The power of simplicity in investing : Proxy passive approach

Sitting in the second quarter of 2019, there has been an active push towards investing moving towards passive investing ( Passive investing is akin to indexing, where money follows the index and not a style of any manager around rebalancing portfolios). While the concept of passive investing is boring, it ensures that the long term growth rate of an economy is captured in the portfolio, by keeping costs minimal – very little to argue against the philosophy behind it and why funds are chasing the space, considering the high fee active strategy has underperformed for more than 5 years in counting ( more so globally).

However, in a market like India there are always smart ways of constructing the same passive indices. While you have the HNI focussed products like PMS and AIFs which have become mainstream today, there continues to be innovation in products which are simple and easier to benchmark too.

One such product, is the Nifty Alpha Low-Volatility Index. The construction is fairly straightforward, and NSE has a primer on the details too

https://www.nseindia.com/content/indices/NIFTY_Multi-Factor_Indices_Methodology.pdf

In effect, one is constructing a 30 stock portfolio of the top 150 companies in India, which has shown low volatility and high alpha in the last 1 year, and the same is rebalanced every 6 months.

The returns of such a portfolio, over a 14 year period is at 21% IRR ( 1 Rs invested in 2005 would be worth 15 Rs today as of May 2019). More importantly, as an investor I would call this higher quality returns as the volatility one is faced with is 11% ( one of the primary reasons investors get out of the equity markets, is because of the high volatility they are not able to digest. The government bonds in India have a volatility of ~9% as a proxy).

So effectively, the index construct from NSE has given a high performing ( one of the best equity returns) with a debt like volatility profile.

The question that begets an investor, is why is everyone not investing in this index. The answer is two fold :

a) Very few know of such an index ( lack of knowledge / marketing)

b) The portfolio construct is too boring ( investors want a more complicated narrative in their portfolio, around themes and opportunities).

The next time you as an investor are pitched a sophisticated strategy , always remember to ask 2 questions which is going to determine the long-term returns

i) the nature of the growth rate of the portfolio

ii) the fee structure of the portfolio

(Simplifying the portfolio construct, focussing on growth and reducing the fees paid out, is the only long-term sustainable way for an investor portfolio growth).

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