The overview showed an accruals screen quietly outperforming, and beating the index in every five year window. That is exactly the kind of clean result that deserves suspicion. So we pressed on it: is the edge genuine, or is it the small cap tilt that flatters so many screens? And how should you actually hold it?
Almost every rules based screen ends up leaning toward smaller companies, and smaller companies happened to do well this decade. So the first honest move is to strip that tilt out and ask whether anything is left. With most strategies, not much is. With this one, something real remained.
The screen did lean small: its returns tracked a small company index at a correlation of about 0.95, so a good part of its story is simply that small caps ran. But unlike the pretenders, it did not stop there. Measured against that closest index it still added roughly 8% a year of genuine excess return, one of the largest and most consistent premiums we have measured. The earnings quality signal was doing real work on top of the size tilt, not hiding behind it.
Most screens give back return when you constrain them. This one did the opposite. The tidy, constrained build, capping how much any sector or size could dominate, actually produced the highest return of all, about 23% a year, with the shallowest fall. That is a rare and reassuring signature: an edge robust enough that imposing sensible risk limits improves it rather than dulling it. You did not have to take wild bets to collect this premium. You had to take disciplined ones.
Value needs a rebound and momentum needs a trend, but earnings quality is a steadier thing. Split the decade by macro backdrop and the screen stayed positive in every state, a little hotter when growth expanded but never dependent on it. Companies whose profits are backed by cash tend to hold up whatever the economy is doing, which is precisely why the signal was so consistent across five year windows.
Set the story aside and count. Pick a random month, hold, and how often did you finish ahead of a plain index fund? For the sensible builds the answer climbs to a near certainty by five years.
Read the bottom rows: over five years the diversified versions beat the index essentially always. That is not a promise about the future, but it is a strong statement about how durable this particular inefficiency has been.
Here is the teardown in a line. The accruals screen is part small cap tilt and part genuine, durable, all weather premium, and the genuine part is large. It improves when you discipline it, it works in most conditions, and it demands only that you sit through the ordinary drawdowns of small cap investing. Of everything we have tested, it is perhaps the least exciting and the most quietly ownable. The catch is simply that nobody talks about it, which may be exactly why it still works.
How strict the quality cut, how tight the constraint, whether to pair it with cheapness or momentum. Each choice reshapes the edge. The only way to find the build you could hold for a decade is to move the dials yourself and watch the history rebuild on your answer.
Two last checks make the risk concrete: what the basket was actually made of, by company size, and, instead of the single drawdown path, the worst fall you would have suffered no matter which month you started and held for five years.
So we took it to Krest, and ran it through the whole test.
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For education only. Not investment advice or a recommendation to buy, sell, or hold any security, strategy, or product. Past performance does not guarantee future results, and all investing carries risk, including the possible loss of capital. Make your own decisions, and consider consulting a SEBI registered investment adviser.
Best effort analysis. Prepared on a best effort basis from historical data and may contain errors, omissions, or assumptions. Shared for information and discussion only, and should be independently verified before you rely on it. Krest accepts no liability for any decision made or loss incurred based on it.
Figures reflect an accruals screen (ranked by total accruals to total assets, positive net profit, market cap above ₹500 cr), reconstructed yearly over the last ten years of Indian data (since June 2016), measured against the Nifty 500 total return index. Concentration, closest index, regime and base rate figures computed across all rolling windows. The accruals anomaly was documented by Richard Sloan (1996).
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