A cursory glance at the top of the mutual fund performance charts nowadays reveals an increasingly familiar name. Pick any category, and chances are that a Quant AMC fund will be at the summit, the next best trailing far behind. The AMC is making heads turn. We delve in to see what sets Quant funds apart and if these merit a space in your portfolio. For most AMCs, the investing philosophy is usually fixated around business fundamentals. This is supplemented with a ‘buy-and-hold’ approach, with fund managers keen to ride the bets for a reasonable time. But Quant AMC’s approach is different. It relies a lot on quantitative models, but not in the traditional sense of a rulesbased, quant-driven fund. Fundamentals are a part but not the centerpiece of its investment framework.
At its core, the AMC harnesses ‘predictive analytics’ that constantly feeds on data to drive decision making. It tries to predict broader macro trends that will serve as a guidepost for its investments. This is not limited to ordinary data points like interest rates, FII flows or GDP growth. It also weaves in wide-ranging data like weather patterns, exit poll results or even earth’s magnetic fields into its algorithm! The premise is that markets are dynamic—a diverse set of variables and participants are continuously interacting with each other in myriad ways. Says Sandeep Tandon, CEO, Quant AMC, “We are a macro-driven house.
We quantify everything that affects the markets, including fear and greed.” Santosh Joseph, Managing Partner, Germinate Investor Solutions, remarks, “It uses macro analysis to make micro investing decisions.” Portfolios of Quant funds keep reacting to these data points, reflecting in a very high churn. It is commonplace to find its funds replace nearly the entire portfolio several times within a year. Kaustubh Belapurkar, Director, Manager Research, Morningstar Investment Advisor India, observes, “Quant AMC funds run a very high turnover portfolio with the aim to get in on trends early and exit before they fizzle out.” However, Tandon denounces the negativity associated with it.
“We keep rebalancing portfolios in a dynamic style to reduce risk, which translates into a higher churn. As long as returns compensate for it, I don’t see why a high churn should come with any baggage.” He says even if equities as an asset class is meant for the long term, individual stocks and sectors may not. For the past few years, the performance of Quant AMC funds has stood out across market phases. What is striking is the continuity in superior returns even in weak market conditions. Where Quant sets itself apart is in its unconstrained approach, not married to any investing thesis. It believes there is no one formula or strategy or perspective that can consistently outperform.
“We are opportunists,” declares Tandon. “We remain agnostic to style, market cap and sector. The idea is to generate absolute return irrespective of market conditions.” The AMC buys and sells stocks on specific inflection points i.e. when mispricing occurs against them (buy) or in favour of them (sell). Selling at the right time is a key driver. Tandon quips, “In this dynamic world, relying on valuation alone can be problematic. It does not give you all the answers.” Where many of the AMC’s peers are known to build portfolios closely around the benchmark index, Quant takes a free-wheeling approach within permissible limits. That is why its portfolios bear little resemblance to that of category peers. Its data-driven processes also take away fund manager risk.
But can the AMC sustain the results for the long term? It is still young, managing Rs.17,000 crore in assets across 17 offerings. Its mutual fund operations kicked off in 2018 when Quant Capital bought Escorts AMC. Its biggest scheme manages a modest Rs.3,500 crore. This affords its schemes a degree of agility bigger, established peers do not enjoy. Belapurkar says, “It remains to be seen if these strategies can remain as nimble as they scale up. Moving in and out of positions at larger size can be tricky.”
The fund house is also yet to prove credentials over longer time frames. Quant AMC relies on data crunching to drive returns. This puts it in a different orbit compared to traditional asset managers. Investors and advisers may take a while to find confidence in this outlier. Joseph says, “It is natural to be suspicious of a new asset manager, but I wouldn’t write off Quant. Investors can consider these funds not to chase performance, but to give space to a differentiated investing style.” While the fund house’s offerings deserve a closer look, investors should not extrapolate current performance into the future and build unrealistic expectations, cautions Belapurkar.