Human nature conditions us to adapt to the changes around us. If our food lacks salt, we add some more to it. If the weather gets cold, we wear thicker clothes. We take actions based on external or internal factors to adapt to the changes around us. Now let’s apply the same logic to a smallcase.
A smallcase is a basket of stocks that is aligned with a market theme/idea/strategy. To adapt to the changing market conditions, most smallcases are rebalanced on a quarterly basis to ensure that the stocks in a smallcase are the right picks for taking exposure to a particular theme.
Drawing parallels
Let’s take the example of a football team – there would be 10 players at any given point, playing on behalf of a team. However, as the match goes on, substitution happens along the way – some players are asked to retreat and another player is sent in their place, for various reasons. Although the individual players who are part of the team would be changing, the team that they are playing for still remains the same.
Similarly, if a stock is no longer a match for the model criteria, it would be removed from the smallcase at the time of rebalancing and any new stocks that do fit the model criteria would be added to the smallcase, however the theme of the smallcase remains the same. Moreover, rebalancing is done to ensure that the stocks in a smallcase are aligned with the theme. Most of the smallcases are reviewed on a quarterly basis.
Let’s see this in action using a sample model criteria:
Model criteria of a smallcase:
•Select top 500 companies as per market capitalisation
•Select companies with a PE ratio > 20
If a stock fails to meet the criteria, it would be removed from the smallcase. New stocks that are in accordance with the criteria would be added to the smallcase.
Let’s simplify this using the example of the football team
Criteria for a player:
•Select players in white jerseys
•Select players with odd numbered jerseys
Before rebalancing
After rebalancing
Player 73 in a grey jersey, players 10 and 22 (even numbers) who didn’t match the criteria were removed and new players 05, 57 and 85 who fit the criteria, were sent in their place.
In the same fashion, stocks that no longer fit the model criteria would be removed and new stocks that fit the criteria would be added to the smallcase at the time of rebalancing.
If one has invested in a smallcase, these changes would be sent as a rebalance update, which can be reviewed and applied in 2 clicks.
Rebalancing just takes a couple of clicks and some minutes of your time. It helps your smallcase keep reflecting the same theme and be up to date.
INDIA
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