Alphie ranks Minerva India under-served an 8 out of 10 compared to a 5 for S&P BSE Small Cap!

In the finance sector where performance is the ultimate benchmark, I embarked on an analytical expedition into the alpha-beta Cartesian framework, guided by two compelling charts. These charts represented the India Underserved strategy and the Indian SmallCap, each benchmarked against the BSE 500.

The alpha axis, indicative of performance surpassing the benchmark, consistently displayed positive values, while the beta axis fluctuated, reflecting the inherent volatility of the market. The India Underserved strategy demonstrated a judicious spread across the quadrants, signaling a strategy of balance. Notably, less than 30% of its performance was categorized in the lower quadrants of Q3 and Q4, typically associated with underperformance and heightened risk.

Conversely, the narrative of the SmallCap strategy was marked by its assertive approach, with over 90% of its performance recorded in the higher-risk quadrants of Q3 and Q1. This underscores its aggressive pursuit of elevated returns, albeit accompanied by greater risk exposure.

Equipped with these insights and adopting a decile system where no single quadrant represents more than 50% of the data, I proceeded to evaluate these strategies. The India Underserved, with its equitable distribution, received a score between 7 and 8, acknowledging its strategic balance and risk management. The SmallCap strategy, characterized by its more extreme performance, was scored between 3 and 4.

However, this initial scoring is merely the beginning. A comprehensive evaluation demands a multi-dimensional approach, incorporating a suite of metrics such as Sharpe Ratios and Sortino Ratios. These tools provide a deeper understanding of risk-adjusted returns and investment strategy nuances. Therefore, this analysis is an ongoing process, as I continue to derive insights from the alpha-beta plot, a vital instrument in navigating the complexities of financial performance.

Alphie, Intelligent Investing

The following is the conversation we had with Alphie.

AlphaBlock: What does an alpha and beta Cartesian plot signify for simulations of a strategy?

Alphie: An alpha and beta Cartesian plot in the context of simulations of an investment strategy typically refers to a graphical representation of the performance of an investment portfolio compared to a benchmark index. In this framework, alpha and beta are key concepts:

• Alpha (α): Alpha measures the excess return of an investment strategy compared to the return of a benchmark index. It represents the value that a portfolio manager adds to or subtracts from a fund’s return. A positive alpha indicates that the strategy outperformed the benchmark on a risk-adjusted basis, while a negative alpha suggests underperformance. It is also the Intercept in the linear CAPM equation.
• Beta (β): Beta measures the volatility of an investment or a portfolio in comparison to the market as a whole. A beta greater than 1 indicates that the investment is more volatile than the overall market, while a beta less than 1 means it is less volatile. Beta is often used as a measure of the investment’s systematic risk.

In a Cartesian plot representing alpha and beta:

• The x-axis typically represents beta, showing how sensitive the strategy is to movements in the benchmark.
• The y-axis represents alpha, illustrating the strategy’s ability to generate returns above or below the benchmark.

Such a plot can be used to visually assess the risk-return profile of different investment strategies. For instance, a point located:

• Above the x-axis and to the right may indicate a strategy with high risk (high beta) but also high excess returns (positive alpha).
• Below the x-axis and to the right might suggest high risk without corresponding excess returns (negative alpha).
• Near the y-axis (low beta) and above the x-axis suggests low risk with positive excess returns.

This graphical representation helps investors and portfolio managers to understand and compare the performance of different investment strategies in relation to their risk profiles and the broader market. It’s a crucial tool in performance analysis and strategic decision-making in investment management.

AlphaBlock: Let the x axis be alpha and y axis be beta and now use the following images to analyze the India Underserved strategy further compared to its competing benchmark Indian small cap. Both the competing performances are compared to the BSE 500 composite benchmark. Do you see the Q1+Q2 had more data for India under-served compared to Small Cap? Do you realize that this shows a higher proportion of Alpha for the manager vs. Small Cap Index?

