Systematically Traded Portfolio
STraP
The wish of every investor is to buy at a market low and sell at a market high. However, investors worldwide have recognized the fact that this is easier said than done. To do this, one needs the trait of equanimity, which is very difficult to attain. Equanimity means evenness of mind, which does not easily get elated or depressed.
In the world of investments, equanimity can pay rich dividends as it allows investors to overcome emotions of fear and greed. Fear prevents us from buying at a market low when markets are depressed and greed prevents us from selling at a market high when markets are exuberant. If one can detach investment decisions from these emotions and follow a rigorously tested quantitative discipline, equanimity in investments can be achieved. Such models are used worldwide by sophisticated and large investors.
Nifty STraP is one such quantitative model developed by Benchmark Asset Management Company Private Limited now Goldman Sachs Asset Management (India) Private Limited. It has been in use since February 2003.
In a nutshell, Nifty STraP implements the age-old principle of sell at a high and buy at a low, disciplined by a quantitative model.
Simulation Results
The success of any quantitative investment model depends on the rigorous simulation of various situations and circumstances.
Nifty STraP has been tested since January 1, 1992 till May 29, 2009. During this period, the Nifty STraP portfolio (with initial investment of Rs. 1,00,000/-) has grown to Rs. 6,30,171/- returning 11.20% per annum while a similar amount invested in the Nifty Index has grown to Rs. 6,49,548/- returning 11.40% per annum.
As can be seen from the chart above, Nifty STraP’s performance is very close to the Nifty Index. Nifty STraP protects the portfolio on the downside rather than trying to outperform it.
Assumptions
- Transaction cost : 0.50%
- Return on Cash : 6% per annum
- Nifty returns are returns of Nifty Price Index
- Returns are before management fees
Asset allocation on autopilot
The chart demonstrates how the model reduces equity exposure when the market goes up and increases equity exposure when the market goes down.
Nifty STraP, due to its dynamic nature can serve as an ideal tool for tactical asset allocation
Downside Protection
| Period |
No. of Periods Studied |
No. of Negative Periods | Period of STraP out performance (%) |
|
| STraP | S&P CNX Nifty | |||
| 1 Year | 227 | 52 | 89 | 50% |
| 3 Years | 203 | 12 | 48 | 57% |
| 5 Years | 179 | 0 | 21 | 51% |
The table illustrates how Nifty STraP provides greater downside protection in a falling market. For this, we have considered a number of rolling periods i.e. every month one rolling period will commence.
The results show that Nifty STraP has less periods of negative returns and thus provides superior protection in a downward market. It outperforms Nifty in each and every negative period without exception.
Mean Returns
| Period |
Max. Return | Mean Return | Min. Returns | |||
| STraP | S&P CNX Nifty | STraP | S&P CNX Nifty | STraP | S&P CNX Nifty | |
| 1 Year | 53% | 92% | 10% | 15% | -52% | -52% |
| 3 Years | 23% | 56% | 9% | 11% | -2% | -14% |
| 5 Years | 17% | 44% | 9% | 12% | 2% | -6% |
The table depicts rolling returns generated for Nifty STraP compared to Nifty Index.
As can be seen from the table, for 1 year rolling mean returns, though Nifty STraP has marginally underperformed the Nifty in a bull market, it has provided protection during a bear market.
Lower Risk
| Period |
Risk (Std. Dev.) | |
| STraP | S&P CNX Nifty | |
| 1 Year | 13.45% | 32.75% |
| 3 Year | 4.92% | 15.22% |
| 5 Year | 3.22% | 11.57% |
The advantage of STraP from the risk angle where risk is calculated using standard deviation.
The table shows that the standard deviation for any period is less than half for Nifty STraP as compared to the Nifty Index. This also means that the timing of entry into Nifty STraP has a lesser effect on performance as compared to the time of investment into Nifty Index.
Risk Factors
- Securities investments are subject to market risks and there can be no assurance or guarantee that the objective of any of the PMS Scheme will be achieved.
- As with any investment in securities, the Net Asset Value (NAV) of the portfolio under the Portfolio Management Scheme can go up or down depending on the factors and forces affecting the capital market.
- Past performance of the Portfolio Manager does not indicate the future performance of the same scheme in future or any other scheme(s) of the Portfolio Manager.
- Straps is only the name of the Portfolio Management Scheme and does not in any manner indicate either the quality of the scheme or its future prospects and returns. Client is therefore urged to study the Disclosure Document carefully and consult their Investment Advisor, if any, before they enter into Portfolio Management Agreement.
- The Portfolio Manager is not responsible or liable for any loss or shortfall resulting from the operation of the Scheme.
- Investors in the Scheme are not being offered any guaranteed or assured returns.
- Because of halt of trading in market the portfolio may not be able to achieve the stated objective.