On the Radar. Why Quantum Long Term Equity faltered

What happens when a fund stays away from infrastructure, engineering, and banks for most of 2014? Starkly lower returns, of course.

Quantum Long Term Equity’s extreme caution in the latest market rally saw it post one-year returns of 25 per cent. While this is better than the 23 per cent return of its benchmark Sensex Total Return Index, it is far below the category average of 38 per cent. While a conservative strategy does call for caution, Quantum’s tendency to stay on the sidelines means that investors lost out on a good market rally.

The recent bull run was certainly fuelled by speculation on economic turnaround and earnings pick-up. Valuations, thus, went far ahead of actual earnings growth, especially in the beleaguered cyclical sectors.

But even so, Quantum’s withdrawal from these sectors was very premature and saw it snag few multi-baggers. Peer funds that upped exposure to these sectors clocked handsome gains.

Quantum Long Term Equity moved out of infrastructure major Larsen & Toubro, bank stocks such as State Bank of India and Axis Bank, logistics companies Gateway Distriparks and Container Corp during April-June 2014. These stocks have gained upwards of 40 per cent since. Similarly, the fund exited engineering companies Cummins India and Crompton Greaves by mid-2014. These stocks have only recently corrected.

The fund’s strategy echoes that of 2013, when it trailed the TRI Sensex as it stayed away from market darlings FMCG and pharmaceuticals. These two sectors still don’t feature in the fund’s portfolio. In the past year, Quantum Long Term Equity pulled ahead of the benchmark through prudent calls on Voltas, Indian Hotels, and HDFC. The fund lowered exposure to automobiles, its top holding, to 10.4 per cent now from 13.5 in January 2014. But it pruned holding in underperformers such as Bajaj Auto in favour of star performer Maruti Suzuki.

Because the fund holds a concentrated portfolio, outperformance of a few stocks can swing returns. The fund also doesn’t churn its holdings much.

Move into cash The second factor constricting the fund’s performance was its falling equity exposure from November 2013 onwards — the beginning of the recent rally. From holding 92 per cent in equities in October 2013, the fund dropped to 67.4 per cent by March 2015. Cash holdings through the CBLO market, which have relatively low returns, rose to 31 per cent by March 2015.

ICICI Prudential Dynamic fund, also a conservative fund that mandates a move into debt depending on market valuations, has clocked better returns at 34 per cent for one year.

While the fund had a similarly low equity exposure of around 75 per cent, its debt component was invested in gilts, which have rallied from August 2014.

The fund’s returns, thus, are higher than Quantum Long Term Equity.

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