Nifty 50 has rebounded 83.7% from March lows majorly supported by massive surge in foreign fund inflows (₹1.6 lakh crore in 2020). From an earnings perspective, Q2FY21 earnings surprised positively after years of disappointment, which in turn, has led to upward revision in forward earnings estimate for FY22 & FY23.
Despite the revision, the market valuation still seems to be stretched and shall require consistent support in terms of earnings growth. As we begin the new year, various factors such as the vaccines, liquidity, government policies, inflation and earnings growth shall shape the market going forward.
At Fintso, we had developed a Tactical Intervention Approach (TIA) using machine learning (ML) which gives us the signal whether we should go overweight, underweight, or neutral on equities.
For Q1 2021, the signal given by our model, based on the multi-factor inputs, is to go Tactically Underweight for the coming quarter.
The model answers two questions at the beginning of each quarter:
Q1. Will the market go up significantly in the next two quarters?
Q2. Will the market have a big drawdown in the coming months?
The answer to these were “No” and “Yes” respectively for the coming quarter. Based on this, the Model portfolio has been re-aligned to reduce equity exposure by 5%.
Brief recap on our Machine Learning algorithm
We feed in 15-18 distinct input factors to our machine, which are broadly classified into categories such as macro (market capitalization to GDP), valuation (P/E, P/B, etc.), momentum indicators, trends, volatility, liquidity and so on. Besides their absolute value, we take the first derivative (implying % change and direction of the change) for some of the parameters.
The model identifies new patterns in the data set and produces market predictions without following instructions coded by humans. Thereby, removing all biases and preconceived notions developed by humans on the markets.
For full details on the program, please read our previous post here.
The story so far
The past tactical calls on the market by our model were:
Based on the above signals, our Model Portfolio (for aggressive profile) with Tactical Intervention generated an alpha of 4.5% (absolute) over Model Portfolio without Tactical Intervention (since March 2019)
To recap our journey:
Stage 1: Create Model Portfolios (strategic allocation) for different risk appetites using Mean Variance optimisation on 6 different asset classes including Gold and Foreign investments and thereby, strengthen the businesses and empower the IFA advisory support services.
Click here to know more about our Model portfolios.
Stage 2: Using our own algorithms to make Fund Selection for Equity Mutual Funds, which not only covers Quantitative measurements of Returns/Risk but also covers skill of the fund manager and his ability to take sectoral calls. This will prove to be a great boon for the mutual fund distributors as well.
Click here to know more about our Ranking process.
Stage 3: Use ML to give active Tactical calls to enhance returns and lower risks
Fintso is an open architecture fintech ecosystem that brings together financial advisors, financial product manufacturers and vertical aggregators. With the aim of democratizing wealth management with the best wealth management software through existing unorganized players, Fintso provides a white labelled platform-as-a-service for financial advisors to operate their business of serving their investors and grow their brand and identity. The platform provides multi-product transaction execution capabilities along with proprietary research and advisory to financial advisors. Acting as a demand aggregator for asset managers and a means to become omni-channel and connect to a physical distribution network for online-only vertical fintech aggregators, Fintso is enabling them to reach wider audiences.
About the authors
Co-Founder and CEO
George has 22 years of experience in the Wealth Management space. As CEO, for Avendus Wealth Management, George was responsible for a 110-member team spread across 7 locations in India that managed clients’ assets worth $4 billion with a CAGR of over 60% over the last 5 years. His rich experience in the financial domain renders him an expert in financial planning, product innovation, and advisory solutions. His cooler side and his need for speed fuel his passion for super-sports biking, cycling and kickboxing beside being an expert and prolific scuba diver.
AVP – Products, Research & Advisory
Over the past 8-years in the Indian financial markets, Kumar has developed an intrinsic understanding of different asset classes and built an excellent product knowledge by working for top wealth management firms like Motilal Oswal and IIFL Wealth. He was a core member of the team that created the processes that were used for fund selection in both these previous organizations and is now working to bring the same level of research and advisory to financial advisors.
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