Quant funds should be used only for portfolio diversification, and are suited for high net worth investors.
Computers have replaced humans in many walks of life. And now, these machines are finding their way in the investment world too. Financial institutions like banks and mutual funds are using them for jobs that traditionally required a huge amount of human experience – picking stocks, for instance.
Consequently, mutual funds are launching products, based on quantitative analysis. Currently, two fund houses have such funds. Reliance Mutual Fund’s scheme is called Quant Plus and Religare Mutual Fund has AGILE. The latter has two variations – an open-ended equity fund and an equity-linked savings scheme. The latest to join the bandwagon is Canara Robeco. The company plans to launch Large Cap+ Fund, based on quant.
Consequently, mutual funds are launching products, based on quantitative analysis. Currently, two fund houses have such funds. Reliance Mutual Fund’s scheme is called Quant Plus and Religare Mutual Fund has AGILE. The latter has two variations – an open-ended equity fund and an equity-linked savings scheme. The latest to join the bandwagon is Canara Robeco. The company plans to launch Large Cap+ Fund, based on quant.
The analysis involves using historical data of stocks and prediction of stock movements, accordingly.
But returns, as of now, have not been too impressive. If you look at the performance of the existing fund, human intelligence has outperformed the artificial intelligence. Religare Agile has returned 57.11 per cent since January. The ELSS scheme has 84.80 per cent returns. And, Reliance’s scheme has fared better with returns of 86.14 per cent.
Equity diversified schemes have fared much better comparatively. Out of the total 189 equity diversified funds that existed before January, 110 have given higher returns than any of these quant funds.
But that’s in their characteristic. As Vetri Subramaniam, head – equities at Religare Mutual Fund and also the fund manager for the AGILE scheme, explains, “These funds work on historical data. The volatility seen globally, and in India, in the past year- and a-half has not happened before.”
WORKING OF QUANT FUNDSThese funds pick stocks based on a computer programme. This computer programme is made on trends of various stock market parameters observed in the past 10-15 years. The parameters could range from price-to-earnings (PE) ratio, stock price movement, market sentiment, earnings expectations and so on.
Every fund house has a proprietary model based on the parameters they choose. For example, Canara Robeco uses PE and price-to-book ratio, upgrades and downgrades recommendations by analysts, stock momentum of the recent past, earning valuations and earning expectations by analysts.
Analysts in one of the mutual fund’s parent company, Robeco, used this model at headquarter in Netherlands. “The programme is further tweaked to Indian markets based on what is perceived to drive stock prices in the country,” said Anand Shah, head – equities at Canara Robeco.
Reliance uses parameters such as periodical moving average of the stock, liquidity, market capitalisation, PE and PB ratios, earnings before interest tax depreciation & amortisation (EBITDA) & EBITA margin and other parameters, based on the balance sheet and profit and loss account.
These models assume that stock markets or companies will continue to behave the way they have in the past. “But under different situations like the sharp fall of 2008, mathematical models might not hold good. These funds can, therefore, generate significant losses to investor,” said Chintamani Dagade, Head of Research at Morningstar (India).
Religare AGILE faced the same problems last year when market fell. The one year returns for the fund is mere 36.65 per cent. The category average of the equity diversified funds delivered 90.56 per cent returns in the same time.
Another industry expert said that quant funds are more likely to succeed in the developed countries, where markets are efficient. He also added, “As the models are proprietary, asset management companies (AMCs) keep them secret. This causes transparency and accountability issues.”
The existing funds from Reliance Mutual Fund and Religare Mutual Fund are very aggressive. With their benchmark as 50-share Nifty index, their portfolio comprises of less than 20 funds. They also use futures and options extensively.
“As the portfolio consists of a few stocks, these funds will tend to outperform the market in the bull phase and fall heavily in downturns,” said Subramaniam.
These funds tend to use a lot of technical analysis and hence, suited for seasoned investors only. Pankaj Narain, director, head private clients at Deutsche Bank also said that quant-based funds are for investors who have a large portfolio of investment and they have their asset allocation in place. “This is essentially for investors who are looking for diversification in investment strategy. Such investors can put in 3-5 per cent of their portfolio in these funds,” said Narain.
But returns, as of now, have not been too impressive. If you look at the performance of the existing fund, human intelligence has outperformed the artificial intelligence. Religare Agile has returned 57.11 per cent since January. The ELSS scheme has 84.80 per cent returns. And, Reliance’s scheme has fared better with returns of 86.14 per cent.
Equity diversified schemes have fared much better comparatively. Out of the total 189 equity diversified funds that existed before January, 110 have given higher returns than any of these quant funds.
But that’s in their characteristic. As Vetri Subramaniam, head – equities at Religare Mutual Fund and also the fund manager for the AGILE scheme, explains, “These funds work on historical data. The volatility seen globally, and in India, in the past year- and a-half has not happened before.”
WORKING OF QUANT FUNDSThese funds pick stocks based on a computer programme. This computer programme is made on trends of various stock market parameters observed in the past 10-15 years. The parameters could range from price-to-earnings (PE) ratio, stock price movement, market sentiment, earnings expectations and so on.
Every fund house has a proprietary model based on the parameters they choose. For example, Canara Robeco uses PE and price-to-book ratio, upgrades and downgrades recommendations by analysts, stock momentum of the recent past, earning valuations and earning expectations by analysts.
Analysts in one of the mutual fund’s parent company, Robeco, used this model at headquarter in Netherlands. “The programme is further tweaked to Indian markets based on what is perceived to drive stock prices in the country,” said Anand Shah, head – equities at Canara Robeco.
Reliance uses parameters such as periodical moving average of the stock, liquidity, market capitalisation, PE and PB ratios, earnings before interest tax depreciation & amortisation (EBITDA) & EBITA margin and other parameters, based on the balance sheet and profit and loss account.
These models assume that stock markets or companies will continue to behave the way they have in the past. “But under different situations like the sharp fall of 2008, mathematical models might not hold good. These funds can, therefore, generate significant losses to investor,” said Chintamani Dagade, Head of Research at Morningstar (India).
Religare AGILE faced the same problems last year when market fell. The one year returns for the fund is mere 36.65 per cent. The category average of the equity diversified funds delivered 90.56 per cent returns in the same time.
Another industry expert said that quant funds are more likely to succeed in the developed countries, where markets are efficient. He also added, “As the models are proprietary, asset management companies (AMCs) keep them secret. This causes transparency and accountability issues.”
The existing funds from Reliance Mutual Fund and Religare Mutual Fund are very aggressive. With their benchmark as 50-share Nifty index, their portfolio comprises of less than 20 funds. They also use futures and options extensively.
“As the portfolio consists of a few stocks, these funds will tend to outperform the market in the bull phase and fall heavily in downturns,” said Subramaniam.
These funds tend to use a lot of technical analysis and hence, suited for seasoned investors only. Pankaj Narain, director, head private clients at Deutsche Bank also said that quant-based funds are for investors who have a large portfolio of investment and they have their asset allocation in place. “This is essentially for investors who are looking for diversification in investment strategy. Such investors can put in 3-5 per cent of their portfolio in these funds,” said Narain.
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