Although most investors are familiar with the two main types of mutual funds: actively managed and passively managed funds, Quant funds is a different category that many investors may be interested to explore. Quant funds are a hybrid of passive and active funds that rely primarily on an automated system.
Quant funds are rules-based equity-oriented mutual funds that use a customised statistical model to take investment decisions and they make up a minor portion of the mutual fund universe. Quant funds are like semi-passive funds, they have a low expense ratio and limited human interference in order to prevent behavioural biases.
Quant funds are suitable for investors with a long-term investment horizon, since the Quant-based approach for investments may take years to fully harvest the gains and investors with a strong risk appetite, as these funds are mandated to invest up to 80% of its assets in equity and equity related securities.
The quant Mutual Fund has recently launched quant Quantamental Fund, which is an open-ended equity scheme investing based on a quant model theme. The quant model theme helps in stock screening process through quantitative and fundamental analytical measures.
Under this investment strategy, the portfolio of stocks will be selected, weighed and rebalanced using stock screeners, factor based scoring and an optimization formula, which aims to enhance portfolio exposures to factors representing ‘good investing principles’ such as growth, value and quality within risk constraints.
Table 1: Details of quant Quantamental Fund
|Type||An open ended Equity Scheme investing based on a quant model theme||Category||Thematic Fund|
|Investment Objective||The investment objective of the Scheme is to deliver superior returns as compared to the underlying benchmark over the medium to long term through investing in equity and equity related securities. The portfolio of stocks will be selected, weighed and rebalanced using stock screeners, factor based scoring and an optimization formula, which aims to enhance portfolio exposures to factors representing ‘good investing principles’ such as growth, value and quality within risk constraints. However, there can be no assurance that the investment objective of the scheme will be realized.|
|Min. Investment||Rs 5000/- and in multiples of Re 1 thereafter. Additional purchase Rs 1000/- and in multiples of Re 1 thereafter.||Face Value||Rs 10/- per unit|
|Entry Load||Not Applicable||Exit Load||
|Fund Manager||– Mr Sandeep Tandon
– Mr Ankit Pande
– Mr Sanjeev Sharma
|Benchmark Index||NIFTY 500 TRI|
|Issue Opens:||April 13, 2021||Issue Closes:||April 19, 2021|
(Source: Scheme Information Document)
What will be the Investment strategy for quant Quantamental Fund?
The scheme will predominantly invest into equity and equity related securities by emphasizing on selecting stocks from a universe of NIFTY 500 TRI and it would be selected based on a quantamental model.
Quantitative methods will be used for (i) screening mechanism to choose best picks and make the stock selection universe smaller, (ii) Deciding on the portfolio weightage for better return as the investment will focus on company’s size and liquidity.
The fund house is of the view that a rules-based mechanical approach needs to be combined with the value of years of human judgement and experience to yield ‘adaptive alpha’ – the outperformance which is generated by an ability to adapt investment rules/factors to novel market phases. Thus, the fund house augment the traditional quantitative and qualitative methods to be the investment strategy for this scheme in order to provide better returns and capital preservation.
The qualitative method, which will be used, for stock selection will be based on two broad parameters viz., Stock Price movement & Financial/ valuation aspects. The model will use aspects like:
- Stock Price related parameters – This would include stock specific aspects like relative strength, liquidity and volatility, Historic Performance (based on quarterly and annual relative and absolute price movement).
- Financial/ Valuation parameters – This would include aspects based on a company’s Balance sheet, cash flow statement & profit & loss account. The parameters are Sales growth (Historical), Earning before Interest and tax (EBIT) & Free Cash flows. (Historical), Dividend yield, Price to book ratio (PB), Return ratios, etc.
The underlying quant model theme is quant Money Managers Limited (qMML) research’s ‘Quantamental’ investment strategy. qMML believes that a quantitative approach to money management would yield optimal results when combined with the value of human judgement, as rules or factors can behave differently when the entire market environment changes. Thus, the quantamental approach seeks to find the harmony between objectivity and subjectivity.
What is a quant model theme?
The quant model theme is an investment strategy that helps in stock selection by building a strong algorithm based model on various quantitative metrics and analytic measures. The Quantamental investing mainly combines two investment strategies, quantitative based on complex algorithms and fundamental based on bottoms up fundamental of any company.
The quantamental approach goes beyond purely factor-based, smart beta or algorithmic strategies. Quantamental combines the innate human ability to adapt, adding to the alpha generated by discipline and identification of underlying factors – adaptive alpha, providing the edge needed to manage volatility and utilize periodic market imbalances to the portfolio’s advantage.
