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Alphabet Factor Portfolios

Our Alphabet Factor Portfolios had an impressive performance in the last month, with the multifactor approach offering a good hedge against the volatile first week while participating in the sentiment ride thereafter. We show our model results aren’t a mere luck but are backed by substance, with strong outperformance not only during the back-test period but also out of sample since the go-live date.

Traversing through the initial volatility

The juggernaut of exit poll predictions and the subsequent blow of less than expected seats for the NDA resulted in extremely volatile sessions during the first week for Indian markets. While the momentum stocks were bruised, less volatile and fundamentally stable names offered a good hedge against the seesawing markets. Absorbing the shock of the election results, investors with renewed sentiment continued to prefer stocks with good ratings from sell-side analysts.

All-Season portfolio outperforms Nifty-50

Our All-Season portfolio, with exposure to all individual factors discussed above in a multifactor framework, outperformed the Nifty-50 benchmark, both on an absolute basis and a risk-adjusted basis during last month. The diversified broad-based portfolio was a clear winner compared to the concentrated version, even if we compare the performance in the last year. With markets trading at stretched valuations and uncertainty around the upcoming budget on whether the government engages in populist versus prudent measures, we recommend investors follow a blended multifactor approach rather than style timing.

Sectors that matter

The All-Season broad portfolio benefitted from overweight exposure to Technology and Materials in last month. For July 2024, the model has turned underweight on Technology and further increased the overweight exposure on Non-Durables. We continue the underweight exposure to Financials, although, relative to last month, the exposure to Financials has increased for July 2024.

The Alphabet Suite of Factor Portfolios

Alphabet is a suite of four single-factor portfolios and a multifactor portfolio based on the Nifty-50 index universe. Each month, top 15 ranking stocks based on the respective factor scores form the Broad portfolio while the top 5 stocks form the Concentrated portfolio for the said factor. Given the nature of construction of these portfolios, it is highly likely that Alphabet portfolio recommendations may differ from KIE analyst ratings for the same set of stocks. Alphabet can be used both by quantitative and fundamental managers for portfolio construction as well as a screening tool to filter down the investment universe. The factor scores may also be used as an overlay on the existing stock selection process in a multifactor framework by investment managers. Our Alphabet portfolios show strong performance both on an absolute and risk-adjusted basis, not only during the back-test period but also after the model went live (out of sample).

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