Investing is all about making money. Or is it really?
A pattern break in Larger Caps
For the past decade, a select set of stocks sustained valuations that many would argue were 5 to 10 times their intrinsic valuation. Investors in these companies pointed out the predictability of their earnings, dominant brands, indestructible moats, distribution prowess, attractive working capital dynamics, clean accounts and high barriers to entry.
These were quality businesses with high-quality management that the markets would keep rewarding for long periods of time.
These stocks, some of them Giga caps (that we define as stocks with market caps greater than Rs 500K crore) have delivered a 7.2% return over the past year, underperforming the NIFTY50’s 11.1% 1-year return. In fact, a number of these stocks have delivered negative returns over the last year.
That’s really not so concerning until you notice that the midcaps have delivered 33%, smallcaps 48.5% and microcaps a staggering 71.3% over the same time period.
Until 2017, Indian investors were fully committed to smallcap stocks and star smallcap fund managers. So much so that even largecap funds invested in mid and smallcap stocks to generate alpha, triggering a regulator-led initiative on reclassification of fund schemes.
Post-2018 largecaps provided attractive returns and lower volatility and the realization set in that good largecap portfolios would consistently compound investor wealth.
Fast forward to today, large caps have underperformed and mid and smallcaps have roared higher. Pattern breaks occurring from time to time are the inherent nature of markets.
Competitive advantages are increasingly looking unpredictable.
