The Mutual Fund Show: How This Fund Has Outdone Peers During Uncertainty
Quant Mutual Fund’s schemes have outperformed peers in all categories as equities recovered after the worst selloff in more than decade in March.
In the last three months, mutual funds have returned gains of 10.3 to 27.4%, according to Morningstar data. Quant Capital’s schemes beat the industry and the benchmarks.
On BloombergQuint’s Mutual Fund show, Sandeep Tandon, managing director and chief executive officer at Quant Capital, attributed this to their “VLRT” investment framework. That’s short for valuation, liquidity, risk and time.
“We look at valuation analytics—which is a third of our work. We have another two-thirds of the component which is known as liquidity and risk appetite analytics, and ‘T’ is obviously for time,” he said. As a combination, we like to work towards this model which really helps us in not de-risking our portfolio because three styles are involved rather than just pure fundamental analytics.”
Watch the full show here:
Here are the edited excerpts from the show:
What has led to this good performance of (Quant Capital)? Do you reckon that you will be able to emulate this performances going ahead?
Tandon: First of all, as a house we are very macro-driven. We try to understand what sort of global environment is and accordingly decide our strategy. So, we are not bottoms-up approach guy that we look at very stock-specific or sector-specific things, we are much larger macro house. Everything starts from risk. We try to understand what sort of risk environment we are operating right now. We look at bond risk indices of global markets, particular asset classes—if there is any change in particular geographies or any region or particular segments. So it’s like, start with risk then look more from a currency perspective, larger commodities market, credit market, and then comes to equity, sector and to individual names.
We have been talking about that from 2018 till 2023—the phase where geopolitical volatility will remain elevated, and the phase which we describe is known as ‘quality expansion phase’. And we have to work out a strategy, how to manage an ‘elevated wall’ situation. So you are not in a normal environment where everything is fine. We are all living in the uncertain times and in a completely abnormal environment. We have seen the choppiness among global asset classes and based on these data points, we take a conscious call and accordingly we work on it.
We manage our money in a very dynamic manner. We as a house believe that we are in the business of risk management and in this challenging environment, instead of looking at risk from a balancing perspective, from a medium term or quarterly or monthly, we manage our risk in a more dynamic manner. This is one of the reasons we have done better because we are able to understand what sort of environment we are in. We are a student of behaviour science or behavioural finance. So we try to quantify fear and greed in this environment, which really helps us.
Our style of investing is slightly different from most of the traditional houses. We’ve defined ourselves as part of the VLRT framework. We look at valuation analytics, which is one-third of our work. We have another two-thirds of the component known as liquidity analytics and risk appetite analytics, and ‘T’ is obviously for time.
This model really helps us in de-risking our portfolio because three styles are involved rather than just pure fundamental analytics. We look beyond valuation. In the current environment, the whole world is talking about liquidity parameters. We have a concept in our model portfolio, VLRT framework, where liquidity analytics is a part. We have been working on liquidity analytics not only for various global asset classes, but we also try to predict and analyse a framework, which we call a 'predictive analytics framework' where we try to understand the liquidity of sector and stocks. So, it’s a very vital data point for us.
What does that set of analysis tell you for people who want to invest, put money into mutual fund investing right now? Is the market looking risky, overstretched or comfortable because of the kind of liquidity that we have? What should an average mutual fund investor do in the current times?
Tandon: As I explained earlier, we are living in an ‘elevated walls’ environment so when the choppiness remains high, we have to accept this phase. The people who are not prepared, should not be part of this phase altogether, and we’re not talking about that this phase is just temporary — that it can last for one month, two months or a quarter or so. We are saying it is a five-year cycle which we are in, and it can last up to 2023. Now, that does not mean that you will not get returns. The only thing is that the strategy has to be very different. The traditional tools that don’t factor these walls as an important input should be encouraged to look at all these aspects also and based on that, we can form our strategies.
What would your strategy be when you’re saying that you are dynamic versus what some of the houses are doing?
