PremiumMUMBAI : In the beginning were the rules. Know your company before you bet on it. Once you are in, ignore the daily churn, buy and hold. Focus on the tree, not the forest.
Till an upstart came in and broke each of them—and still made pots of money. That’s the story of Quant Mutual Fund, and how each of its risky bets—data over instinct, flux over stability, buy-and-sell over passively holding on to stocks—has paid off so far, allowing it to race ahead of the pack and make its investors very happy.
Take Romil Kapoor, for instance. Quant Mutual Fund first showed up on his radar in January 2021. The Pune-based mutual fund distributor was intrigued by the fund’s performance. While the market had rebounded strongly over the previous months from its covid lows, Quant Mutual Fund had outdone its peers. “I looked at Quant’s risk-adjusted returns and that’s what got me interested," Kapoor told Mint. Kapoor then invested some money from his personal portfolio into Quant to test the waters and was rewarded with an 18% return. Today, having studied the fund house carefully for a while, Kapoor recommends it to clients and has stayed invested personally, but has capped his exposure at 15-20%.
Something similar happened with Uday Hazarika, a Mumbai-based underwriting professional, who was looking for a tax saving fund. “I invested in Quant in late 2020 or early 2021. I saw that they were topping the charts on Value Research (an independent mutual fund research agency) for the last three to five years. I invested around ₹1 lakh in their taxsaver fund. The returns have been great since then. I might invest more in the future if the performance sustains," he said.
Shesadri Biswas, a Bengaluru-based HR professional, came in at the start of 2022, when the stock market cycle had turned. But he says his investments in Quant have held up better than the broader market. “I invested in Quant three months ago. The last three months have been bad for the markets, but I would say even at this tough time my investments have marginally outperformed," he said.
Like Kapoor, Hazarika and Biswas, thousands of investors have been impressed by Quant Mutual Fund’s performance. The fund house topped the charts in various categories in 2020 and followed it up with a similar performance in 2021. Its assets under management (AUM) have gone from next to nothing to ₹6,500 crore (average AUM in the January-March 2022 period), largely driven by retail investors.
The eye-popping returns have long been regarded suspiciously by wealth managers, financial advisors and experts in the mutual fund space. However, the fund house has largely bypassed the established intermediaries to go directly to retail investors—through online platforms. The number of investor folios in its schemes jumped from around 25,000 in March 2020 to almost 1 million in March 2022. Around 60% of its assets are in direct plans (they have not come through mutual fund distributors).
On the investment side, the fund house went against the consensus of fund management—bottom-up research, and a buy-and-hold philosophy. Quant Mutual Fund relies strongly (though not wholly) on macroeconomic data, tracking everything from sentiment to climate change and buys and sells frequently. If it succeeds as a fund house, Quant will upend an entire school of thought among financial advisors and intermediaries.
The approach
To understand Quant, you have to imagine a proprietary trader in the garb of a mutual fund. A trader is not wedded to any stock and does not care about the long term. He wants to make a profit the next day, week or month. To achieve this, he buys and sells frequently—making money here and losing money there—in the hope that money is made on a net basis.
This trading mentality at Quant comes from the founder’s background. Sandeep Tandon spent much of his career trading derivatives and prides himself on having conducted India’s first derivatives trade in the year 2000. Tandon started his career in a leading media publication on the business side. He soon moved to proprietary trading and broking, especially trading in derivatives. He worked at ICICI Securities, Refo Sify Securities and Kotak Securities before launching his own firm, Quant Capital, as a broking house, in 2007. From there, after a few changes in avatar, Quant Mutual Fund took its present form in 2017.
But trading skills alone are not sufficient to drive outperformance in the highly competitive mutual fund industry. Tandon has based Quant Mutual Fund’s investment strategy on the heavy use of data. “I have spent almost $15-16 million on data over the past 15 years. Everything we do at Quant is data-driven. There is no place for gut feel or emotion. We even quantify things like sentiment or liquidity. Our model looks at things like geopolitics and climate change. Investment success cannot come from good old bottom-up stock picking alone; it also needs analysis of macro variables," said Tandon.
“After applying all these inputs, the model tells you whether a stock is favoured or hated. And we buy hated stocks and sell favoured ones. Eventually the stocks mean-revert and we make money. We don’t take partial positions. We either like a stock and own it or don’t like it and exit completely. There is no ‘reduce position’ to see what happens. We act on our convictions," he added.
By ‘hated stocks’, Tandon means markets mispricing certain stocks because of investor sentiments. Quant takes advantage of this mispricing.
Quant Mutual Fund does not believe in the traditional model of ‘star’ fund managers or analysts specialising in particular sectors. Its investment team of about 20 people instead has a ‘rotating portfolio.’ There are three fund managers for each fund and analysts are sector-agnostic. The quantitative model reigns supreme—fund managers can select stocks from among the model’s recommendations, but they cannot override it. The proprietary model is refined over time—with new indicators being added and this is what analysts focus on. “People say keep things simple. But the world is complex. As we add data and complexity to our model, it just gets better," said Tandon.
