2 hrs ago
Kotak Says Mid-Cap Rebalancing Erodes Historical Investment Relevance
Kotak studied how useful mid-cap stock indexes are for investors.
It said these indexes change their companies often because share prices move.
The Nifty Midcap 150 has 150 companies, but many different companies entered and left it over time.
Only 46 companies stayed in the index throughout the period Kotak examined.
This makes it harder to compare today’s index with its past performance.
A few popular industries can also become unusually large parts of the index.
This means the performance of those industries can strongly affect the whole index.
Kotak therefore said broad earnings and valuation comparisons may not be very useful for this index.
Kotak Institutional Equities says mid-cap indices have low utility as investment tools because their composition changes frequently.
The Nifty Midcap 150 includes 150 companies selected by free-float market capitalisation, allowing stock-price movements to alter its constituents.
Only 46 stocks remained in the index from FY22 through the first half of FY27, while 275 unique stocks appeared during FY22-FY26.
Kotak says constant churn makes historical comparisons of earnings growth and valuation multiples less meaningful.
Sector concentration and changing investor sentiment can heavily influence the index, with its top three sectors contributing 34% to 152% of returns in six positive half-year periods.
- Who
- Kotak Institutional Equities, also identified as Kotak Securities in the report, analyzed mid-cap indices.
- What
- The report argued that frequent rebalancing, sector concentration, and sentiment-driven stock movements reduce the usefulness of mid-cap indices for investment analysis.
- Where
- The analysis focused on the Nifty Midcap 150 index.
- When
- The strategy report was dated 19 September and examined the Nifty Midcap 150 across FY22-FY26 and the first half of FY27.
- Why
- Frequent changes in constituents and the dominance of selected sectors make historical earnings and valuation comparisons less meaningful.
Key facts
- Index examined
- Nifty Midcap 150
- Index size
- 150 companies selected by free-float market capitalisation
- Consistent constituents
- 46 stocks were part of the index continuously from FY22 through the first half of FY27
- Unique constituents
- 275 different stocks were included during FY22-FY26
- Sector concentration
- Seven different sectors ranked among the index’s top three sectors by weight across 10 half-year periods
- Return contribution
- The top three sectors contributed 34% to 152% of index returns in six positive half-year periods
- Report date
- 19 September
Quotes
Kotak Institutional Equities
Institutional equities research and strategy division of Kotak Securities
“Top-down earnings and valuation exercises have little relevance given (1) frequent and constant changes to the composition of the indices, (2) dominance of one or a few sectors or themes at most times, and (3) exaggerated movements in sectors and stocks due to frequent emergence and demise of sentiment-driven popular ‘narratives’.”
livemint.com
“The constant churn in the indices makes them irrelevant for any meaningful historical comparisons such as future earnings growth with historical earnings growth, and future multiples with historical multiples.”
livemint.com
Sources
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