary calculations and models to reach such conclusion. While the stock selection is barely 20% of the work, 80% is the capital allocation which is derived through an algorithm.
The algorithm based factor investing ensures protection from the following issues:
1. Over-Diversification or Concentration- Since each sector is represented, the portfolio is never exposed to concentration risk from a single industry. Only the major sectors/ industries are invested into, hence the portfolio is scalable and not exposed to liquidity risk.
2. Biased towards a stock- The system is extremely factor specific and 'Stock names' are ignored from the initial research, so that there are no bias or favouritism towards any specific stock.
3. Momentum Based Rebalancing- The portfolio rebalances based on Momentum Adjustment, viz- adds weight to the outperformer from the underperformer.
Each stock put in the portfolio has to go through a "fragility test", to ensure how they behaved in the past when confronted with adverse situations.
1. Liquidity Risk- Risk that investors won't find a market for their securities, which may prevent them from buying or selling when they want.
2. Market Risk- Risk of losses on financial investments caused by adverse price movements.
3. Model risk- Risk that occurs when a financial model is used to measure quantitative information and the model fails or performs inadequately which leads to adverse outcomes for the investor.
Portfolio Construction System
Quant Based Systems build after comprehensive back testing and continuous improvisation are used for stock selection.
A max of 2 stocks per sector are chosen.
Once Selected, each stock is put through fundamental tests and eventually a third set of Multi Factor Models are used to allocate capital to each company in the portfolio.
Investing Philosophy
We Believe markets will always be surrounded by industries that are in a business up cycle. This portfolio attempts to increase allocation to sectors in an up cycle while reducing allocation to that in it down cycle.
All of which while ignoring companies with over dependence to Cyclicality.
Risk Mitigation
1. Liquidity Risk; is mitigated by restricting the stock universe to only the top 500 listed companies in India.
2. Market Risk; The system has in built "check valve" mechanism which triggers an exit from stock ensuring value generated from stock is preserved or stop loss prevents major loss as and when any material even- price wise or fundamentally takes place.
3. Model Risk; We acknowledge that quant based systems are exposed to "Model Risk" and hence the model is in constant over view and improvement.
Each of which are ensured by the "Rebalancing" or "Re-alignment' in the pre-defined frequency.
