How Do Alpha Portfolios Determine Which Stocks to Include?

The objective of an Alpha Portfolio is to outperform the benchmark index and generate positive alpha for the investor. In simple terms, this means that Alpha Portfolios is designed for investors who would like to make better returns at lower risk than passive investing in mutual funds or benchmark S&P500 index ETFs.

There are three India Alpha Portfolios: Large-Cap, Mid-Cap and Small-Cap. The specific characteristics of each portfolio varies based on investment category and timing. For example, in a bullish market, the Alpha Portfolios would include good quality stocks that are outperforming the benchmark, while in a bearish market, the portfolios shift to cash to generate Alpha. On similar lines, there may be times when Large-Cap and Mid-Cap stocks are trending up but Small-Cap stocks have not joined the rally – during such times you would notice that Small-Cap Alpha Portfolio is still allocated to cash while Large-Cap and Mid-Cap Alpha Portfolios have equity allocations.

Alpha portfolios employ three main strategies to generate alpha: Timing, Selection, and Allocation. The timing strategy involves evaluating the market segment daily to determine trend. Selection is a critical aspect of Alpha Portfolios which involves selecting a diversified portfolio of stocks that have low correlation. Each portfolio consists of 8 to 15 stocks. Allocation logic aims to improve risk-adjusted-return of the portfolio.

Rebalancing is a key process for Alpha Portfolios and occurs 5 to 8 times per year. This ensures that the portfolio remains aligned with the investment objectives and takes advantage of market opportunities as they arise. The goal is to maximize returns while minimizing risk in comparison to the benchmark NIFTY-50 index.

In summary, Alpha Portfolios determines which stocks to include by evaluating market conditions and selecting stocks that have the potential to outperform the benchmark index. Regular rebalancing is done to maintain alignment with investment objectives, and the portfolios employ timing, selection, and allocation strategies to generate ‘alpha’ for investors.

Useful Links:
Alpha Portfolios US
How to Use Alpha Portfolios (YouTube)