‘Small caps’ returns have gone into a different planet’

livemint.com:

Mint amid the frenzy in many of these stocks. The founder of GQuant Investech believes that Sebi is right in sounding the alarm bells about the froth in the small-cap space , even as these warnings are being cheerfully ignored by the market.

Edited excerpts: There is absolutely no doubt that small caps have gone into a completely different planet in terms of returns. The reality is that the data for long-term returns from large caps is extremely sobering and something that almost every market participant is ignoring.

The data of returns for Sensex from May 2014 up until the present day is just 13% CAGR! This is a full 2.5% pa below long-term Sensex returns! But that is how the human mind works: somehow all of these data points have become forgotten in the frenzy surrounding small caps and all of us have started believing that the entire market returns have been superlative! This is called recency bias. The more recent data points become larger than life and overshadow the complete data set.

Therefore the entire action in the last 10 years and in particular in the last four years has been only in the small cap space with some isolated movements in groups like the state-owned companies recently and the Adani group back in 2021. Otherwise, large caps have been extremely barren of returns.

I mean the key question is that why should anybody invest in equities if the 10-year compounding return is just 13% and that is including a very strong last four-year returns. Because adjusted for volatility, long-term equity return for the last 10 years from Indian benchmarks have been abysmal, with a Sharpe (risk- adjusted return) of below 1! And the fact is that the emergence of the small investors in India has made the small cap market