Always good to receive positive feedback from regular readers. Such feedback makes all the writing effort worthwhile.
One such reader, Kshitij, wrote an encouraging email from Ludhiana along with an interesting query,” If you can throw some light on NIFTY 50 NV20 index. Surprisingly, its beaten most of the other Large Cap Benchmarks in last 3 yrs. Thought it might be an interesting analysis for you subscribers.”
I had compared the performance of various factor indices (Value, Momentum, Low Volatility, Alpha) in a previous post. The results were not very favourable for the value factor. While the value factor did very well during the period 2006-2010, it had a big underperformance in the past decade (2011-2020).
I reproduce a couple of graphs from that post.
While I do not know about the future, it is easy to see from the above graphics that investing in Nifty 500 Value 20 index would have been a painful experience especially during the past decade. And 10 years is a very long time for most of us.
A few readers highlighted a few issues.
There is no index fund for Nifty 500 Value 50. There are many ETFs for Nifty 50 Value 20 in the market.
- Kotak NV 20 ETF
- Nippon India Nifty 50 Value 20 Index Fund
- Nippon India ETF NV 20
- ICICI Pru NV 20 ETF
Shouldn’t I have used Nifty 50 Value 20 instead of Nifty 500 Value 50?
I do not necessarily agree with this. The authors in “Your Complete guide to Factor Based Investing: The way smart money invests today” wrote that, for an investment metric to a considered a factor, it should be
- Persistent (has works over long periods)
- Pervasive (works across geographies and assets)
- Robust (works for various definitions of factor)
- Investable (not just on paper, you can actually invest in the factor)
- Intuitive (some behavioural or risk-based explanation).
Specifically, for “Robust” property, value factor should work for all definition of value (Price-to-earnings, Price-to-Book, Price-to-sales). Thus, I was NOT very keen on comparing the performance of Nifty 50 Value 20. Didn’t expect the returns to be very different.
Still, let’s compare this. Let’s first look at the difference between the construction methodology between the two value indices.
Nifty 50 Value 20: Eligibility Criteria for Selection of Constituent Stocks
- The company should be a part of NIFTY 50.
- Companies are selected based on ROCE (return on capital employed), PE (Price-to-earnings ratio), PB (Price-to-book) and DY (Dividend Yield).
- Companies with relatively lower PE and PB and higher dividend yield and ROCE are selected.
- Index is rebalanced annually
Nifty 500 Value 50: Eligibility Criteria for Selection of Constituent Stocks
- Stocks from NIFTY 500 index eligible for inclusion.
- 50 companies that rank high on Earnings to Price ratio (E/P), Book Value to Price ratio (B/P), Sales to Price ratio (S/P) and Dividend Yield are selected.
- Index is rebalanced semi-annually
You can find out the detailed methodology for the 2 indices on this link.
Where is the difference?
Nifty 500 Value 50 picks stocks from the universe of 500 stocks.
Nifty 50 Value 20 (NV 20) picks stocks from the universe of 20 stocks.
More importantly, Nifty 50 Value 20 considers ROCE (return on capital employed) while selecting stocks. Nifty 500 Value 50 index does not do that.
Nifty 50 Value 20: ROCE gets 40% weightage, PE gets 30% weightage, PB gets 20% weightage and dividend yield gets 10% weightage.
Nifty 500 Value 50: PE, PB, PS and Dividend yield get equal weightage.
Now, ROCE is not technically a value parameter. You would rather associate ROCE as a quality metric. So, I will see Nifty 50 Value 20 as a mix of value and quality metric.
We have seen Nifty 500 Value 50 didn’t do well.
Will Nifty 50 Value 20, with inclusion of ROCE as the selection metric, in the selection criteria offer better returns?
Let’s find out.
Nifty 50 Value 20 (NV20) VS. Nifty 500 Value 50 Vs Nifty 50 TRI
Nifty 50 Value 20 (NV20) was launched in March 2014 with base date as January 1, 2009.
Nifty 500 Value 50 was launched in September 2018 with base date as April 1, 2005.
Therefore, we will compare the data for the 3 indices from January 1, 2009.
The performance of Nifty 50 Value 20 (NV20) index looks impressive.
Since Jan 1, 2009, until July 30, 2021, Rs 100 invested in Nifty 50 Value 20 index has grown to Rs. 1043. CAGR of 20.5% p.a.
Nifty 50: Rs 100 has grown to Rs 605. CAGR of 15.4% p.a.
Nifty 500 Value 50: Rs 100 has grown to Rs 658. CAGR of 16.2% p.a.
Point-to-Point returns suffer from start and end point bias.
So, let’s look at calendar year and rolling returns.
Nifty 50 Value 20 beats Nifty 50 TRI in 8 out of 12 completed years. Beats Nifty 500 Value 50 index in 7 out of 12 completed years.
Nifty 50 Value 20: Rolling Returns
While Nifty 500 Value 50 is all over the place, Nifty 50 Value 20 has given a very stable performance.
What about risk measures?
We look at the standard deviation of monthly returns and maximum drawdowns.
Nifty 50 Value 20 is almost at par with Nifty 50 TRI.
Nifty 50 Value 20 has done slightly better than the Nifty 50.
Should you invest in Nifty 50 Value 20 (NV 20) index fund or ETF?
As we can see, adding ROCE to the pure value metric (Price-to-Earnings, Price-to-Book, Price-to-sales, Dividend yield) has added to the performance of NV20. However, I can’t say this conclusively because the better performance could also be due to smaller stock universe.
Nifty 50 Value 20 has done far better than Nifty 500 Value 50 during the period under consideration on both risk and return characteristics.
So, if you must choose between Nifty 50 Value 20 (NV20) and Nifty 500 Value 50, NV20 is a far better choice.
Even though Nifty 500 Value 50 looks a bad choice on risk and return parameters, it was still the best performance in 4 out of 12 years (2009, 2014, 2016, 2017). Leads by a wide margin in 2021 too. We saw very similar charts when we compared low volatility and high beta indices.
This reinforces the point that no investment strategy, no matter how good, does well all the time. Similarly, no investment strategy, no matter how bad, does badly all the time.
Therefore, while selecting investments, do not just focus on a couple of years of past performance. Look for consistency over longer periods.
Now to the more important question, should you invest in Nifty 50 Value 20 (NV20)?
The performance of Nifty 50 Value 20 is certainly impressive, especially on the return front.
It is even the more impressive given that the pure value factor has struggled so badly during the past decade. Perhaps, value stocks with a quality tilt do well in India.
If you are keen on an index based around value theme, you can consider it part of your satellite equity portfolio.
The Usual Caveats
- Past performance may not repeat.
- I have used results of Total Returns Index (TRI). Actual returns can be different because of costs and tracking error.