{"id":330,"date":"2019-05-20T12:23:21","date_gmt":"2019-05-20T12:23:21","guid":{"rendered":"http:\/\/blog.certifiedfinancialguardian.com\/?p=330"},"modified":"2019-05-21T04:55:55","modified_gmt":"2019-05-21T04:55:55","slug":"dsp-quant-fund-a-worthwhile-proposition-in-the-long-run","status":"publish","type":"post","link":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/2019\/05\/20\/dsp-quant-fund-a-worthwhile-proposition-in-the-long-run\/","title":{"rendered":"DSP Quant Fund: A Worthwhile Proposition In The Long Run?"},"content":{"rendered":"\n

DSP Mutual Fund<\/a> has launched an open-ended scheme, DSP Quant Fund (DSPQF), that will invest in equity, based on a quant model. <\/p>\n\n\n\n

What is a Quant fund?<\/strong><\/p>\n\n\n\n

A quant fund is a thematic \/sectoral type of an open-ended equity mutual fund<\/a>, as it follows a specific approach of investing.<\/p>\n\n\n\n

Quant funds follow quantitative analysis to select stocks while\nconstructing the portfolio which is based on several factors combined. Fund\nmanagers create a mathematical model that determines the fund\u2019s investment. <\/p>\n\n\n\n

Since there are a host of factors used in investing a quant fund,\nthis fund uses a multifactor approach\nof investment. Factor strategies (also known as smart beta) today\ncombine active and passive investing models providing the investors with the\ntools to express investment preferences and philosophies in an efficient\nmanner.<\/p>\n\n\n\n

Current volatility in the markets has made the stock selection\nprocedure difficult, especially in the large-cap space due to shrinking alpha.\nHence fund managers are seeking and implementing various strategies to\noutperform the indices and generate better returns. A quant-based strategy of\ninvestment is between actively managed funds and index funds; as the investment\ndecisions are determined by a scientific model than by human judgment created\nby the fund managers.<\/p>\n\n\n\n

DSP Quant Fund will be using rational principles combined with scientific risk management efficient strategy. It is designed to seek benchmark-beating returns for an investor who wants to invest in a well-diversified large-cap oriented CORE portfolio and have an investment time horizon of seven years or more. <\/p>\n\n\n\n

Table 1: NFO Details<\/em><\/strong><\/p>\n\n\n\n
\n Type<\/strong>\n <\/td>\n An open-ended equity Scheme investing based on a quant model theme.\n <\/td>\n Category<\/strong>\n <\/td>\n Sectoral\/ Thematic\n <\/td><\/tr>
\n Investment Objective<\/strong>\n <\/td>\n To deliver superior returns as compared to the underlying benchmark over the medium to long term through investing in equity and equity-related securities.
\nThe 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 \u2018good investing principles\u2019 such as growth, value and quality within risk constraints.
\nHowever, there can be no assurance that the investment objective of the scheme will be realized.\n <\/td>\n<\/tr>
\n Min. Investment<\/strong>\n <\/td>\n Rs 500\/- and any amount thereafter\n <\/td>\n Face Value<\/strong>\n <\/td>\n Rs 10 per unit\n <\/td><\/tr>
\n Plans <\/strong>\n <\/td>\n
    \n
  • Direct*<\/li><\/ul>\n <\/td>
\n Options<\/strong>\n <\/td>\n
    \n
  • Growth*<\/li>
    \n
  • Dividend (Pay-out and Reinvestment*)<\/li><\/ul>\n *Default\n option<\/em>\n <\/td><\/tr>
\n Entry Load<\/strong>\n <\/td>\n Nil\n <\/td>\n Exit Load<\/strong>\n <\/td>\n Nil\n \n <\/td><\/tr>
\n Fund Manager<\/strong>\n <\/td>\n Mr Anil Ghelani\n <\/td>\n Benchmark Index<\/strong>\n <\/td>\n S&P BSE 200 TRI Index\n <\/td><\/tr>
\n Issue Opens:<\/strong>\n <\/td>\n May 20, 2019\n <\/td>\n Issue Closes:<\/strong>\n <\/td>\n June 3, 2019\n <\/td><\/tr><\/tbody><\/table>\n\n\n\n

(Source: Scheme\nInformation Document<\/a>)<\/p>\n\n\n\n

How will the scheme allocate its assets?<\/strong><\/p>\n\n\n\n

Under normal circumstances, the scheme’s asset allocation<\/a> will be as under:<\/p>\n\n\n\n