Basically, the quant model theme endeavors to eliminate the fund manager behavioral biases if any during the stock selection process, which plays an important role in performance of the scheme.
This scheme apart from investing 80% of its assets in equity and equity related securities, it may also invest up to 20% of its assets in Debt & Money Market instruments and it may invest up to 5% of its assets in Units issued by REITs & InvITs to meet its liquidity requirements.
Under normal circumstances, asset allocation will be as under:
Table 2: Asset Allocation of quant Quantamental Fund
|Instruments||Indicative Allocation (% of assets)||Risk Profile|
|Equity and equity related instruments||80||100||Medium to High|
|Debt & Money Market instruments||0||20||Low to Medium|
|Units issued by REITs & InvITs||0||5||Medium to High|
(Source: Scheme Information Document)
Who will manage quant Quantamental Fund?
Mr Sandeep Tandon, Mr Ankit Pande and Mr Sanjeev Sharma will be the dedicated fund managers for quant Quantamental Fund.
Mr Sandeep Tandon is MD and CEO of quant Mutual Fund and has over 23 years of experience in the financial industry. Prior to being the founder of quant Mutual Fund, he was associated with ICICI Securities as Vice President, Economic Times under Research Bureau, and IDBI (now Principal) Asset Management as a part of core asset management team.
Mr Ankit Pande is a Fund Manager (Equity) at quant Mutual Fund and has over 8 years of experience in Indian equities and of 3 years in software products. Prior to joining quant Mutual Fund he was associated with Infosys’ Finacle in banking software, began his career in finance with equity research in 2011. His qualification includes, the (U.S. based) CFA charter in 2015 and MBA from the Chinese University of Hong Kong in 2017.
He has won the Thomson Reuters StarMine Award for best stock picker in the IT sector in 2014 and is a lifetime member of the Beta Gamma Sigma honour society. Currently schemes under his management are; quant Absolute Fund, quant Large and Mid-Cap Fund, quant Infrastructure Fund, quant Focused Fund, quant Mid Cap Fund, quant Consumption Fund, quant Tax Plan, quant Small Cap Fund, quant Active Fund.
Mr Sanjeev Sharma is Fund Manager (Debt) at quant Mutual Fund and has over 17 years of work experience, which includes 13 of experience in the financial market. Prior to this Mr Sharma was working with PACE group of companies as Fund Manager, Tipsons Financial Services Pvt. Ltd. as Associate Vice President, Escorts Mutual Fund as Fund Manager – Fixed Income.
His qualification includes, PGDBA (Fin.), M.com and CerTM (Treasury & Forex Risk). He specializes in identifying crucial inflexion points in securities and currently schemes managed by him are; quant Multi Asset Fund, quant Small Cap Fund, quant Dynamic Bond, quant Liquid Plan, quant Money Market Fund, quant Absolute Fund, quant Large and Mid-Cap Fund, quant Focused Fund, quant Mid Cap Fund, quant Active Fund.
Fund Outlook – quant Quantamental Fund
The quant Quantamental Fund will invest in equity and equity related securities based on data derived from quant model theme and accordingly perform the future stock selection process. It differs from the traditional investing techniques used by equity-oriented mutual funds.
Quantamental investing is a form of investment strategy that combines quantitative and fundamental investing to produce better returns. Quantitative analytics uses security prices, market volatility, global macros, statistical modelling, and various quantitative parameters to create the best model. While fundamental analytics entails to determine the value of a company by performing a deep dive into their balance sheets, management commentaries, competitors etc.
The underlying investment strategy reduces human intervention to a certain level, as it focuses on the quantamental model and makes the stock selection process free from any emotions and behavioural biases of the fund manager.
The quant Money Managers Limited (qMML) may, from time to time, review and modify the Scheme’s investment strategy if such changes are considered to be in the best interests of the unitholders and if market conditions warrant it. However, no assurance can be given that the fund manager will be able to identify or execute such strategies.
Being a thematic fund, one of the risks associated with this quant model theme is that it may take time to adjust to new trends in equity dynamics and market conditions. The time it takes for a quant model to adapt to new developments could result in delayed actions and a failure to provide you with the best possible returns.
This scheme is suitable for investors seeking to invest in Quant model based thematic mutual funds, ensure that you hold a high-risk tolerance to survive various market cycles, a long-term investment horizon and your investment goals align with the fund’s objective.
This article first appeared on PersonalFN here