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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   

 

As a follow-up to our detailed thematic strategy note on (published Jun’17), we now review the performance of our strategies. To test our hypothesis, we have used quarterly rebalancing, and therefore, have run the updated quintiles as on 30^th Sept’18. We present our key findings along with our top contrarian bets in this note.

 Key takeaways from CY18 performance

• Our analysis suggests that over the long term, neutral-to-moderately popular stocks deliver significant outperformance, even bettering the performance of most popular stocks. In CY18, neutral-to-moderately popular stocks as well as the most popular stocks failed to beat the benchmark. In fact, the most popular and the least popular quintiles have delivered the worst returns, whereas neutral-to-moderately popular stocks have delivered second best returns.
• Our analysis also pointed out that in the long term, stocks with the highest ‘sell rating’ performed the worst. In fact, in CY18, these stocks performed the worst in line with our empirically established relationship.
• Our findings prove that over the long term, out-of-favor low P/E stocks delivered disproportionate returns, significantly beating the benchmark. In CY18, the performance of low P/E stocks has been dismal, failing to beat the BSE-100 benchmark. In fact, performance of all value strategies (low P/E, low P/B and Low PCF) has been abysmal.
• We have highlighted in our initial detailed note that in some sub-themes, returns from a quintile deviated from its long-term pattern. However, this is in line with trends observed even in the long-term study, where returns can deviate for a quarter, but over a long period the hypothesis is proven right. For example, in the popularity theme, instead of Quintile-4, Quintile-3 has delivered the best returns in CY18. Quintile-3 is the second worst-performing quintile over the last decade.