Table 2: DSP Quant Fund\u2019s Asset\nAllocation<\/em><\/strong><\/p>\n\n\n\n
\n Instruments<\/strong>\n <\/td>\n Indicative allocation (% of total assets)<\/strong>\n <\/td>\n Risk\n Profile<\/strong>\n <\/td><\/tr>
\n A. Equity & Equity related instruments including\nderivatives\n\n <\/td>\n 95\n <\/td>100<\/td>\n Medium to High\n <\/td><\/tr>
\n B.\tDebt and money market instruments\n <\/td>\n 0\n <\/td>5<\/td>\nLow \n <\/td><\/tr>
\n C.\tUnits issued by REITs & InvITs\n <\/td>\n 0\n <\/td>5<\/td>\n Medium to High\n <\/td><\/tr><\/tbody><\/table>\n\n\n\n

 (Source: Scheme\nInformation Document<\/a>)<\/p>\n\n\n\n

What will be the Investment Strategy?<\/strong><\/p>\n\n\n\n

The fund\nmanager aims to create a model-based fund that is anchored around fundamental\nprinciples of good investing. The endeavour is to create an automated stock\npicking and weighting model that generates portfolios which maximize\ncharacteristics of the chosen factors while adhering to liquidity and risk concentration\nconstraints.<\/p>\n\n\n\n

Stepwise\ndescription of the investment strategy<\/strong><\/p>\n\n\n\n

Step 1: Universe<\/strong><\/p>\n\n\n\n

The scheme will invest in stocks\nselected from a universe of S&P BSE 200 as it represents a universe of\nreasonably liquid and well-researched companies. <\/p>\n\n\n\n

Step 2: Exclusion Criteria<\/strong><\/p>\n\n\n\n

Weed out stocks based on exclusion\ncriteria; companies that fail to pass through proprietary earnings quality and forensic\naccounting screeners based on reported accounting statements, exposed to higher\ndefault risk, are highly volatile, and which do not meet certain pre-defined\nownership\/shareholding criteria. The universe of stocks is reduced to 100-80\ncompanies. <\/p>\n\n\n\n

Step 3:<\/strong> Inclusion criteria<\/strong><\/p>\n\n\n\n

Based on 5 factors to evaluate Quality<\/strong>, Growth <\/strong>and Value<\/a><\/strong>characteristics, percentile score is assigned for each company across selected factors, which is combined into an aggregate score <\/strong>for relative company percentile ranking. Only the top-ranked companies having the highest aggregate score which constitute 50% of BSE 200 index by weight will be considered (i.e. 30-50 stocks)<\/p>\n\n\n\n

Step 4:<\/strong> Portfolio construction: Optimizer inputs\nand constraints<\/strong><\/p>\n\n\n\n

Will choose stocks based on its\nweight (10 times its weight in the BSE 200 index or maximum weight of 10%,\nwhichever is lower) and +\/- 10% deviation of stock\u2019 sector weight in the BSE\n200 index. <\/p>\n\n\n\n

Step 5:<\/strong> Optimizer objective function and Output<\/strong><\/p>\n\n\n\n

Run the optimizer with the utility\nfunction to maximize portfolio level factor exposure (average percentile rank\nacross all five factors) aggregate score<\/p>\n\n\n\n

Step 6: \nRebalance Semi-annually<\/strong><\/p>\n\n\n\n

Rebalance the portfolio end of\nevery March and September.<\/p>\n\n\n\n

Stock level exposures to various\nfactors can be measured by one or any of the following descriptors. As markets evolve, the data availability, as well as academic research,\nbecomes more sophisticated, the understanding and definitions of factors may\nkeep evolving.<\/p>\n\n\n\n

\n \n \n \n \n

Factor <\/strong><\/p><\/td>\n

Fundamental measures<\/strong><\/p><\/td>\n <\/tr>\n

Growth<\/p><\/td>\n

    \n
  • Historical Earnings Growth<\/li>\n
  • Estimated Consensus Earnings Growth<\/li>\n
  • Growth in revenues<\/li>\n
  • Growth in assets<\/li>\n <\/ul><\/td>\n <\/tr>\n

Quality<\/p><\/td>\n

    \n
  • Return-on-Equity (ROE)<\/li>\n
  • Earnings Growth Variability<\/li>\n
  • Return-on-Invested Capital (ROIC)<\/li>\n <\/ul><\/td>\n <\/tr>\n

Value <\/p><\/td>\n