Insider trading, nanocaps and happy hours: Smallcase managers try offbeat ideas

Smallcases are simply baskets of stocks or exchange-traded funds (ETFs) created to provide one investment idea.

Back in 2016, when Smallcase was launched, it used its own research arm to design and build baskets of stocks and ETFs, but today many research analysts and investment advisors are offering investment ideas through small cases. are doing. There are over 150 smallcase managers that have evolved over the years.

From microcaps to insider buying to post-Covid-19 revenge consumption, here’s a look at some interesting investment ideas created by smallcase managers.

Searching for ideas among microcap stocks

Hyderabad-based Abhishek Banerjee along with co-founder Dr. Prachi Deuskar, who is a professor at the Indian School of Business (ISB), founded Lotusdue Wealth in May 2019.

Banerjee has in the past served as a portfolio manager for the $180 billion Netherlands Sovereign Wealth Fund MN and worked at Franklin Templeton in their hedge fund business, managing their multi-asset long-short hedge fund strategies, quantitative investment strategy, Fund selection. Banerjee also holds a degree in Computer Science Engineering. He is an MBA from Rotterdam School of Management and Duke University, USA.

Listed Venture Capital and Nanocap Champs are two microcap focused strategies launched by LotusDew Wealth in 2019 and 2021 respectively. Microcap stocks are stocks that are smaller than small cap stocks in terms of market capitalization.

Banerjee, with the help of his programming and coding experience, has built AI-algorithms that run through the stock market universe and aim to identify microcap companies with superior corporate governance and management quality.

Their algorithms map board members of microcap companies with other listed companies to check if the same board members are part of these companies. In addition, the algorithm tries to identify the schools they passed out, their batchmates, “to understand the people associated with this person and the companies associated with this person,” says Banerjee.

“Typically, people with high credibility will only associate with people who come with high credibility. By exploring these relationships, we see that these perceived high-credibility people on the boards of large companies are more likely to be on the boards of small companies.” This first step of screening narrows down our search substantially. From a universe of 2,500 stocks to about 100,” says Banerjee.

It follows another set of hardened filters. LotusDew uses natural language processing (NLP) to examine the history of tax litigation through a company’s annual report. AI is used to analyze the top-line trajectory, stability of profit margins, lump-sum items on the balance-sheet, tax payment history, etc. “We’re trying to avoid companies that seem to be gaming the system,” he says.

There are other checks as well. “We check whether most of the board members have the same surname. If so, it could be a sign that the independence of the board has been compromised. How many geographic locations are they operating in? The more locations the company operates in, the harder it is to thwart the system,” he explains.

Listed Venture Capital has given 51% compound annual return over the last three years. Overall it is 237%. Nanocap Champs has delivered 27% returns (in absolute terms) since its launch on September 27, 2021.

looking at insider trades to buy cues

Top 10 Insider Trading is a short affair of tracking the buying trends of promoters and looking for buying opportunities.

Created by Mumbai-based Nooresh Merani, who has over 15 years of experience in the markets as a technical analyst, trader and later investor, Smallcase looks for promoter buyouts of large amounts in a company and then invests in such companies .

“Usually when there is a promoter buyout, that money stays there. This is because if the promoter initiates selling, it is perceived very negatively by the markets. So, in most cases, it is a one-way street,” says Merani.

Smallcase can only buy companies where there has been insider trading activity. So, this in itself narrows down the investable universe to this small matter.

Merani also checks whether insider buying and selling is just an inter-promoter transfer. “So, we look for odd-share size. Typically, when there are multiple entries of shares in the same quantity, it’s just a transfer of shares from one promoter to another,” he says.

Some of the names that are part of Merani’s portfolio are Maharashtra Seamless, MAN Infra and Mazda, which have seen strong promoter buying.

Merani and his team study insider trading data that is disclosed on the Bombay Stock Exchange (BSE) at the end of every week. “Though we do not churn our portfolio much, maybe once a quarter we replace one or two names in the top-10 portfolio,” he says.

This smallcase focuses on small cap companies. Merani says he is well aware of the risks of corporate governance that come with small caps, but now he has good experience picking out the bad apples.

The Top 10 Insider Trading Smallcase has given returns of 43% (in absolute terms) since their launch in August 2021.

Finding the Beneficiaries of the Post-Covid-19 World

Dick Hosey Modi from Mumbai has over 30 years of experience in capital markets. Over the first 25 years, he has worked on the institutional broking side at various global investment banks (JP Morgan, Morgan Stanley and Deutsche), advising global wealth managers on their Indian equity investments.

In 2016, he founded Ethical Advisors as a Wealth Management Advisory. Ethical Advisors began 2020 with five portfolio smallcase offerings and now offers 20 theme-based smallcase offerings.

“We started our short journey after Covid-19 broke out. We sensed some macro thematic opportunities at that time as valuations across multiple sectors took a hit and launched metal, financial and auto themed smallcases around that time,” says Modi.

Happy Hours: Cheers to Good Times was launched in 2021 when the first wave of COVID-19 peaked. Modi says it was launched to capitalize on demand coupled with latent cash with investors piling up due to the Covid-19 lockdown.

“When it comes to travel, hospitality, leisure, there was a lot of demand. And we foresaw a greater tendency for revenge in the post-Covid-19 world. We first took a cue from this trend in the US economy,” Modi explains.

Ethics consultants follow fundamental analysis. “First and foremost, we identify the topic we want to focus on.”

Then the universe is reduced to 20-25 names. Within this universe, companies are analyzed on their balance-sheet strength, dividend track-record, earnings trajectory. Modi uses his experience as an investment banker to scrutinize companies that may have promoter-led issues or weak management, and the universe has narrowed further.

Since its inception in June, 2021, Smallcase has given returns of 55% in absolute terms.

tracking insurance

Smallcase had its own product team that developed several Smallcase strategies since it was founded in 2016.

In the initial days, the team at Smallcase started with sector and theme-focused Smallcase and that’s when the insurance tracker was launched. “We realized that in those days there were not many exchange-traded funds (ETFs) that tracked sectors and even sector indexes were market cap-weighted. Hence, we offered investors low-cost options. Smallcase, with a portfolio built to better represent the sector,” says Naveen Kaushik Rajan, Assistant Vice President, Investment Products, Windmill Capital.

In 2020, Smallcase’s product team was spun off into a separate entity – Windmill Capital.

The process of investing begins by looking at all the insurance companies. Companies are reviewed on the windmill’s Internal Quality Score, which is like a hygiene test that measures the effectiveness of a company’s management and the variability of earnings. “We also check for things like promoter pledge and adequate liquidity in the stock,” says Rajan.

Once all this is done, the investable universe is created and then they are analyzed to assess the fundamental strengths and weaknesses of the companies. Windmill Capital has a research team of six analysts and 53 across a wide range of smallcase strategies.

The insurance tracker has yet to deliver as it is down 16% over a three-year period. It has given just 1% return since inception.

What should investors keep in mind?

While smallcases offer a diversified portfolio, it may not be as diversified as a mutual fund. A more concentrated portfolio can potentially offer higher returns, but can also see sharp declines if market conditions are not favourable.

Smallcases are rebalanced when the manager feels that a stock needs to be included or excluded from its portfolio. An alert is sent to the investor and it is up to the investor to decide whether to rebalance as per the manager’s decision.

When the rebalancing involves a sale, it may attract capital gains taxes.

Smallcase comes with a subscription fee. The fees charged are not taken into account in the returns shown on the Smallcase website.