MAPE ADMISI Securities, a part of the boutique financial services firm MAPE group, is the second brokerage to offer stock advice, based on quantitative research. Edelweiss Securities is the other Mumbai-based firm that has had a quantitative research team in place for last three years.
Typically, brokerage firms in India offer stock advice based on fundamental research on the company which looks at data but also applies qualitative measures. Typically, analysts meet a company’s management, look at the financial statements, analyse industry trends and make forecasts about future earnings potential.
A quantitative analyst uses statistical tools and studies historical earnings trends to arrive at a list of stock recommendations.
“We didn’t see any value in offering another fundamentals-based research report to institutional investors. Already there are 30-odd brokers offering such stock recommendations. So, giving quantitative research-based stock advice will be our unique selling proposition,” says Mahesh Bhagwat, head of equities at MAPE ADMISI Securities, which is a joint venture with the London arm of a commodity brokerage, Archer Daniel Midland Investor Services Inc.
Bhagwat has spent three years as head of derivatives desk at ICICI Securities, the investment banking arm of ICICI Bank Ltd. The MAPE group was formed in 2001 by three investment bankers of DSP Merrill Lynch Ltd.
Bhagwat’s two-member team is bringing out a quantitative research report dubbed ‘Quant Insights.’ It uses four analytical techniques to arrive at stock recommendations in the IT sector. It looks at the fluctuations in the expected earnings growth of each company and corelates it with the deviation in such expectations. The research report also tries to identify metrics such as growth or momentum factors that are driving returns in the sector. Yet another quant product of the firm recommends a two-stock portfolio with a low-risk profile on quarterly basis.
Although these offerings are just a few months old, the company claims to have received good response from institutional investors, such as domestic mutual funds and foreign institutional investors.
A relatively old hand in this field, Edelweiss, has a four-member team that offers around 15 quant-based products to institutional investors.
“Until recently, only foreign institutional investors were showing interest and using our quant research inputs. But ever since mutual funds have been given more freedom to invest in derivatives, we have seen lot of them showing interest in our quant reports,” says Sunil Jain, the analyst for alternative and quantitative research at Edelweiss.
Outside India, quant mutual funds are often referred to as “black box” investments for their strict adherence to quantitative metrics and technical analysis. As per Lipper Analytics, there were three quant funds in 2001 and, by 2006, the number of such funds zoomed to 102. Also, the assets managed by these funds rose from $19 billion (Rs77,900 crore) in 2002 to almost $40 billion in 2006. Most global financial services firms such as Goldman Sachs and Merrill Lynch have full-fledged teams to do quantitative research.
Considering that only 20 of the 159 equity funds in India have been able to outperform the Sensex over the past year, fund managers may soon resort to quant techniques.
Says Nilesh Shah, chief investment officer at Prudential ICICI Mutual Fund: “We are entering a scenario where the markets are trading in a narrow range and the fundamentals of a company do not change overnight. So quantitative techniques could become a differentiating factor.” Shah says he has been using quantitative tools provided by Bloomberg to customize his research.