This, too, goes against the conventional mutual fund model of fund managers specializing in particular sectors or market segments. The unorthodox approach followed by Quant has caused much of the wealth management industry in India to stay away from the fund house, especially large distributors and family offices.
How it all began
After working in companies such as ICICI Securities and Refo Sify in the early 2000s, Tandon founded Quant Capital in 2007-08. However, after a few years of going it alone, in 2014, he allowed the Anil Ambani-owned Reliance Capital to buy a major stake in his firm. This was a short-lived marriage that ended, according to sources, when the ADAG Group became interested in a banking licence. Tandon went on to carry out a management buyout of Quant Capital.
In 2017, Tandon spotted an opportunity in the ailing Escorts Mutual Fund, where he had already taken a minority stake some years before. The Escorts Group was not keen on growing the AMC business and Tandon proceeded to buy out the small AMC, which had around ₹200 crore of assets under management.
“The first two years were spent sorting out legacy issues, hiring new people and putting our own systems in place. Escorts AMC had around 14-15 offices around the country. We closed them all and chose to restrict ourselves to our Mumbai head office. I wanted to operate an asset-light business," said Tandon.
“If anyone wanted to buy our units in those years, they would’ve had to physically come to our head office in Worli or the Karvy office in Mumbai. We didn’t even allow online subscriptions. It was in mid-2020 that we became live on the BSE Star MF platform and later on online investment apps like Groww and Paytm Money, after we had demonstrated our performance," he added.
“Our AUM has grown from ₹200 crore or so at the time of acquisition to around ₹8,000 crore now. This is all retail money. We do not advertise and we do no marketing. Retail investors see our performance and they invest," said Tandon. “The large distributors usually prefer mid to large AMCs. So, even among distributors, we rely on the small ones. We pay these small distributors the highest commissions in the industry," he added.
The fund attracted most of its investors in 2021 and rewarded them with a handsome performance. Quant Small Cap Fund zoomed 91.73% last year, while Quant Tax Plan surged 63.27% and Quant Active Fund shot up 58.68%. To put that in perspective, the small cap mutual fund category rose 65.37% in 2021, the tax planning category rose 33.45%, and the S&P BSE 500 rose 31.63%. The 2-3% outperformance that AMCs generally deliver was 20-30% in Quant’s case.
What critics say
Quant AMC’s critics focus on multiple issues. The first is its high churn level. Quant Mutual Fund portfolios are churned several times a year, making it difficult to isolate a coherent investing philosophy or make any estimates about future performance. Frequent churn is also a departure from the conviction-based long-term approach followed by other AMCs.
The key question before investors is whether the performance will sustain. If Quant’s algorithms essentially follow a momentum strategy, it might fail in a bear market. Momentum investing is a strategy that picks stocks that have risen in the recent past on the hope that they will continue to rise in the near future.
“In my view, a lot of the outperformance stems from high beta stocks, which don’t generally outperform in the long run and hence they need to be frequently traded. So far, the AMC has only seen the up-move. How it does across the full cycle will be the real test," said Anish Teli, founder, QED Capital. High beta stocks are those that are more volatile.
According to Tandon, however, the critics ignore the returns generated by Quant’s schemes when they focus on churn. He is confident that the fund house will navigate multiple cycles, pointing out that the AMC shifted from growth to value stocks in late 2021 and successfully anticipated a market shift towards value.
The second critique is that Quant has historically invested in companies that some AMCs avoided in the name of corporate governance. According to Tandon, this criticism is also outdated. Quant has done its homework, tracking its key holdings, such as Adani Group stocks, over a long time, even visiting their facilities. “Some investment gurus have become wedded to their stocks. They have effectively become promoters of those companies. I am driven by data. I neither like nor hate any stock. I buy and sell dispassionately, according to what my model says," he added.
The third criticism is that Quant Mutual Fund runs its schemes the same way, with the same stocks featuring in its schemes, regardless of category (large cap, mid cap or small cap). “There is a fair bit of overlap in the portfolio holdings across funds as well as the top return contributors. It will be important see the investment process being consistently applied, going forward, as assets continue to scale up," said Kaustubh Belapurkar, director, fund research, Morningstar Investment Advisor India.
Tandon rejects this charge saying that the AMC does not rely on star fund managers, instead applying a collective approach to investment with three fund managers per scheme.
Fourth, the sceptics say that as Quant becomes larger, the fund house will no longer be able to successfully implement its strategy of frequent trading. Its buy-and-sell orders will move market prices. Tandon dismisses this criticism by insisting that most stocks in India have sufficient liquidity and AMCs are allowed to use derivatives up to 35% of a scheme’s assets. Derivatives such as futures and options are more amenable to frequent trades.
Regardless of their final performance, investors in Quant’s schemes should understand that they are essentially betting on a trading house that is very different from the rest of the mutual fund industry. They might be rewarded with high returns, but to get there they must steel themselves for a roller-coaster ride.
