Smart beta - value continues to lose 1HCY2014 gains as sentiments get favored :: Kotak Sec, link

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Smart beta—value continues to lose 1HCY14 gains as sentiments get favored.
We have seen contrasting investment styles prevalent in 2HCY14 as compared to
1HCY14. Sentiment remains the only factor outperforming the CNX Nifty 50 in
November. The optimized CNX Nifty 50 portfolio gained 1.9% over the month, lagging
the benchmark by 1.3%. For CYTD14, the optimized portfolio remains ahead of the
CNX Nifty 50 by 3.5% despite its recent underperformance.

eXtractor, KIE’s proprietary data-analytics tool 

KIE’s proprietary data-analytics tool, eXtractor, mines a universe of Indian stocks based on nine 

factors: value, relative value, growth, profitability, momentum, leverage, size, sentiment and our 

proprietary factor iQ, or investment quotient. The data-mining is comprehensive in nature with 

iQ deriving higher concepts from basic financial parameters by unifying various traditional 

investment parameters under a single factor. This bridges the gap between data and inference. 

eXtractor is part of our Quantools offerings and is available on our website 

(http://kie.kotak.com). Here, clients can screen and test various investment styles, using their 

own parameters for universe, investment horizons, churn periods, portfolio size and more. 

eXtracted Whizdom—NMDC, CAIR, MPHL, SUNTV and ONGC do well on both frameworks 

With markets hitting record highs in November, we consolidate results from the eXtractor 

framework along with the essential elements of the DCF-based decision-support tool 

(Whizdom) to identify value investments. We customize the eXtractor framework to measure 

stocks solely based on value and relative value. To identify deep value using the DCF 

framework, we identify stocks where the enterprise value based on the reported free cash flows 

(NG14) is more than half the current market price (see Exhibit 4). We also calculate the implied 

growth for the same. NMDC, CAIR, MPHL, SUNTV and ONGC do well on both the frameworks. 

The enterprise value of NMDC based on reported free cash flows is equivalent to 76% of the 

market price. Markets seem to be discounting decline in free cash flows for companies like 

EROS and CAIR. 

Smart beta—1HCY14 gains eroding due to recent underperformance 

While value investments outperformed in 1HCY14 as cyclical stocks re-rated and outperformed 

defensive bets, the past few months have seen the growth and sentiment exposure paying 

dividend on the backdrop of rich valuations, record-high market levels and lower crude price 

(see Exhibit 5). Exhibit 6 highlights the recommended factor exposure to various investment 

styles considered by our optimized CNX Nifty portfolio. As can be seen, the portfolio focusses 

on value investments with positive sentiments. BOB and AXSB were the biggest gainers in the 

portfolio while NMDC was the biggest loser (see Exhibits 7 and 8). 

Optimized CNX Nifty portfolio for December—exposure to financials drops

The portfolio outperformance of 1HCY14 has eroded due to the recent underperformance 

(see Exhibit 9). That being said, the portfolio continues to lead the benchmark by 3.5% for 

CYTD14. On a sector-wise basis, allocations have moved away from financials in December 

(see Exhibit 10). IIB and ICICI saw the biggest reductions in weight while CAIR and SUNP 

were the biggest additions to the portfolio (see Exhibit 11). The optimized CNX Nifty 50 

portfolio for December is showcased in Exhibit 12. AXSB, HCLT and NMDC are the biggest 

constituents in the portfolio.

LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily03122014ac.pdf