While Chinese equities usually get most of the headlines among emerging markets, India has been quietly making the case for being the best performing large emerging market globally in the last year. India’s strong performance has coincided, through April 30th, with the one-year anniversary of the MarketGrader India-All Cap Growth Leaders Index (MGINGROW) as the benchmark for the VanEck India Growth Leaders ETF (GLIN). Investors tracking the Index (or the ETF), have fully participated in the market’s rise in the last year and then some, earning a 56.5% USD return (including dividends), compared to 50.4% had they followed the MSCI India Index. Tracking Indian equities, however, has been anything but straightforward in the past, with investors often choosing to give up returns by shunning the country’s small caps, in exchange for the lower volatility offered by the country’s large caps. The MarketGrader India All-Cap Growth Leaders Index now gives investors a third option by focusing on company selection, regardless of size, while delivering better risk-adjusted returns in the long run.
India: Large, Small, or GARP?
Indian small caps have beaten their large cap brethren handily in the last year, with the MSCI India Small Cap Index up 90% through April 30th (price-only, USD returns) compared to a 49.4% return for MSCI India, a large cap benchmark. Volatility for both indexes was almost identical, at 20.9% for the small caps index and 19.4% for the large cap index[1]. This means investors earned 4.3 units of return for every unit of risk tracking the small cap index compared to 2.5 units of return per unit of risk tracking the large cap benchmark. The return for MGINGROW was closer to that of the large cap index, with the Index up 54.5% in the last year, also based on USD price returns. It did so, though, with lower volatility than the MSCI Index, based on its 15.5% annualized standard deviation. This translated into 3.5 units of return for every unit of risk, squarely in the middle of the small and large cap indexes, without having to pick either size segment. The Index’s one-year results are shown in Figure 1.
Figure 1. One-Year Returns for MGINGROW vs. Large and Small Cap India Benchmarks
| MSCI India | MSCI India Small Cap | MarketGrader India All-Cap Growth Leaders | |
| One-Year Ending April 2021 | |||
| Cumulative Return | 49.4% | 90.0% | 54.5% |
| Annualized Std Dev | 19.4% | 20.9% | 15.5% |
| Return / Std Dev | 2.55 | 4.32 | 3.52 |
When looking further back, the choice between small and large cap stocks in India has not been as clear as it was last year. An investor tracking the small cap benchmark in the last three years would have earned a price return of just 1.6% per year, while withstanding annualized volatility of 32.4%, making the risk/reward tradeoff almost inexistent. The wiser choice would have been to track the country’s large caps, which generated an annualized price return of 5.9% with much less, but still elevated, annualized volatility of 24.4%. MGINGROW earned only 3% per year but with lower volatility than either of the size indexes. While it failed to beat the large cap benchmark, it would have allowed investors to allocate to the entire opportunity set in that country (without excluding small caps) and earn at least half of the market’s return without having to place a size bet. The value of MarketGrader’s all-cap methodology, combined with its GARP-based selection shines through clearly over longer periods as may be seen in Figure 2. In the last five and 10 years the Index delivered much better risk-adjusted returns than both size benchmarks by allocating across the entire size spectrum. And since inception[1] the Index would have delivered 0.34 units of return for every unit of risk per year, more than twice the risk-adjusted returns of either large or small caps. MGINGROW not only provides investors with a passive exposure to India’s market (beta) returns, but it allows them to do so without forgoing the opportunity to earn some of the higher returns that are often available from the market’s small cap segment, all without having to place explicit size bets or take outsized risk.