Tandon: As a mutual fund, we are ultimately in the business of risk management. Return is a by-product of that. So when time cycles are in your favour and when you say markets are more stable and everything’s looking normal, that’s the time you try to re-adjust or re-balance your portfolio from a risk-perspective—sometime on monthly, most people actually do on a quarterly basis or on an event-driven basis. When I say we are in the environment which can remain choppy for a very long period of time, then you have to re-balance your portfolio on a regular basis. I’m not talking about daily or weekly, but it has to be done in a more dynamic manner as the situation unfolds.
We are a student and a believer of adaptive asset allocation. We basically, in very simple terms if I have to put it, try to adapt the environment—what is the current environment. Based on that, you build your portfolio analytics tools.
What is it that your current analysis is telling you, Sandeep? Would it be a good time to invest into equity mutual funds or should people do a mix of equity plus debt? Also, in equities, what kind of funds would you presume would be better risk-reward suited right now for that average retail investor who’s probably seen some salary cuts, may have seen some job losses but still has some hard earned money and wants to put it to work?
Tandon: So from a mid- to long-term perspective, given the low interest rate environment it is not worthwhile putting a very large or substantial money towards debt. We would either be looking at gold as an important asset class—we are looking at precious metal from a longer-term perspective, and even gold movement will not be very linear in the current environment. We have seen that it has been on a sharp upmove in last one year. I expect that upmove can halt maybe in next two-three weeks’ time and then you can see a deeper correction there also.
As an asset class, we are quite bullish on the precious metal space. Beyond precious metals, I think equity is a good asset class from a longer-term perspective. But keeping in mind the volatile phase we are in right now, I expect that you should look for a profile of a fund manager or a particular scheme which is more managed in a dynamic manner, rather than a traditional way. And obviously, the market has good opportunities, so it’s all about sector rotation.
If you really look at banking, the largest weighted in the portfolio, has done extremely bad in last four months. It was the most preferred sector for a very long period of time—maybe from 2013 till 2020 we have seen the banking sector doing extremely well. But in the last six months, whether it is pharma or specialty chemicals or agro chemicals, some of these names have actually delivered good returns. So, it’s not that everything has collapsed and everything has given negative returns. It is all about how best you can shortlist these sectors and how best you can identify these in your portfolio.
With an increase in AUM, which no doubt will happen given your performance, would you be able to kind of be this free-flowing and dynamic?
Tandon: The strategy which we’re using are pretty scalable. It’s not about AUM. Today we are definitely in the very initial phases. We took over a mutual fund in this country and we are trying to turn it around with our framework. Effectively, not even three months have passed that we took over and are trying to revamp the entire thing. It is a very scalable strategy and is not just about the impact cost. As the fund grows, the strategy remains the same. The stock selection can be slightly different, but the strategy will not change.
What have you done which has led to such a sharp performance display over the course of the last three months? What is it that you would look to do in your mutual fund schemes over the course of the next 12-18 months?
Tandon: Right from January we were very clear that if our own research forecast is that global markets are heading for a difficult environment and if we are in the volatility expansion phase, so what should be our strategy? It has to be a low-beta strategy, we will not like to take extraordinary risks in the current environment.
We pruned beta in our portfolio and moved towards defensive as a strategy. We started increasing our exposure towards pharma, consumption names, some of the specialty chemicals, which were not that expensive in January-February. We pruned our financials—the largest weightage in the index and among other portfolios—from January significantly. We built our portfolio keeping in mind the uncertain environment.
We went significantly overweight on stocks like pharma, agro chemicals, specialty chemicals, utility, energies, and consumption. That is how the strategy played off well. What is more important is that is not like we took very extraordinary risks. If you look at the beta value of our portfolio, it is less than 1. So, most of the beta values are like 0.65, 0.79. Even a small-cap beta value is 0.9. So with a limited risk, we performed well because the sector allocations were relatively better and that made a big difference to us.
Would you look to keep this beta value that you’re talking about as a consistent, under one kind of a scenario, going ahead as well? How important would it be from somebody who is trying to analyse what mutual funds are doing?
