Boring stocks held up better than winners in our re-test of Indian factor books
Two ideas dominate systematic equity investing in India: own the calmest stocks, or own the ones that have already been going up. We rebuilt both on cleaner price data and then tried to break them. One survived the stress test almost untouched. The other turned out to draw much of its strength from the corner of the market where a backtest is least trustworthy.
Here is the result up front. A low-volatility book -- the stocks whose prices moved around the least -- produced a Sharpe ratio of 1.93 over the test period when paired with an index hedge, alongside a compound annual growth rate of 20% and a worst peak-to-trough fall of 25%. Sharpe ratio is simply return measured against how bumpy the ride was; higher means you were paid more for the turbulence you sat through. Momentum, put through the same treatment, landed far lower once the universe was cleaned up, and it fell much harder along the way.
The cleaning matters, so it is worth explaining. Price histories that ignore dividends and stock splits understate what an investor actually earned, which can quietly deflate any long-horizon study. We re-fetched the constituents of a 500-stock benchmark on a fully adjusted basis and got 420 of 481 names back. The 61 that would not resolve are themselves a small warning sign, and they lead straight into the second and more interesting test.
That second test targets survivorship bias -- the habit a backtest has of looking brilliant because it only ever sees the companies that made it to the present day. Firms that were delisted, absorbed or quietly wound up leave no price history behind, so a study built from today's index membership is studying winners by construction. There is no way to fully repair this without the trading record of the vanished names, which we do not have. What can be done is to bound it.
So the same strategy was run twice: once across the whole pool, which skews mid-cap and carries most of the delisting risk, and once across only the 100 largest names, a far more stable set and close to survivorship-clean. The logic is blunt. If an edge exists only in the messy pool and evaporates among the large caps, then the disappearances were doing the work, not the strategy.
Low volatility barely flinched. Restricted to the 100 largest names with the same hedge, it returned a Sharpe of 1.76 against 1.93 for the full pool, a CAGR of 19% and a worst fall of 23%. Strip the hedge out and the two pools sit at 1.20 and 1.06, both at 15%. Losing a fraction of a point when you throw away the entire mid-cap tail is about as clean a pass as this kind of probe can deliver. On the evidence we have, the low-volatility effect in Indian equities is not an artefact of counting only the survivors.
Momentum told a different story. Ranked across the 200 largest names it looked strong: a Sharpe of 1.17 for the version that strips out the market's own move, and 1.20 for the plain version, at 27% and 28% a year. Narrow the universe to the 100 largest -- the group we trust most -- and it drops to 0.84 and 0.83. That is the wrong direction. An edge that gets weaker as the data gets cleaner is an edge partly funded by companies that happened not to fail.
And 0.84 is not much of a prize on its own. The benchmark itself scored 0.66 on the same measure, so the trustworthy version of momentum sits only modestly ahead of simply holding the index -- before anyone has paid a rupee of brokerage, spread or tax to run the frequent reshuffling that momentum requires. Trading costs are not captured in these figures, and momentum demands far more turnover than a low-volatility book does.
Then there is the shape of the losses. Momentum's worst drawdowns in these runs ranged from 36% to 45%, against 23% to 25% for low volatility. Drawdown is the peak-to-trough loss an investor would have had to absorb without abandoning the plan, and it is the number most people underestimate about themselves. A strategy with a similar headline return and twice the depth of hole is not the same product.
One sub-question got a clear answer along the way. Practitioners argue about whether to rank on plain price gains or on gains with the market's direction stripped out, on the theory that what is left is the purer signal. Across this universe the distinction was a wash: 0.83 for the plain version against 0.84 for the stripped one among the large caps, close enough that the choice is not what decides the outcome.
Our own earlier work needed a correction too. A previous study found that switching to adjusted prices lifted a momentum result dramatically, which raised the worry that a whole body of prior research was biased low. That worry was overdone. For these diversified books the adjustment proved minor -- low volatility moved from 1.86 to 1.93, and the momentum variant went from 0.88 to 0.84, which is noise. The earlier jump belonged to a concentrated, ten-name monthly configuration, not to factor portfolios in general. Adjustment matters most when a strategy holds very few positions.
Honest limits are worth stating plainly. Survivorship here is bounded, not eliminated; the large-cap pool is cleaner, not clean. Sixty-one names could not be retrieved at all. Dealing costs, the cost of borrowing to maintain a short index overlay, and the practical difficulty of running one sit outside what was measured. And every figure above describes a historical window that has already closed -- a statement about the past, not a description of something on offer.
What the exercise establishes is narrow and worth having. Of everything tested, the low-volatility book is the result that has withstood the most attempts to knock it over. Momentum is real but conditional, riskier, more expensive to run, and thinner than it looks once the vanished companies are taken out of the picture.
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