Figure 2. Summary of Returns for MGINGROW vs. Large and Small Cap India Benchmarks
| MSCI India | MSCI India Small Cap | MarketGrader India All-Cap Growth Leaders | |
| 3 Years Ending April 2021 | |||
| Cumulative Return | 18.9% | 4.9% | 9.1% |
| Annualized Return | 5.9% | 1.6% | 3.0% |
| Annualized Std Dev | 24.4% | 32.4% | 22.8% |
| Return / Std Dev | 0.24 | 0.05 | 0.13 |
| 5 Years Ending April 2021 | |||
| Cumulative Return | 56.9% | 71.4% | 56.6% |
| Annualized Return | 9.4% | 11.4% | 9.4% |
| Annualized Std Dev | 20.9% | 27.4% | 19.6% |
| Return / Std Dev | 0.45 | 0.42 | 0.48 |
| 10 Years Ending April 2021 | |||
| Cumulative Return | 33.9% | 57.7% | 86.8% |
| Annualized Return | 3.0% | 4.7% | 6.4% |
| Annualized Std Dev | 22.4% | 28.8% | 21.4% |
| Return / Std Dev | 0.13 | 0.16 | 0.30 |
| Since Inception Ending April 2021 | |||
| Cumulative Return | 48.8% | 55.3% | 113.1% |
| Annualized Return | 3.8% | 4.2% | 7.4% |
| Annualized Std Dev | 23.1% | 28.9% | 21.8% |
| Return / Std Dev | 0.16 | 0.15 | 0.34 |
March Reconstitution and Rebalance
The MarketGrader India All-Cap Growth Leaders Index (MGINGROW) completed its most recent semi-annual reconstitution and rebalance on Friday, March 19th, replacing 39 of the constituents from the September 2020 class, which represented a constituent-turnover of 49%. This was well above its historical average turnover of 38% dating to its base date in December 2007. The last time it achieved a near-average turnover was during the March 2020 rebalance, when it replaced 39% of its constituents.
Only five of the 41 companies that were retained from September had a negative price return in the last six months, while the average return for the entire group between September and March was 42.7%. The fact that so many companies with such strong returns were re-selected to the Index goes to show that MarketGrader’s GARP selection methodology does not simply look for cheap companies; it looks for growth companies—and is willing to hold them for long periods of time—provided their valuation is reasonable, and not for rock-bottom cheap stocks, which often go nowhere. This is also evident in the fact that the 39 companies that the Index replaced in March had an average price return of 5.3%. In fact, 21 out of the 39 saw their shares decline during the period, which means that despite becoming cheaper, they failed to make the cut in the MarketGrader ranking that determines the Index selection.
Sector Changes
The most interesting observation from a sector perspective following the Index’s latest rebalance is how different the sector makeup looks relative to MGINGROW’s historical sector allocations. This suggests that the Covid pandemic and the resulting lockdowns and global economic recession have created significant dislocations across many Indian industries, which is likely to continue for some time as the country battles the worst of its Covid-19 surges to date.
From the Index’s bottom-up selection perspective, the sectors faring the worst are the two consumer-based sectors: Consumer Discretionary and Consumer Staples. While Consumer Discretionary gained a net five names from zero in the September selection, this leaves it, at 6.3% of all constituents, almost four points short of its historical average of 10%. Consumer Staples fared even worse, losing all six companies from the September class and gaining none, whereas historically it has accounted for 8% of the Index’s constituents. Combined, both sectors are almost 12 points below their historical allocation. The other underperformer worth mentioning is Financials, which now accounts for 10% of all Index constituents, below its historical 14% representation.
Three sectors stand out as out-performers, at least from a selection count perspective. The most impressive is the Materials sector, which although gaining only a net two names from September, now has 18 companies in the Index, or 22.5% of all constituents. This is almost 10 points higher than its historical average of 13%. Most of the companies in the sector, it should be said, are in various Chemicals sub-industries (11 out of 18). An outsized exposure to the sector might help the Index withstand some of the rising inflationary expectations that have crept into global markets lately, or at least participate in some of the upside of any inflationary global trade.
The next standout is Health Care, which did not gain any names from September but nevertheless maintains a total of 18 companies, or 22.5% of the Index, well ahead of its historical average of 16%. Following the collapse of India’s health care system under the weight of Covid, and the social unrest this has spawned, we wouldn’t be surprised to see this sector become a major beneficiary of long-term government spending, which could mean an elevated allocation to the sector within MGINGROW for years to come.
Lastly, despite losing a net two names in March, Technology is still the third largest sector, by constituent count, in MGINGROW. Its 15 constituents account for almost 19% of the Index, about five points higher than its historical average of 14%. Figure 3 shows all sector changes following the most recent rebalance as well as each sector’s historical allocation average.
