Mutual Funds

Keep Axis Quant Fund on your radar for now

Hari Viswanath BL Research Bureau | Updated on June 19, 2021

The fund’s back-testing performance cheers but watch it during the next bout of market correction

Quantitative investing refers to investment strategies in which buying and selling of shares/investments is done primarily on the basis of a process-driven analysis of numerical data.

Globally a popular concept especially in the US - with the US quant ETF AUM alone at around $1.5 trillion as per a recent report by Bloomberg - it is still at a nascent stage as far as the Indian mutual fund industry is concerned. There are currently five quant-based mutual funds — Nippon India Quant, DSP Quant, Tata Quant, ICICI Pru Quant and Quant Quantamental, all cumulatively managing less than ₹1,000 crore in a an industry with Equity AUM of ₹33 lakh crore.

The latest entrant is Axis Quant Fund, an open ended equity scheme open for subscription till June 25.

The fund will be focussed only on domestic equities as the same quant model will not work across different geographies due to various factors. It will be benchmarked to the S&P BSE 200 TRI.

Investment process

The fund will be actively managed, the difference being the buying and selling decisions will be made by software, with oversight by a human fund manager. The fund aims to pick stocks based on a predefined process to identify companies using quantitative and qualitative parameters. The key factors underlying the quantitative process are — one, fundamental factors like return on equity (ROE), sales growth, price to earnings, etc; two, technical factors like liquidity, stock price momentum, volatility; and three, risk factors like volatility, beta, risk ratios.

Once the universe of stocks is screened and short-listed based on scores using fundamental factors, the technical and risk factor weights will be applied to arrive at final stock selection.

The portfolio will be reviewed, monitored and rebalanced based on a pre-defined frequency. Ad hoc rebalancing will be done only in case of exceptional situations. The final portfolio is likely to consist of a diversified portfolio of around 50 stocks across market-cap categories.

Quant funds, in general, try to identify the important factors first, and then the appropriate combination/weightage of factors that help generate consistent alpha. While Axis fund strategy works on a combination of the three factors mentioned above, the DSP Quant fund has a strategy that is built on eliminating highly leveraged companies and then picking stocks based on high ROE and earnings potential.

Tata Quant uses artificial intelligence and machine learning to pick stocks while Nippon India Quant follows a quality-cum-momentum strategy. ICICI Pru Quant process includes selecting stocks based on a combination of macro, fundamental and technical factors.

In many cases there will be overlapping of the factors across strategies of these funds, and the difference in performance will be driven by the sub-factors used and the weights applied to these factors.

As per back-testing, the Axis Quant strategy would have delivered robust returns with a CAGR of 16 per cent in the 14 years till CY20 vs the benchmark delivering 11 per cent.Similar back-testing analysis starting January 1, 2020, indicates that the drawdown in the model portfolio at the peak of the Covid lows in March 20 would have been around 29 per cent vs a higher 37 per cent for the benchmark.

While the back-testing results are encouraging, investors need to note that any back-testing analysis comes with many constraints and hence must only be viewed as an indicator — and not a validation of any strategy. There will be constraints to performance that are not detected now but will come to light only when a strategy is executed with real money.

To put it simply, net practice and playing a real game are different. But a player performing well in net practice must be keenly watched for performance in the real game.

Watch this space

Globally, quantitative strategies have proven to be successful and there is no reason why such strategies should not succeed in India as well. Some of the largest hedge funds in the world are quant funds. One of the biggest advantages that quant investing brings to the table is elimination or reduction of cognitive human bias in investing decisions. Hence such funds offer investors some good diversification opportunity within the equity landscape.

Given the encouraging back-testing performance for the Axis Quant Fund, investors can have it on their radar and see how it fares in the real world. With markets at all-time highs now and valuations extremely stretched, if the fund fares well during the next bout of market correction, it would then be a validation of the strategy and a reason to consider investing.

Published on June 19, 2021

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