Corporate File

Building equity using the integrity screen

Lokeshwarri S K | Updated on June 22, 2021

Founder leader: Ajit Dayal founded Quantum Advisors

On its silver jubilee, the men behind Quantum Advisors introspect on the value of investing.

Quantum Advisors has many firsts to its credit. In the 1990s, when equity research was scarcely known, it pioneered stock selection through consistently applied valuation metrics. While the Indian mutual fund industry depended on distributors to market funds, Quantum AMC, a part of Quantum Advisors, decided to introduce direct plans, sans distributor commissions, in 2006, even before SEBI introduced the concept. AMC was also the first to use Total Return Index as a scheme benchmark and decided to have only one scheme per category well before it became the rule.

The group has now completed 25 years after a reorganisation in 1996. Sharing the journey so far, Ajit Dayal, founder, Quantum Advisors, says, “We started Quantum in 1990 with three companies — Quantum Holding Limited, Quantum Financial Services Private Ltd and Quantum Properties Private Limited. We filed an application for an IPO of ₹3 crore for each of the three companies and I am still awaiting a response because the Controller of Capital Issues was abolished in 1991.” SEBI’s rules regarding networth criteria for companies floating an IPO were more stringent; the IPOs were therefore shelved.

Quantum Financial Services (QFS) had three businesses — Quantum Advisors to which Quantum AMC was added, Equitymaster and PersonalFn. The split in Quantum Advisors in 1998 was due to a partnership with Hansberger Global Investors (HGI) from 1996 to 2004. Because of the regulatory concerns with the US Securities Exchange Commission (SEC), HGI wanted to be a part of a company that was solely into investment management. EquityMaster.com, then called Quantumindia.com, was the first Indian financial services company to go online on April 22, 1996.

“We would have liked to be much larger than we are today in terms of number of clients and AUM [Assets under management]. But we are absolutely delighted with the reputation we have and the delivery on promises made to our customers,” says Dayal.

It takes pride in its culture of integrity at work. “Honest advice is a philosophy that we believe in. There is integrity in whatever we do,” adds IV Subramaniam, MD & Group Head (Equities), Quantum Advisors, who has also spent around 25 years at Quantum.

Bigger AUM overseas

Quantum Advisors however has a bigger investor base overseas than that in India. Its Q India Value Equity Strategy manages ₹20,000 crore of AuM, under a PMS licence, for international investors. The same product in India under the AMC umbrella has attracted hardly ₹1,000 crore.

Explaining the reason behind this anomaly, Dayal says, “International investors look at risk; the return is expected to match the risk they are willing to take. The way we look at risk is through valuation and through the integrity screen.”

Selecting companies high on integrity has helped in curbing risk, according to Subramaniam. “While returns from stock could be high for a brief period of time, if the integrity is weak, the company could blow up at some point in time. If you look at what Satyam Computers did, it met all the return criteria; it was the investors’ darling in the much sought-after IT industry. But when we dug deeper, we found something missing, integrity was missing. That’s where the integrity screen becomes important. We would rather miss a short-term opportunity than take a client’s money and put it at risk in a company with low management integrity.”

Quantum AMC

The Quantum AMC complex has only one scheme per category. There are three equity products — the value fund, the ESG fund that uses the integrity screener built between 1996 and 2014 and the Quantum Equity Fund of Funds. In partnership with research from Personal FN, a basket of the best equity funds is selected so that investors’ money is distributed to funds managed by other fund houses. The offering for individual investors is rounded with the liquid fund and gold fund.

The Quantum AMC advocates the 12:80:20 rule to investors. It means an emergency fund equivalent to 12 months of current expenditure should be in liquid funds and savings bank accounts. Of the remaining money, 80 per cent should be in equity funds. Of the 80 per cent, a majority of 70 per cent should be invested into Quantum Equity Fund of Funds and the rest equally divided between Quantum India ESG Equity Fund and Quantum Long Term Equity Value Fund. The balance after allocating to equity funds is 20 per cent and this should be in the Quantum Gold Savings Fund and Quantum Gold Fund ETF.

Dayal says they are there to satisfy investors looking for long-term returns.

Published on June 20, 2021

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