The Conservative Formula: Evidence from India

Abstract

We implement the Conservative Formula outlined by Van Vliet and Blitz (2018) on data from Indian stock markets. It selects 100 liquid stocks based on three criteria: low realised volatility, high net payout yield and strong price momentum. We demonstrate that this simple yet robust formula exposes investors to key factors like low volatility, quality (through operating profitability and investment factors) and momentum in India. The quarterly rebalanced portfolio of 100 stocks significantly outperforms the S&P BSE 100 in absolute returns (by 12.6% pa compound) and risk-adjusted returns. We show the Conservative portfolio’s performance outperforms the S&P BSE 100 and the Speculative portfolio over different business cycles. The formula has been shown to work over long periods: in US markets since 1929 and in other markets like Europe, Japan and Emerging Markets. Our paper extends this evidence to India. The conservative formula uses three simple criteria that do not require accounting data and, therefore, should appeal to a broad base of asset owners and managers in India.

Keywords: Factors, Factor Investing, Conservative Formula, India

JEL Classification: G11, G12, G15