Figure 3. Changes in Company Selections by Sector for MGINGROW during its March 2021 Rebalance
| September 2020 | March 2021 | Net Gain or Loss | Historical Average | ||||
| Sector | Companies | % | Companies | % | Cos. | % | |
| Cons. Discretionary | 0 | 0% | 5 | 6.3% | +5 | 8 | 10% |
| Consumer Staples | 6 | 7.5% | 0 | 0% | -6 | 7 | 8% |
| Energy | 2 | 2.5% | 1 | 1.3% | -1 | 2 | 3% |
| Financials | 11 | 13.8% | 8 | 10% | -3 | 11 | 14% |
| Health Care | 18 | 22.5% | 18 | 22.5% | 0 | 13 | 16% |
| Industrials | 8 | 10% | 14 | 17.5% | +6 | 15 | 19% |
| Materials | 16 | 20% | 18 | 22.5% | +2 | 10 | 13% |
| Technology | 17 | 21.3% | 15 | 18.8% | -2 | 11 | 14% |
| Telecommunications | 1 | 1.3% | 1 | 1.3% | 0 | 1 | 2% |
| Utilities | 1 | 1.3% | 0 | 0% | -1 | 1 | 2% |
Company Highlights
Six companies left MGINGROW in March after having been members for at least two years: Tech Mahindra (five years), L&T Technology Services (three years), Coforge Limited (three years), Honeywell Automation India (two years), WNS Holdings (two years), and Nestle India (two years). On the other hand, 19 companies were selected for the very first time, including eight Industrials, six from the Materials sector, four Technology companies, and one Health Care company. Meanwhile, nine companies returned to the Index after an absence of at least two years. Lastly, we would like to highlight MGINGROW’s list of “Growth Compounders.” These are companies that have been perennial members of the Index as they seem to get selected repeatedly regardless of underlying economic and market conditions. These companies score among the best in MarketGrader’s coverage regularly and form the backbone of the Index. We usually like to highlight the top 30, based on the number of times they have been selected to the Index. The list appears in Figure 4.
Figure 4. The 30 Companies with the Most Historical Selections to MGINGROW
| Symbol | Company Name | Selections |
| 532540.IN | Tata Consultancy Services Limited | 27 |
| 507685.IN | Wipro Limited | 26 |
| 526299.IN | Mphasis Limited | 25 |
| 532281.IN | HCL Technologies Limited | 24 |
| 532819.IN | Mindtree Limited | 23 |
| 532488.IN | Divi’s Laboratories Limited | 21 |
| 524804.IN | Aurobindo Pharma Ltd | 19 |
| 500124.IN | Dr. Reddy’s Laboratories Ltd. | 19 |
| 500182.IN | Hero Motocorp Limited | 18 |
| 532296.IN | Glenmark Pharmaceuticals Limited | 15 |
| 500126.IN | Procter & Gamble Health Ltd. | 15 |
| 500408.IN | Tata Elxsi Limited | 14 |
| 500820.IN | Asian Paints Ltd. | 13 |
| INFY | Infosys Limited Sponsored ADR | 13 |
| 534816.IN | Indus Towers Limited | 12 |
| 532466.IN | Oracle Financial Services Software Limited | 12 |
| 500680.IN | Pfizer Limited | 12 |
| 532538.IN | UltraTech Cement Limited | 12 |
| 532331.IN | Ajanta Pharma Limited | 11 |
| 532977.IN | Bajaj Auto Limited. | 11 |
| 532702.IN | Gujarat State Petronet Limited | 11 |
| 531213.IN | Manappuram Finance Limited | 11 |
| 532482.IN | Granules India Limited | 10 |
| 532733.IN | Sun Tv Network Limited | 10 |
| 500042.IN | BASF India Limited | 9 |
| 540005.IN | Larsen & Toubro Infotech Ltd | 9 |
| 500087.IN | Cipla Limited | 8 |
| 534091.IN | Multi Commodity Exchange of India Limited | 8 |
| 524494.IN | IPCA Laboratories Limited | 7 |
| 526371.IN | NMDC Limited | 7 |
[1] Inception date of MGINGROW was Dec. 31, 2007. The Index was first published on February 21, 2020.
[1] Volatility based on annualized standard deviation. Source: MarketGrader.
