What’s In A Name?
A self-explanatory name, this portfolio is an elite selection of the cream of the crop that is the Nifty 50, picking only the “Sharma ji ke betes” of the stock market.
The known Nifty 50 universe, as the name suggests, comprises 50 stocks across 10 sectors with correlations amongst each other. Clearly, that’s too many to account for and can cancel each other out, resulting in reduced returns.
By weeding out the underperformers of the glorious Nifty 50, we comb through a select universe of stocks that beat the market, taking into consideration historical performance, cyclical trends, all-star sectors, current market conditions, and future potential.
Simplify
When we were kids, playing gully cricket after school was the highlight of the day, and having the best team was of utmost importance, the strategy for which was simple:
Shortlist the names of friends who played well consistently
Avoid the names of those that tend to take their bat home if they were bowled out
Pick your friends who are experts in certain roles - the best bowler, batsmen and fielders
You’re finally left with your very own dream team, entering the pitch after being inspired by Kapil Dev.
Similarly, this portfolio aims to scour the known Nifty 50 companies, select specific sectors that are set to do well in the near and distant future, pick out clean companies that are leaders in those sectors, and bet on trends that are sure to beat the benchmark index.
Skin in the Game
If you’re yet to be convinced that this strategy works, we will let you in on some behind-the-scenes proof!
We analysed the best 10 performers on a monthly basis for the last 12 years and made some interesting observations:
Industry leaders tend to perform better than followers. This proves true for the wonder-twins of IT - TCS and Infosys, HDFC Bank in the banking sector and the famed Maruti in the auto sector
High-quality names, which have been new entrants in the Nifty 50, have steadily risen to the top (Asian Paints, Titan, Bajaj Finance), and provide outsized returns
Cyclical stocks (commodities) give outsized returns during an up-cycle. One can switch between cement, metals and oil to consistently appear in the best 10 performing
Some sectors and stocks simply don't make the cut over time and wade out of the index. Take Electrical companies for example. At one point, there were multiple of these in the index (ABB, BHEL, Siemens, Bosch). Now, none of them are a part of the Nifty 50
As mentioned in our “recipe”, we allotted 40-80% of the portfolio to certain heavyweight sectors that do well across timeframes, 10-30% towards companies with growing fundamental strength and prowess, and the remained 10-30% towards the commodity cycles that we intend to bet on.
Here is what the exercise results* were:
5-Year Average | Returns | Standard Deviation | Sharpe Ratio | Sortino Ratio |
|---|---|---|---|---|
Nifty Top 10 | 29% | 16% | 1.8 | 2.6 |
Nifty 50 | 17% | 19% | 0.8 | 5.6 |
*As on December 31, 2022
Looks like the strategy works, doesn’t it? We only choose the best of the best!
Recipe for the Dough 💸
Keep exposure to a few base sectors, which have a heavy weight on the index like Banking, Oil & Gas, Automobiles or even Consumer
Identify intra-sector trends, which have the potential to perform better than the overall sector. Example: two-wheelers over four-wheelers, discretionary over staples, or rural versus urban. Take positions in companies best placed in the sub-sector
If there are no specific sub-sector plays, shortlist stocks basis the fundamental strength of their financials and future growth prospects via extensive research
Find multi-year plays on companies that show promise in valuation premium and growing business models
Track cyclical commodity bets by analysing global macro developments, demand-supply dynamics and volume/price data. We’ve distilled down to 3 possible commodity segments, namely cement, oil and metals to choose from depending on the market cycle
Allocate weight across sectors, companies and cyclical basis view expected returns and conviction
Identify the top 10 best-performing stocks in the Nifty 50 that consistently deliver returns periodically
Monitor their progress, or lack thereof and make adjustments to the portfolio accordingly (Rebalance)
Here is how we assign weights to each factor:
Segment | Weightage |
Sector Heavyweights | 40-80% |
Rising Players | 10-30% |
Commodity Bets | 10-30% |
Sketchy Names/Duds | 0% |
Piece of the Action 🍕
Nifty Top 10 is exclusively available to invest in on Kotak Cherry. The minimum ticket size is Rs. 35,000 and a fee of 2.5% AUA per annum. Just click on the button to check it out!