Welcome to PersonalFN’s weekly analysis on diversified equity mutual funds! In this issue, we have analysed Quant Small Cap Fund, highlighting its performance, peer comparison, investment strategy, fundamentals, portfolio, and suitability.

Quant Small Cap Fund is a momentum-driven scheme in the Small Cap Fund category that has recorded extraordinary performance over the last few years and has registered category-topping returns across time frames.

What is the growth of Rs 10,000 invested in Quant Small Cap Fund five years ago?

Past performance is not an indicator of future returns
Data as of July 24, 2024
(Source: ACE MF, data collated by PersonalFN) 

Incepted in October 1996, Quant Small Cap Fund is a momentum-driven scheme in the Small Cap Mutual Fund category that follows aggressive investment strategies. The fund was originally launched as a debt-oriented fund under which it invested predominantly in fixed-income and money market instruments with up to 25% allocation in equities. It was later categorised as a Small Cap Fund in 2018 after the Quant Group took over the sponsorship of the AMC from Escorts Mutual Fund.

Quant Small Cap Fund follows an active investment approach whereby it constantly hunts for attractive opportunities, which makes it sector and benchmark agnostic. The fund has performed remarkably well under its current mandate particularly since 2020, which helped it handsomely rewarded its investors. The fund’s higher exposure to certain sectors such as Engineering, Infrastructure, and Consumption, proved to be extremely rewarding in the last couple of years. Consequently, its AUM has shown a commendable growth from Rs 1,712 crore as of June 2022 to Rs 22,967 crore as of June 2024.

In the last five years, Quant Small Cap Fund has registered returns at a CAGR of 46.8%, which surpasses its peers by a broad margin. The benchmark Nifty Smallcap 250 – TRI grew 31.1% during this period. An investment of Rs 10,000 in Quant Small Cap Fund would have now grown to a whopping Rs 68,416 compared to a valuation of Rs 38,753 in its benchmark.

How has Quant Small Cap Fund performed on a rolling return basis?

Scheme Name	Corpus (Cr.)	1 Year	2 Year	3 Year	5 Year	7 Year	Std Dev	Sharpe
Quant Small Cap Fund	22,967	54.44	32.24	43.86	35.85	24.86	19.98	0.37
Nippon India Small Cap Fund	56,469	48.28	31.28	39.69	29.51	24.26	16.81	0.44
HSBC Small Cap Fund	16,397	44.46	27.59	37.73	24.47	20.02	16.86	0.41
Tata Small Cap Fund	7,868	38.31	27.05	35.95	29.46	—	14.92	0.42
Franklin India Smaller Cos Fund	14,023	49.84	30.25	35.74	23.37	17.90	16.32	0.42
HDFC Small Cap Fund	31,523	44.04	28.50	35.66	23.30	21.37	16.16	0.36
Canara Rob Small Cap Fund	11,499	33.56	22.28	34.65	30.57	—	16.11	0.38
Edelweiss Small Cap Fund	3,816	40.91	25.64	34.14	31.15	—	15.71	0.38
Bank of India Small Cap Fund	1,237	42.12	24.68	33.79	33.86	—	16.82	0.36
ICICI Pru Smallcap Fund	8,438	37.04	23.92	33.65	26.96	19.34	14.58	0.39
NIFTY Smallcap 250 – TRI		49.73	24.78	31.96	22.61	16.06	19.29	0.30

The securities quoted are for illustration only and are not recommendatory.
Returns are on a rolling basis and in %. Direct Plan-Growth option. Those depicted over 1-Yr are compounded annualised. Risk ratios are calculated over a 3-year period assuming a risk-free rate of 6% p.a.
Data as of July 24, 2024
(Source: ACE MF, data collated by PersonalFN)
Please note, this table only represents the best-performing funds based solely on past returns and is NOT a recommendation. Mutual Fund investments are subject to market risks. Read all scheme-related documents carefully before investing. Past performance is not an indicator for future returns. The percentage returns shown are only for indicative purposes.

Quant Small Cap Fund has registered extraordinary performance over the last few years and handsomely rewarded its investors. In the last 3-year period, Quant Small Cap Fund has outpaced the benchmark by a remarkable margin of nearly 12 percentage points and also stood as the category topper. Its superior performance in recent years has boosted its long-term returns. Even the short-term performance of the fund outpaces that of the benchmark and its peers by a noteworthy margin. The fund has now found a place among top-performing schemes, boasting superior returns across time frames.