Tandon: It all depends on the environment which we are in. It is very difficult to predict three years, five years or a 20 years’ view with the current environment. I can say with a good amount of confidence that the next six months or the next one quarter or the next two quarters definitely can remain fully challenging. So, we like to live with this philosophy in the current environment that we will not take extraordinary risk and be very selective in both in terms of sector as well as stocks.
In equity conversations, we do a lot of these questions whether people should invest in large, mid or small caps currently. From a mutual fund investor’s perspective, what is a good category in the current scenario to invest into?
Tandon: Given the framework, which a lot of our many predictive analytic tools are endorsing, going forward the small and mid caps have potential to outperform the large caps. That is one of the reasons our portfolio is also relatively more skewed towards small caps. And from behaviour perspective, when you are in a risk environment, people have a very simple tendency to park money in the large-cap names, don’t take unwarranted risk—the traditional approaches. But given the environment we are looking at, and I said we are more of a research-based house so a lot of our propriety tools are endorsed, and this is the phase where small and mid caps will do much better for the next two-three year perspective. So, I would like to recommend either multi-asset or multi-cap funds.
Sandeep, a lot of people who come on the mutual fund show say that debt and long-term debt allocation should be a part of your portfolio as well. Now I heard you say somewhere in this conversation that you don’t think looking at the current scenario that debt funds are a good option. Why do you say that?
Tandon: In the current environment, where global central banks are coming together, the amount of liquidity which we have seen pumped in the system—given a scenario in 2008 when the global financial crisis-I happened—is significantly large. This crisis is actually far bigger than 2008. The amount of liquidity which has been pumped by the central bank is more than before, and we have not even finished 2020. So, the first four months or maybe in a quarter’s time that sort of liquidity is pumped. When liquidity comes to the market, it has its own side-effects and its impact obviously by default comes to the equity market, which was depressed that time when the market corrected very sharply, our risk appetite parameters collapsed significantly. It was a perfect case for a bull market. That’s the way bull markets perform. The risk appetite has to be significantly low, which is accompanied by large liquidity acting as a catalyst. That was a classic phase. If I look at from the current market perspective, maybe liquidity will not go down in absolute number terms, but the momentum which we have seen has already started tapering off—we call it the ‘easy phase of liquidity’, which started from somewhere in March-end or April. That sort of liquidity momentum is fizzling out, so it might have some small-term consolidation in the market.
In the low-risk environment, I will still go for equities and we have a view from a longer-term perspective, particularly, more from a developed market. We expect that inflation is coming with a different magnitude which people are not anticipating right now. The whole theory and consensus in the global market is low inflation and low interest rate. We believe that massive inflation is coming over the period of 2020 and second half of 2021. So maybe that stage when the inflation starts inching up, and global interest rates start picking up, that could be the time when one can look at some amount of exposure in the debt market. Our perspective is completely macro, and global than Indian perspective because the amount of data points which we see in the global markets are not available in India, so it is very difficult to visualise that. But everything is global. If U.S. interest rates harden from the next year, which we expect from 2020, maybe at that stage we will look and can consider the debt market portfolio.
I heard you mentioned that you believe that the precious metal rally could peak out in the next two or three weeks, but if indeed argument is that inflation could inch up, it could actually augur positively for assets like gold, right? What should investors do?
Tandon: From a longer-term perspective, we are very constructive on the precious metal as a space, but the amount of hype which has been built in the media as well as among the investor fraternity, the amount of awareness about silver, gold which is there worldwide, it’s leading to some amount of euphoric move which we have seen. I’m not saying that is going to collapse and correct significantly, but 200-300 points dollar movement in Comex gold is a very large movement. So, if you are heading towards 1,900, it can go maybe closer to 2,000 and from 2,000 if it corrects to $300, it’s a very substantial move. So, we are trying to highlight as we see some amount of euphoria getting built there from a very near-term perspective but we remain very constructed from a longer-term perspective. That’s the reason we are saying that instead of looking at debt fund, multi-asset fund is a better option, and if the portfolio has a mix of both—gold, bullion maybe equity in a big way and a small portion of debt that could be an ideal combination.