When I wrote about how to construct the Best portfolio using index funds and ETFs, Wilfred commented, “Why Nifty Alpha 50 is missing in comparison?”
I had no proper answer. To be honest, I was not really following the Nifty Alpha 50 index and it was never part of my consideration set. And why was I not following this index?
- In an earlier analysis, I had found Alpha 50 to be too volatile. However, now I think including Nifty Alpha 50 in the analysis would have been a good choice.
- I had not read much about Alpha as a factor. Hence, was not very comfortable
I have been keeping an eye on the index since then. The Nifty Alpha 50 index has given super returns in the last 2 years. 52% in 2020 and 75% in 2021. While equity markets have offered generous returns over the past 18-20 month, this is still an enviable performance. To put this performance into perspective, Nifty 50 delivered 14.9% in 2020 and 24.1% percent in 2021.
While I do not plan to redo the “Best portfolio” analysis again so soon, it is apt to compare the performance of Nifty Alpha 50 against a few factor indices from the Best portfolio analysis.
What do we compare Nifty Alpha 50 against?
We compare the performance of Price index for the following indices.
We compare the data from April 1, 2005, until January 31, 2022. For the analysis, I look at the monthly returns (and not the daily returns).
Why only these indices?
Nifty 50 is the bellwether index. No performance comparison is complete without including Nifty 50.
Nifty Alpha Low Volatility 30 index is multi-factor index that chooses stocks based on their alpha and low volatility scores.
About Nifty 200 Momentum 30 index, I believe Nifty Alpha 50 is just another way of defining momentum. Hence thought it is important to compare the performance of Alpha 50 with Momentum 30 index.
Moreover, Alpha Low Volatility 30 and Momentum 30 found their way in many “Best Portfolios” on CAGR, Sharpe Ratios and rolling returns. Thus, I thought these were good to compare against.
We also have ETF/index fund products for all these indices. So, you can actually invest in these indices. Skipped the Nifty 100 Alpha 30 index because there is no index fund or ETF available.
Nifty Alpha 50: Kotak Alpha 50 ETF
Nifty 200 Momentum 30: UTI Nifty 200 Momentum 30 index fund, Motilal (both index fund and ETF)
Nifty Alpha Low Volatility 30: ICICI Alpha Low Volatility 30 ETF (also FoF)
Performance Comparison: Nifty Alpha 50 Vs. Nifty 200 Momentum 30 Vs. Nifty Alpha Low Volatility 30
In terms of CAGR, Nifty Alpha 50 has been the best performer, followed by Nifty 200 Momentum 40 index and Nifty Alpha Low Volatility.
However, Nifty Alpha 50 lags the Nifty Momentum 30 and Nifty Alpha Low Volatility index in risk adjusted returns (Sharpe ratio and Alpha). Nifty Alpha 50 is also the worst performer when it comes to drawdowns.
Even on the returns front, look at the average rolling returns. Both Momentum 30 and Alpha Low Volatility 30 are ahead of Nifty Alpha 50 in average 3-year and 5-year rolling returns.
Notice the almost vertical rise in Nifty Alpha 50 over the last 18 months.
To avoid the start and end point bias, let’s look at the calendar year and rolling returns.
Look at Nifty Alpha 50. It tops the rankings in 10 out of 17 years. Finishes last in 5 years.
Contrast this with Momentum index. Tops the ranking in just 1 year. Does not finish last in any year. Quite consistent in the rankings. And not far behind Alpha 50 in terms of CAGR. In fact, in my previous analysis done in October 2020, the Momentum index was ahead of Nifty Alpha 50 in terms of CAGR too.
Rolling returns: Nifty Alpha 50 Vs. Nifty 200 Momentum 30 Vs. Nifty Alpha Low Volatility 30
Nifty 200 Momentum 30 and Nifty Alpha Low Volatility 30 are more consistent. And we saw in the table earlier that both the indices provided better average rolling returns than Alpha 50.
However, I must concede that Nifty Alpha 50’s poor performance on rolling returns is because of poor numbers in 2006-2010 period. In the last 10 years, all the 3 factor indices under consideration have been very close.
Volatility and Drawdowns
We can debate whether Nifty Alpha 50 is best performer in terms of returns. However, when it comes to drawdowns and volatility, Nifty 50 is without doubt the worst performer.
During the financial crisis in 2008, it lost over 77%. That’s almost 4/5th of your investment gone. At what level would you have lost all hope and exited?
Even during the market fall in March 2020, it fell the most among the 4 indices considered.
Please note I have considered monthly returns to do the analysis. Since the markets bottom out in the fourth week of March 2020, the actual drawdown (for all the indices) would have been higher than shown in the illustration.
The Usual Caveats
- Past performance may not repeat, especially on the returns front.
- Except Nifty 50, the data for the 3 factor indices is backfitted. We do not have live data since April 2005 for other 3 indices. The live data history is much shorter.
- Alpha 50 since November 2012, Momentum 30 since August 2020, and Alpha Low Volatility 30 since July 2017
- The alpha from any investment strategy may come down when serious investor money chases it.
- ETFs and the index funds for the 3 factor indices (Alpha 50, Momentum, Alpha Low 30) may have higher tracking errors. In case of ETFs, you will also have to navigate through Price-NAV difference.
- Look at the universe from which these stocks are picked. Alpha Low Volatility picks from Top 150 stocks. Momentum index from top 200 stocks. And Nifty Alpha 50 from top 300 (this is getting into microcap category). The lower you go, expect more slippage and a higher tracking error.
What should you do?
When it comes to investments, the journey is as important as the destination. If journey is too unpleasant, you might desert the ship before it reaches the destination. Hence, while picking up investments, you shouldn’t focus just on the returns. You must focus on volatility too.
While all equity investments are volatile, some strategies are more volatile than the others. You must pick strategies whose volatility you can digest. And this aspect is important. You can always look at the past data and draw comfort during bad times. However, it is easy to look at drawdowns in charts. Market falls are way more brutal when experienced real time. And such sharp falls can force you to make strange choices.
And that’s where conviction comes into picture. During bad times, it is easy to persist with an investment strategy you have conviction about. This can drive behavioural alpha. I have greater conviction in momentum investing. Hence, you know what I would choose from the 3 factor indices.
Looking at the data, Alpha 50, Momentum 30 and Alpha Low Volatility 30 are close in returns performance. However, Alpha 50 falls behind the two indices when it comes to volatility and drawdowns. Hence, I wouldn’t be keen on Nifty Alpha 50 index.
If you must take exposure to Alpha factor, a Nifty Alpha Low Volatility 30 index fund or ETF is a better choice (Low Volatility is the magic potion). I say this for most long-term portfolios.
If you are looking for super returns in short term and can time it right, Nifty Alpha 50 can deliver super returns for your portfolio. The question is, can you? And don’t get wrong here. You can consider Nifty Alpha 50 for your long-term portfolio too provided you have the conviction and can digest volatility.
And yes, don’t forget about good old Nifty 50. While I have not given Nifty 50 much space in this post, it should always a part of any balanced long-term portfolio (the core portfolio). Factor indices (Alpha 50, Momentum 30, Alpha Low Volatility 30 or any other) can figure in your satellite equity portfolio.