No two top-decile badges are the same
Minerva Asset Advisors | SEBI Registered Investment Adviser: INA000020332
Not all heavy hitting is associated with great stock picking
While ‘top of the class’ badges are widely trumpeted on the street, no two badges from two separate periods are the same. Skill and good fortune often wear the same suit in investing. Strip away the bull market and see who is still dressed.
More often than not, significant outpacing in declining and flattish environments (C2011, C2018 etc.) comes with narrow leadership, suggesting that underlying performance of the high-hitters wasn’t driven by a popular theme or another popular factor (and therefore exhibits more durability). Consequently, the top-decile performers in such environments are materially departed from the median. Why is this important? Consider environments when ticker tape runs up indiscriminately – Close hugging with the crowd in such environments (i.e. when top decile performers aren’t as far vs. median performers) is often followed by fatigue (marginal buyer gets exhausted), and this can often coincide with increasing admission that prices are significantly disconnected vs. underlying operating returns and/or growth. In such set-ups, de-rating isn’t a risk; It’s usually the base case.
Attached exhibits lay down 3 return distribution sets for Indian mid and smallcap mutual funds – 2 biggest decline years since 2010, 2 biggest up years since 2010, and somewhat of an outlier year. Distributions confirm that large down-years (C2011 and C2018) show a ‘left skewed’ profile i.e. is less suggestive of group-think. In contrast, large up-years (C2014 and C2017) show ‘normal’ or ‘right skewed’ profiles (reflecting concentrated thematic euphoria – ‘Modi trade’ of domestic cyclicals in 2014, and Financials in 2017). As mentioned earlier, C2021 was an apparent outlier i.e. return distribution of Indian small and midcap mutual funds was ‘left skewed’ despite it being an otherwise solidly positive year.
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