3 mutual fund houses lead the charge with offerings in quant space

Quantitative (quant) investing, which employs mathematical models to make investment decisions, is catching the fancy of domestic mutual funds (MFs).

Aditya Birla Sun Life (ABSL) MF is set to launch its fund in this category next month, while SBI MF and Motilal Oswal MF have filed papers with the regulator for approval.

The investing style, which MFs can offer through the thematic route, hasn’t gained much traction in India, even as the majority of the existing schemes have completed three years. There are eight schemes in the category managing around Rs 5,400 crore, which is just 0.2 per cent of the total assets managed by active equity schemes.

"It has been gaining traction among investors looking for data-driven, systematic methods of investing. However, it is yet to achieve mass adoption. While quant funds constitute a minuscule portion of Indian equity assets, it’s nearly one-third in developed countries like the USA," said Alok Agarwal, Head - Quant & Portfolio Manager,  Alchemy Capital Management.

Quant funds are a unique offering in the MF space as the investment decisions are driven by a blend of active and passive strategies.

In quant funds, the investment decisions are driven by a set of predefined rules, said Jiral Mehta, senior research analyst at FundsIndia, adding that the involvement of the human element in these funds is mostly in the design phase and occasional review of the models.

“This actually prevents the stock selection of the fund from getting influenced by human biases, thereby operating in the middle ground between active and passive investing,” she said.

As the models differ from fund to fund, the portfolios and their performances show a wide variance. The one-year returns delivered by the eight quant funds range from 23 per cent to 74 per cent, according to Value Research data. The upcoming offerings are also taking varied approaches.

According to ABSL MF, its quant scheme will look to harness “the repeatability and efficiency of machines and the deep understanding of the markets of humans”.

“The fund will follow a strategy to identify stocks in the large and midcap space to harness the best of active managers — top 75 stocks from the top 15 asset managers. These companies are well-researched and well-invested. Subsequently, to narrow the universe, the fund will look at momentum factors and identify stocks based on this factor,” said Harish Krishnan, co-chief investment officer and head-equity at Aditya Birla Sun Life Asset Management Company.

In its draft filed with the Securities and Exchange Board of India, SBI MF has said that its model will focus on fundamental factors like value, quality, and growth that provide insights into a company’s growth outlook and valuation.

“The key sub-indicators may include return on equity (RoE), sales growth, cash flow, debt-to-equity ratio, earnings growth, price-to-book, price-to-earnings, dividend yield, and earnings yield,” it said.

Motilal Oswal MF plans to deploy the hockey-stick return investment strategy.

“Hockey-stick returns refer to a sharp and sustained rise in the price of a stock. This leads to a hockey-stick formation of the price chart, translating into returns for the stockholders. One key metric for identifying such stocks is through the Economic Profit Power Curve. Economic profit is defined as the product of net worth multiplied by the spread between RoE and cost of equity,” the draft filed by the fund house states.