ORMI beats Sensex and Nifty

LOSERS.INDEX

ORMI Worst 20 (allocation in the worst 20 from CNX 100) and ORMI Relative Performance Sensex 30 (weighting according to winner rankings) delivered similar risk adjusted returns (Annualized returns vs. standard deviation) and as we changed the group from Sensex 30 to Nifty 50 the margin of outperformance between relative performance and extreme reversion (weighing according to loser rankings) became marginal. Hence, dismissing losers was indeed a bad idea.

Indexing: The Orpheus Risk Management Index (ORMI) is based on proprietary algorithm.

The indices values that are disseminated today are broadly based on market capitalization methodology. Market capitalization methodology has been challenged globally for a few broad reasons. 1) As an asset strengthens it is given more weight 2) As an asset weakens it is given lesser weight. This on one side captures momentum but on the other side suggests investors to focus more on growth compared to value. This increases portfolio risk when market growth slows down or reverses, as has been the case since 2007. When markets contract, the erstwhile top performers push into red for extended period of time causing large drawdowns and emotional pain.

The ORMI Indices based on the above extreme reversion idea i.e. outliers tend to reverse, which suggests that investing is about value picking and extremes are prone to reversion. Our Index extends and fine tunes the idea first mooted by De Bondt and Thaler in their 1981 paper suggesting that 3 year worst losers portfolio tends to outperform the 3 year best winners portfolio.

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