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MOSL: India Strategy (Contrarian Investing – Quarterly Update-A review of our contrarian investment strategies)

India Strategy (Contrarian Investing – Quarterly Update; A review of our contrarian investment strategies)

Our thematic strategy note on Contrarian Investing, published in June 2017 gives a detailed account of the subject matter. In this note, we have reviewed the performance of our strategies. Also, since we use quarterly rebalancing to test our hypothesis, we have run the updated quintiles as on December 31, 2017 and present key findings along with our top contrarian bets.

Key takeaways from 3QFY18 quintiles

• Our analysis suggested that, over a longer term, neutral to moderately popular stocks deliver significant outperformance, even bettering the performance of the most popular stocks. In this quarter, neutral to moderately popular stocks as well as the most popular stocks failed to beat the benchmark. The most popular stocks delivered the worst return in this quarter, whereas the least popular stocks performed the best.
• Our findings proved that, over the long term, out-of-favor low P/E stocks deliver disproportionate returns, significantly beating the benchmark. In contrast, the performance of high P/E stocks is dismal. In this quarter, high P/E stocks delivered the best returns, whereas the low P/E quintile failed to beat the benchmark.
• Similarly, out-of-favor low P/CF stocks deliver disproportionate returns, significantly beating the benchmark. In contrast, the performance of high P/CF stocks is dismal. In this quarter, low P/CF stocks delivered the 2nd best returns, whereas the high P/CF quintile performed the worst.
• We also note that in some sub-themes, the returns from a quintile deviate from the long-term pattern highlighted in our initial detailed note. However, this is in line with the trends observed even in the long-term study – where returns can deviate for a quarter here and there but over a long period, the hypothesis is proven right. For example, in the Popularity theme, instead of Quintile-4, Quintile-5 has delivered the best returns in 3QFY18. Quintile-5 is the worst performing quintile over the last decade.