Alphie: Yes, the provided data indicates that for the India Underserved strategy, the sum of the percentages in quadrants Q1 and Q2 is higher compared to the Indian SmallCap strategy. This suggests that the India Underserved strategy has a larger proportion of data points with positive alpha, implying that it has outperformed the benchmark more frequently or to a greater extent in terms of returns, regardless of the associated risk (beta).

Here’s what this could signify about the asset manager’s capability:

• Alpha Generation: The asset manager of the India Underserved strategy appears to have a stronger ability to generate alpha. A higher proportion of data points with positive alpha indicates successful active management skills, especially in security selection and timing.
• Performance in Different Market Conditions: The distribution of data points with positive alpha in both high and low beta regions for the India Underserved strategy suggests that the manager has been able to outperform the benchmark in varying market conditions.
• Comparison to SmallCap: Despite the apparent higher volatility associated with SmallCap investments, the India Underserved strategy manager has been able to find opportunities that yield higher alpha more often than the Indian SmallCap strategy. This could indicate a well-researched and possibly more opportunistic approach to asset selection.
• Investor Appeal: Investors might find the India Underserved strategy more appealing if they prioritize return over risk. The asset manager’s ability to secure higher alpha could attract investors looking for growth opportunities, even if those opportunities come with higher market risk (beta).
• Consistency and Strategy: While the higher proportion of positive alpha is a good indicator of the manager’s capability, potential investors should also consider the consistency of these returns and the underlying strategy used to achieve them. High alpha in some periods can be offset by low or negative alpha in others, affecting long-term performance.

In conclusion, the data suggests that the asset manager running the India Underserved strategy has demonstrated a capacity for strong performance in terms of alpha generation. However, for a comprehensive assessment of the manager’s capability, one should also consider the absolute levels of alpha, the consistency of performance over time, the risk-adjusted returns, and how these align with the investment goals and risk tolerance of the investors.

AlphaBlock: Now let’s look at Q3+Q4 data. India Underserved is less than 30% while small cap is nearly 44%. What does this tell you about the manager?

Alphie: The data showing that the India Underserved strategy has less than 30% of its data points in quadrants Q3 and Q4, while the SmallCap strategy has nearly 44%, provides insights into different aspects of the asset manager’s performance:

1. Risk Management: The lower proportion of data points in Q3 and Q4 for the India Underserved strategy suggests better risk management compared to the SmallCap strategy. It indicates that there were fewer instances where the strategy underperformed the benchmark or took on higher risk without corresponding returns.
2. Downside Protection: A smaller percentage in Q3 (lower alpha, lower beta) implies that the India Underserved manager may have offered better downside protection in falling or less volatile markets. This is because a lower beta correlates with less sensitivity to market movements, and a lower alpha in this context suggests that when the market performed poorly, the strategy did not perform as poorly as the SmallCap strategy.
3. Market Sensitivity: A smaller percentage in Q4 (lower alpha, higher beta) indicates that the India Underserved strategy was less likely to experience high volatility without adequate compensation in returns. This suggests that the asset manager may have been more cautious or selective in volatile or risky market environments, avoiding positions that could result in significant underperformance.
4. Conservative Approach: Collectively, the percentages in Q3 and Q4 can be interpreted as a more conservative approach by the India Underserved manager. The manager may have focused on protecting capital during challenging market conditions, rather than chasing high-risk opportunities.
5. Investor Confidence: For investors, the lower percentages in Q3 and Q4 for the India Underserved strategy may inspire confidence in the manager’s ability to navigate tough markets and avoid large drawdowns, which can be particularly important for risk-averse investors. Overall Strategy Efficacy: The numbers suggest that the India Underserved manager is effectively managing the portfolio to avoid scenarios where high risk is not adequately compensated by high returns (Q4) or where the strategy significantly underperforms the market (Q3).

In summary, the data from Q3 and Q4 suggests that the asset manager of the India Underserved strategy has a relatively strong risk-adjusted performance with an ability to avoid significant underperformance during adverse market conditions. Investors who value capital preservation and lower volatility might find this strategy aligns well with their investment philosophy. However, it’s also essential to consider the complete picture of returns, which includes the Q1 and Q2 analysis, to fully appreciate the manager’s performance.