The volatility registered by the fund is higher than the category average as well as the benchmark. However, Quant Small Cap Fund has managed to reward investors remarkably for the level of risk taken. Its Sharpe ratio, a measure of risk-adjusted return, is currently much ahead of the benchmark and has outperformed the category average but trails some of its prominent peers.

[Read: Small Cap Index Near an All-time High: Should You Rejoice or Worry?]

What is the investment strategy of Quant Small Cap Fund?

Categorised as a Small Cap Fund, Quant Small Cap Fund is mandated to invest a minimum of 65% of its assets in stocks of small-cap companies, i.e., companies ranking 251st onwards in terms of market capitalisation. The fund also allocates around 20-30% of its assets in stocks of large-cap and mid-cap companies. Quant Small Cap Fund adopts a quantitative approach to select high-growth potential stocks based on the relevant market, industry, sector and economic parameters. This quantitative approach is based on the fund house’s proprietary VLRT framework, viz. Valuations, Liquidity, Risk, and Timing. Here are the key features of the framework:

Valuation Analytics: Knowing the difference between price and value

Liquidity Analytics: Understanding the flow of money across asset classes

Risk Appetite Analytics: Perceiving what drives market participants to certain actions and reactions

Time: Being aware of the cycles that govern how the other three dimensions interact

This framework enables the scheme to understand the various investment trends, thereby allowing it to select high-growth potential stocks. The fund holds many of its stocks with a short-term view, and as a result, Quant Small Cap Fund usually recorded a high turnover of 100-500% in the past.

What are the top portfolio holdings in Quant Small Cap Fund?

Holding in (%) as of June 30, 2024
(Source: ACE MF, data collated by PersonalFN) 

Quant Small Cap Fund usually holds a well-diversified portfolio of about 90 stocks at any point in time. As of June 30, 2024, the fund held 91 stocks in its portfolio, with the top 10 stock holdings accounting for around 46% of its assets. Large-cap stocks such as Reliance Industries, HDFC Bank, Jio Financial Services, and Adani Power currently form the fund’s top holdings followed by small-cap and mid-cap names such as Aegis Logistics, Bikaji Foods International, IRB Infrastructure Developers, and HUDCO among others. While Quant Small Cap Fund does not hesitate from holding unconventional bets, it has restriction allocation in each small cap stock to 5% or less.

In the last two years, Quant Small Cap Fund benefitted the most from its holdings in Anand Rathi Wealth, IRB Infrastructure Developers, Arvind, Aegis Logistics, Man InfraConstruction, HFCL, Just Dial, Garware Hi-Tech Films, EID – Parry (India), among others. It booked profits in ITC, Hindustan Copper, The Indian Cements, Century Textiles & Industries, Marksans Pharma, KSB, Sun Pharma Advanced Research Company, Neuland Laboratories, Rites, Aurobindo Pharma, Jindal Steel & Power, GAIL (India), among others.

The top 5 sectors in Quant Small Cap Fund’s portfolio accounted for around 52% of its assets. Its portfolio is skewed towards Banking & Finance, closely followed by Petroleum, Engineering, and Transportation. It also holds significant exposure to Consumption, Construction, Pharma, Telecom, and Power, among others.

Is Quant Small Cap Fund suitable for my investment goals and risk tolerance?

Quant Small Cap Fund stood strong during the 2020 market crash, wherein it outpaced the benchmark and many of its peers. Moreover, the fund topped the category returns in the ongoing bull phase, thereby generating significant alpha for its investors. Quant Small Cap Fund is quick in its approach to shift allocation between market caps and sectors depending on the market conditions which gives it the opportunity to identify high alpha bets.

With significant exposure to stocks in the small-cap and mid-cap segments coupled with the active investment approach followed by the scheme, the volatility registered is higher than the benchmark and many of its peers. Nonetheless, the remarkable returns generated by the fund have helped it score high on risk-reward parameters.

The aggressive investment mandate followed by Quant Small Cap Fund makes it suitable only for investors with a very high risk appetite and an investment horizon of at least 7-10 years.

Watch this video to check out the best Small Cap Funds of 2024:

Note: This write up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. Registration granted by SEBI, Membership of BASL and certification from NISM no way guarantee performance of the intermediary or provide any assurance of returns to investors.

This article first appeared on PersonalFN here