I'll Select These TWO Mutual Funds for my Lifetime Investing Portfolio

Summary

This video explores the optimal two-fund portfolio, focusing on a unique combination of momentum and value funds. The speaker explains market anomalies and the contrasting investor profiles for each strategy. Emphasizing their negative correlation, the video presents data showing the potential of combining these funds for enhanced returns and risk management. Various investment techniques, including rebalancing and switching methods, are discussed to optimize portfolio performance, concluding that a balanced approach between momentum and value can significantly outperform traditional indices.

Takeaways

• 🤔 The speaker was asked to recommend two funds for a portfolio, which led to a challenging exploration of various fund types and investment styles.
• 📊 After extensive research, the speaker concluded that a momentum fund and a value fund would be the best two-fund combination for a portfolio.
• 🏏 Momentum investing is based on the idea that investments that have performed well will continue to do so, similar to a player's form in sports.
• 💰 Value investing focuses on identifying undervalued assets, akin to the Rajasthan Royals' strategy in the IPL, where they picked underpriced but high-performing players.
• 🔄 Both momentum and value strategies are based on market anomalies and investor reactions, and they don't always work, but they can be negatively correlated.
• 📈 A simple 50-50 portfolio allocation between a momentum and value index has shown strong performance over the past 17 years, outperforming popular indices.
• 🔄 The concept of rebalancing was introduced, with annual rebalancing slightly improving returns, although the tax implications were noted for more frequent rebalancing.
• 📊 A 'momentum-based switch method' was proposed, which involves switching the entire portfolio between momentum and value based on market movements, resulting in higher returns.
• 📉 An alternative 'PE ratio based switching method' was less successful, with a lower CAGR compared to the momentum-based switch, indicating the complexity of market timing.
• 📝 The speaker encourages further exploration and experimentation with different combinations of momentum and value, and the inclusion of other variables like PE ratio, volume, and moving averages.
• 👍 The speaker believes that a combination of momentum and value is well-suited for a two-fund portfolio due to their individual performance and weak correlation, offering asset allocation benefits and potential for improved performance without increased volatility.

Q & A

What was the interesting question posed during the webinar?

The question was about which two funds, from a selection of actively managed mutual funds, index funds, ETFs, or a combination of these, should be included in a portfolio if one could only have two.

Why did the speaker find the question challenging?

The speaker found the question challenging because even within the category of equities, there are multiple categories, different capitalizations, and investing styles, which complicates the decision-making process.

What was the speaker's initial approach to answering the question?

The speaker initially did not have an immediate answer and asked for some time to research different parameters such as returns, volatility, drawdowns, and existing research.

Which two types of funds did the speaker ultimately recommend for a 2-fund portfolio?

The speaker recommended a momentum fund and a value fund as the two types of funds for a 2-fund portfolio.

What is the concept of momentum in investing as explained in the script?

Momentum in investing refers to the tendency of investments that have performed well to continue performing well for some more time, and similarly, those that have not done well to continue performing poorly in the short term.

How does the value investing style differ from the momentum style?

Value investing focuses on identifying investments that are currently priced lower than their true worth, with a focus on research and long-term investment. In contrast, momentum investing looks for short-term price movements and trends.

Why are momentum and value strategies considered to be negatively correlated?

Momentum and value strategies are considered negatively correlated because they are based on different market behaviors and investor reactions. Momentum follows the trend of investments that are already performing well, while value seeks undervalued investments that may not be currently popular.

What is the significance of negative correlation in a 2-fund portfolio?

Negative correlation in a 2-fund portfolio can help achieve a balance between returns and risk management, as the funds may perform well in different market conditions, thus potentially reducing overall portfolio volatility.

What was the result of the study comparing the performance of a momentum index and a value index?

The study found that over a 17-year period, both the momentum index and the value index performed well independently, with the momentum strategy leading in terms of lumpsum and SIP performance as well as volatility.

What is the 'momentum based switch method' mentioned in the script?

The 'momentum based switch method' is a strategy where the investor switches their investment between a momentum index and a value index based on the performance of the Nifty 200 Momentum 30 index. If the index goes up by 20% over a three-month period, the investor switches to the momentum strategy, and vice versa for a 20% drop.

What was the performance of the 'momentum based switch method' over a 17-year period?

The 'momentum based switch method' resulted in a 17-year Compound Annual Growth Rate (CAGR) of 22.2%, which was 6% higher than the 50-50 combination method without switching.

What alternative approach did the speaker try using the PE ratio for switching between momentum and value strategies?

The speaker tried a PE ratio based switching method where the investor would switch to a momentum strategy when the Nifty 50 PE ratio goes below 18 and switch to a value strategy when the ratio crosses 24.

What was the performance of the PE ratio based switching method over a 17-year period?

The PE ratio based switching method resulted in a 17-year CAGR of 15.1%, which, while respectable, did not perform as well as the momentum based switch method.

What is the final recommendation for a 2-fund portfolio based on the script?

The final recommendation is to have a combination of a momentum and a value fund in a 2-fund portfolio due to their high performance in isolation, weak correlation, and the potential to improve portfolio performance without adding to volatility.