All Weather Investing: The core philosophy behind this investment strategy is building a portfolio that has the ability to not only offer downside protection during market turmoils, but also provide equity-like returns over the long-run.
The Coronavirus fear has led to markets crash across the globe, including India. Even today, the BSE Sensex crashed by over 1000 points while the number of Coronavirus positive cases shot up to 147 in India. Amid the uncertainties, Vasanth Kamath, Co-founder and CEO, Smallcase Technologies, says there is a product that can protect investors against market fall while ensuring higher returns in the long term. This product is All Weather Investing which has twin objectives of providing higher returns than traditional instruments like savings and Fixed Deposit and provide stable returns. In an e-mail interaction with FE Online, Kamath shares all about All Weather Investing:
What is All Weather Investing?
The core philosophy behind this investment strategy is building a portfolio that has the ability to not only offer downside protection during market turmoils, but also provide equity-like returns over the long-run. That is, it is a portfolio for all types of market conditions, and is hence all weather.
Is All Weather Investing suitable for every investor?
One of the biggest issues with equity investing is the risks involved – and this is especially highlighted during periods of market stress & heightened volatility. It leaves most stock market investors vulnerable, and even scares away quite a few from equity investing altogether. To ensure that investors stay invested in equities, we realised there is a need for an investment product that ensures investors stay anchored to a core portfolio.
The All Weather Investing smallcase is one such core portfolio. While different investors might want to have different percentages of allocations towards the core depending on their risk profile, we believe that it is suitable for every investor.
How All Weather Investing smallcase protects investors in times of market turmoil, like the recent crash triggered due to Coronavirus
The All Weather Investing smallcase significantly minimises the damage that a sudden market fall or a prolonged recession can have on the portfolio. It accomplishes this by allocating capital across a mix of three asset classes – equities, gold, and fixed income. This is provided via the most liquid ETFs in each of the asset classes.
This provides investors with the much needed inherent diversification that helps them not only preserve their wealth, but also grow it in a much safer (i.e. less volatile) manner over the long-term. While exposure to equities generates returns in a rising market, gold provides the much-needed protection against the decrease in value of equities in a down market. On the other hand, Fixed Income provides a stable and positive return consistently.
The allocation across these asset classes is based on expected market conditions as determined by our proprietary algorithm which uses parameters like the India VIX (a measure of volatility), interest rate levels, current/historic equity market levels, etc. It follows the Sharpe maximisation principle, which aims to maximise the excess returns of the portfolio for each unit of risk. Simply put, the exposure to equities is reduced if the markets are expected to be volatile, and vice versa. Finally, this is asset allocation process is reviewed every 3 months to account for the dynamic market conditions.
In summary, that two things make the All Weather Investing smallcase very powerful:
- The mix across the 3 asset classes provides an inherent diversification
- The proprietary algorithm which anticipates the market conditions over the coming 3 months, and allocates wealth accordingly
How has All Weather Investing smallcase performed vs. Stock markets in India (across different periods)?
We launched the All Weather Investing smallcase in July 2018. We did this after rigorous backtests to ensure that it has been test for various market conditions like the Global Financial Crisis of 2008, the European/Greek Debt Crisis of 2012, etc. The results of these are below.
Since launch, the live performance of the All Weather Investing smallcase has validated our thesis. The All Weather Investing smallcase has not only provided returns that are better than that of the Nifty-100, it has done so with far less volatility.
Does All Weather Investing smallcase gives guaranteed return? If yes, how?
There is no guaranteed return – no product that has equity/gold in it can truly offer it. But what is there that the founders of smallcase (and many of smallcase employees) are heavily invested in the All Weather Investing smallcase. In our opinion, that’s the ultimate vote of confidence one can offer!