What you should know about quant-investing based MFs

Asset management companies employ diverse investment strategies to select stocks from the broad market, aiming to achieve returns that outperform the market. One such strategy, which mitigates the subjective bias of fund managers in investment decision-making, is Quantitative Investing. This method uses mathematical models and predefined criteria to rapidly analyse and back-test extensive historical data, assessing the effectiveness of strategies against benchmarks.

Currently, there are nine mutual funds in India using quant investing strategies, including Nippon India Quant, SBI Equity Minimum Variance (though not strictly adhering to a quant strategy), DSP Quant, Tata Quant, ICICI Pru Quant, Quant Quantamental, Axis Quant, 360 ONE Quant, and Kotak Quant. These funds collectively manage assets totalling ₹4,800 crore. Additionally, Aditya Birla Sun Life has submitted a draft document to SEBI for their quant fund. Here’s an overview of the methodologies adopted by fund houses and how they have fared so far.

Model approaches

Quantitative funds employ either single-factor or multi-factor models to streamline their investment scope, often transitioning from a broad index like the S&P BSE 200 TRI to a tailored model portfolio based on these variables. Single-factor investing focuses on factors such as valuations, fundamentals, quality, and statistical measures, to construct investment portfolios. Conversely, multi-factor investing integrates a blend of factors to develop portfolios, which tends to be more intricate and refined. This approach necessitates advanced quantitative modelling techniques and thorough data analysis to pinpoint the optimal combination of factors — typically manifesting as ratios, including price-to-earnings (P/E), price-to-book (P/B), dividend yield, return on equity (ROE), return on capital employed (ROCE), standard deviation and beta. Subsequently, once the model is finalised, each company undergoes ranking and selection processes based on the specific factor being evaluated.

Fund Methodologies

In the quantitative space, seven out of nine funds follow either the BSE 200 or NSE 200 as benchmarks, which is a balanced mix of large- and mid-cap stocks. While the SBI Equity Minimum Variance Fund is benchmarked against the Nifty 50 TRI, Quant’s Quantamental Fund employs the broader Nifty 500 TRI as its benchmark.

Most fund houses adopt the multi-factor approach — to develop proprietary models, systematically identify investment opportunities, manage risks, and potentially enhance returns over the long term. In contrast, the SBI and 360 ONE (previously IIFL) funds are the only ones following the single-factor approach. The former aims to minimise volatility through a blend of risk and factor-based parameters, while the latter adopts a thematic momentum strategy.

As the oldest fund in the category, Nippon India Quant Fund employs a multi-factor approach, considering a blend of parameters, including valuation, earnings, price, momentum, and quality for quarterly stock screening. Quant’s Quantamental Fund, too, focuses on a mix of fundamental, quantitative, predictive and behavioural analytics to construct its stock portfolio. Although both funds claim to be quant-oriented, there is human intervention too, as the funds are actively managed and stock weights are determined by the fund manager. Likewise, Kotak fund, the latest entrant in the quant space, combines data-driven quantitative models with human expertise to select stocks with quality and momentum characteristics.

Tata Quant Fund uses a quantitative model powered by machine learning algorithms, focusing on parameters including macroeconomic variables such as yield spreads and fundamental metrics such as  P/E and P/B ratios. Both DSP and ICICI funds adopt a multi-factor approach, beginning with the elimination of certain companies based on pre-defined exclusion criteria such as high default risk and poor corporate governance. Subsequently, the DSP fund employs a combination of five factors corresponding to quality, value and growth styles ensuring low correlation between each factor, while the ICICI fund’s selection process integrates macroeconomic, fundamental, and technical factors. Similarly, Axis Quant strategy, with its Q-GARP model (Quality Growth At Reasonable Price), operates on a combination of three factors – fundamental, technical and liquidity.

It’s always crucial to comprehend the underlying factors and methodologies these funds use before considering investments.

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