Dil hai to phir dard hoga, Dard hai to dil bhi hoga. Mausam guzarte rehte hai – ‘Dil Se’
The above extract from a famous bollywood song were Ajay Kaul’s favorite. It showed the dual nature of life. If you have a heart, you will experience pain. And to experience pain one had to have a heart is the rough translation of the lines.
This dual nature was also present in markets. Fama’s Efficient Market Hypothesis needed two conditions to be true – active investors and enough profit for active investors as a whole to keep the market efficient. Without active investors, markets would not be efficient.
2018 – No pain no premium
2017 was a superlative year in terms of performance. But pain was around the corner. Any fund manager would gladly sacrifice few percentage points in a very good year and keep it handy for a bad year. But that is not how markets work.
2018 was that kind of year where a fund manager would have wanted to dip in his reserves. Mid and Smallcaps fell. It was also the year when SEBI made some significant changes in Mutual Fund regulations.
- Clearly defined market cap ranks for Large, Mid and Smallcap companies. Also limited the amount of funds a large cap fund could deploy in mid and small cap companies.
- Made it compulsory for AMCs to benchmark funds with a Total Returns Index and not Price Returns index. This ate up about 1-1.5% of alpha that they were showing (not earning)
- Told AMCs that they could only have one fund in every category. This meant only one largecap, midcap, multicap fund etc. for all AMCs. Now no more multiple funds in a single category and have them compete against each other. Keep the winner and kill the rest.
Mid and Smallcaps fell across the board. MIDAS also gave back a lot of it’s returns. AK said a silent prayer at the end of the year.
It was election year again. Time for the bugles to sound. The consensus view was that Modi would be back but with not that kind of majority and victory that he had got for his party in 2014.
MIDAS-R went to 60% cash in March 2019, but very quickly deployed the rest by April. It was a risky move before the elections, but if elections had not been factored in backtests, then there was no reason to do it now. AK white knuckled and followed the system.
May 2019 proved that the Modi trend was not just well and alive, it had strengthened. Even though they had lost a few state elections, the twain had diverged. Voters were behaving differently in state and central elections. Modi was back. And it was the biggest victory that the country had seen since the 1980s. The man who had once been on the no-visa list of US, now had US president calling him his good friend. The crowds at Howdy Modi event in Texas, clearly overawed Trump. And Modi promptly invited him to India. And delivered exactly what the US President had in mind.
Markets sold off post election but picked up again by September 2019 to end the year strong.
As he closed the year AK wondered what the year 2020 would bring with it. Volatility was at record lows. A US election year was coming up. US-China tensions were ebbing and flowing. What would 2020 look like ?