AlphaBlock: Now let’s look at Q3+Q1. More than 90% of data for Small Cap lies in this segment, compared to 30% for India underserved. What does this tell you about the manager?

Alphie: Quadrants Q3 and Q1 on an alpha-beta Cartesian plot represent two distinct performance characteristics:

• Q3 (Low Alpha, Low Beta): This quadrant represents periods where the strategy underperformed the benchmark (negative alpha) but also had lower volatility (beta less than 1). Being in this quadrant suggests a conservative approach but with suboptimal results during the period in question.
• Q1 (High Alpha, High Beta): This quadrant indicates periods where the strategy outperformed the benchmark (positive alpha) and took on higher market risk (beta greater than 1). Being in this quadrant is generally seen as favorable since it indicates a strategy that yields higher returns, although it comes with increased risk.

For the SmallCap strategy:

• The fact that over 90% of the data lies in Q3 and Q1 suggests that the strategy is quite active and aggressive, experiencing significant fluctuations in performance relative to the benchmark. The high percentage in Q1 indicates frequent or substantial outperformance, but this is coupled with high volatility (high beta). The presence in Q3, although typically less desired, is not overly predominant, which may mean that when the strategy underperforms, it does so with lower risk.

For the India Underserved strategy:

• With around 30% of the data in Q3 and Q1, the strategy seems to be more balanced or conservative compared to the SmallCap strategy. The lower presence in Q1 indicates less frequent outperformance relative to the benchmark during high-risk periods. Meanwhile, the data in Q3 points to underperformance during periods of lower market volatility.
• The significantly lower combined percentage in these quadrants suggests that the India Underserved manager may employ a more risk-aware or risk-averse strategy that avoids the extremes of high risk-high return and low risk-low return scenarios.

Overall, the SmallCap strategy manager appears to be more aggressive, pursuing higher returns but accepting higher volatility. In contrast, the India Underserved manager seems to be more conservative, possibly focusing on risk management and capital preservation, which might result in fewer periods of extreme performance (both positive and negative) compared to the SmallCap strategy. Investors might choose between these strategies based on their risk appetite and investment goals, with the SmallCap appealing to those willing to accept higher volatility for potentially greater returns, and the India Underserved to those prioritizing a more measured approach to risk and return.

AlphaBlock: Now, if there was a decile scoring system, with best idealized case without more than 50% data in each quadrant, what score on a scale of 1 to 10, 10 being best and 1 being worst, would you give India Underserved and Small Cap?

Alphie: In a decile scoring system where the best-case scenario is not having more than 50% of the data in any single quadrant (implying a well-distributed performance across different market conditions), we would score the strategies based on how closely they adhere to this ideal distribution.

For the India Underserved strategy:

• Given that it has a balanced distribution with less than 30% in Q3 and Q4 and around 20% in Q1 and Q2, it suggests a more even distribution across all quadrants, which is closer to the idealized case. However, it’s not perfectly balanced (i.e., not exactly 25% in each quadrant), which means it shouldn’t score a perfect 10.
• Since the distribution is conservative and avoids extremes, a score of around 7 or 8 might be appropriate, reflecting a balanced but not perfectly ideal distribution.

For the Small Cap strategy:

• The distribution is more aggressive, with more than 90% in Q3 and Q1 combined. This indicates a concentration in both high-risk, high-return scenarios, and low-risk, low-return scenarios, which deviates from the idealized case.
• Given this skew towards extremes, a score of around 3 or 4 might be suitable, reflecting a more polarized performance that departs significantly from the ideal balanced distribution.

These scores are subjective and would depend on the exact criteria set by the decile scoring system, but they provide a general sense of how each strategy aligns with the stated ideal distribution.

Minerva India Underserved Scorecard on Github

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Please reach out to Piyush Sharma, Arpit Khunteta or Sourav Dutta to request more detailed valuation measures.