By Shreekant Daga, CAIA, CFA, FRM, Associate Director and Authorized Signatory for CAIA India LO.
Global studies have pointed out that passive investments have generated better returns than active investments in general still an average investor is more likely to enter the (trading) ring rather than cart tail a benchmark. Most index providers have often conducted studies across the globe and indices to point out the loss of wealth in case the best days were missed and augur the fear of continuing to remain invested, fulfilling the index/ETF business model.
Nifty is a benchmark Indian stock market index that represents the weighted average of 50 of the largest Indian companies. Nifty 50 is owned and managed by NSE which is the largest Indian stock exchange.
Over the last ~23/24 years, Nifty has multiplied by more than 12 times. The CAGR of the investment is ~11.1%. This also implies a USD return of ~8.4% after factoring in the currency appreciation.
Studies across globe for indices have quantified the loss of opportunity in case the best days are missed. In the case of Nifty, if the best 10 days are missed during the aforementioned period, the USD return drastically falls to 4.7%. Likewise, if the best 20 days are missed then the USD return drops to 2.2%. Finally, if the best 30 days are missed then that results in a 0% USD return.
To flip this conversation, what if the worst days were missed/timed? Missing the worst 10-, 20- and 30-days results in CAGR of 12.6%, 15.3% and 17.9% respectively in USD denomination! The rich returns would certainly build a case for timing (exits).
Timing to not participate during the worst days may seem too difficult and mathematical. But it has been noticed that 12 out of the worst 30 days came in 2008 alone. If one could try and avoid such periods itself, then timing can certainly result in a lot of value creation for the investment.
Moving towards a balanced approach where an investor misses an equal number of best and worst days yields better returns than staying put during the entire investment period. This implies that the down swings have been much stronger than the upswings across horizon suggesting that timing can enhance performance, ceteris paribus.
While the results point out that timing the market can immensely improve performance, the skills required often move away from fundamental to understanding market sentiment and momentum. Unlike understanding financials of a growth story or a cheaply valued investment, the parameter for evaluation here is understanding the temperature of the market. Use of unstructured data alongside data science using technology can gauge these elements better. In the search of alpha within the passive space, timing aided by sentiment and momentum is the new untapped potential!
About the Author:
Shreekant Daga is a CAIA, CFA and FRM charter holder. Shreekant pursued Bachelor’s in Management from Narsee Monjee College and later did his Master’s in Management from Jamnalal Bajaj Institute of Management Studies (JBIMS). He also holds a Master’s in Commerce from Mumbai University. He is an alumnus of Bombay Stock Exchange Training Institute, having completed the certificate program on capital markets. He has also acquired several certificates from the National Stock Exchange in Financial Markets.
Prior to joining CAIA Association, Shreekant had gathered experience in Structured Finance. His experience encompasses investment banking in debt capital markets, handling stressed assets, global RMBS deal evaluation, securitization, stress assets rating and mutual fund rating. Shreekant has worked with organizations such as ICICI Bank, Deutsche Bank Group and India Ratings and Research (Fitch Ratings). In mid-2018, he joined the Chartered Alternative Investment Analyst (CAIA) Association, the international leader in alternative investment education and provider of the CAIA designation, as Associate Director at India liaison office wherein he looks after India operations.
Shreekant has been a visiting faculty at JBIMS and has taught subjects such as Fixed Income, Global Markets & Financial Institutions and Structured Finance. He has been involved in mentoring students at his alma mater for their year-long projects. He has also graded final year MSc students of Mumbai University on their year-long projects. He has also featured in newspapers, magazines, press releases and article on the web. His name also features on the list of educational professionals on the MHRD website. True to the cross function that he maintains with education and industry, Shreekant has 4 research papers presented and published at international forums and journals respectively.
