Prime Fund Recommendation: A fund for the opportunist in you

Some funds have a clear fundamental strategy that shows in their portfolio construct. When that strategy pays off, they deliver. But many good-to-hear strategies have failed for many mutual funds in recent years. This is partly due to fast-shuffling sector preferences in the market and partly due to high stock weights in the index that funds struggle to replicate. As a result, you see them underperforming key indices. 

But there are but a few funds whose portfolios don’t really try to even vaguely hug indices and some stocks in the portfolio don’t exude fundamental confidence. Yet, their performance tops charts. Many of you ask us about such funds and our usual response is something to the effect of ‘sorry, not our kinda fund’ 😃

But in our recent December quarter Prime Funds review, we did add one such fund to our list of recommended funds – Quant Active Fund. In this report, we’re delving into this fund. 

Quant Active fund – a multi-cap fund – is the latest addition to our Equity Aggressive category. We have listed this within a new subcategory called ‘Tactical’. We have introduced this fund to ensure that aggressive investors who want to play the market momentum do not lose out when fundamentals play spoilsport or when fund strategies fail in some markets.

The fund and performance

Quant Active Fund is a multicap fund with the flexibility to invest across large, mid and small-cap stocks, but mandated at a minimum 25% in each market cap segment. While the fund was launched in March 2001, its track record may not be relevant as Quant Capital took over Escorts AMC to start their AMC business. The fund is managed by Ankit A Pande. 

The fund has the flexibility to make tactical allocations, which its manager does not hesitate to use. The fund uses the AMC’s investing framework – called Valuation, Liquidity, Risk appetite and Time (VLRT) to invest in stocks. Like all other funds from the AMC, it uses a bottom-up approach to investing. The one common trait that we note across its life post the Quant takeover is that it has a very high portfolio turnover. This churn suggests very tactical moves. We have not identified any other specific strategy that the fund deploys. However, this does appear to deliver.

In its own category, the fund beats the broad market index Nifty 500 79% of the time when returns were rolled over 1-year periods, daily, from 2019-22. Over 3-year rolling periods, this performance gets a tad better.  This is best only to another multicap fund from the Mahindra stable with a similar tactical strategy. 

Since there are only a few funds with track record in this category (given that it is a new category SEBI created in 2020) we compared the fund with another aggressive category - large & midcap. Here again, going by the rolling average 1-year returns, the fund is next only to the Mahindra fund. This suggests that it competes well with more aggressive categories too. 

Its margin of outperformance is also high. It managed to beat the Nifty 500 by an average 18 percentage points over benchmark when 1-year returns were rolled. To contrast, the multicap and large & midcap categories put together outperformed Nifty 500 by a mere 2.36 percentage points on an average! 

Within its own category, the fund not only has the best upside capture ratio (returns of fund divided by benchmark returns in bull market), its downside capture at about 73% is the lowest as well. That means if the index (we took the Nifty 500) fell by 1% this fund would have fallen by 0.73%. This helps reduce our concerns over how such tactical funds may perform in correcting or volatile markets.

That the fund has managed consistency with a very high tactical allocation in stocks, some of which do not have great fundamentals to fall back upon, provides some confidence in its ability to catch momentum and act deftly.

Portfolio

As a fund house Quant does not respect its benchmarks much 😊. In other words, its holdings deviate significantly from the benchmark, and deliver outsized gains. Quant Active’s portfolio needs close watch as it has high churn. The table below will show you that over a year’s period, the fund had churned its portfolio 1.79 times (179%) as of March 2022. This is significantly higher than its closest peer (in terms of strategy) Mahindra Manulife Multicap. That suggests that it does not have much of a buy and hold strategy like most equity mutual funds. 

The table with data on top 10 holdings as of March 2022 and December 2021 also shows you how its top 10 holdings have dynamically changed in just 3 months. This is not the case with most fundamentally-driven funds.

The fund’s model appears to be able to pick stocks when earnings pick pace. For example, Stylam Industries – and sub-Rs 2000 crore stock by market cap, saw a sound rally driven by momentum in earnings. The fund managed to catch it mid-cycle in April 2021 and continues to hold it. It’s also tactical even larger stocks such as Escorts, which it entered in October 2021 and exited post December 2021.  

However, in tactical picks, timing is also important. In fundamentally less-sound stocks, it has managed exit timing well. Take the case of an under-Rs 1500 crore marktcap stock INEOS Styrolution India. The fund exited this stock in July 2021 and in a few months’ time, the stock went into a steady decline. 

We have highlighted some of the sound calls. There are of course calls that don’t deliver - and therefore quickly exited as well. This also causes adds to the portfolio’s high churn.

Suitability

Before we move to the fund’s suitability, our data and analysis points to a few things: 

• Quant Active does not have the traditional growth/value or cyclical/defensive tilt in strategies like most other funds. It simply appears to use a set of filters – including tactical and momentum driven ones - to arrive at its stock picks. That makes this fund an outlier in the typical world of fundamental-driven investing by mutual funds. 
• The fund has managed to showcase performance by timely capture of opportunities in sectors and stocks that may not be fundamentally sound. Any wrong calls here, therefore, can also hurt badly. 
• The fund has grown from Rs 249 crore in March 2021 (Rs 7.6 crore in March 2020) to Rs 2016 crore in March 2022. The massive inflow can also be contributing to NAV growth. 
• The fund has a very high expense ratio (2.63%) under the regular plan compared with the Direct plan (0.58%). You need to take note of this. 

Therefore, in terms of portfolio quality, this fund would not have passed our portfolio filters! This is a fund for those who wish to take high risk and try to ride the market. A fund such as this one may be adept at capturing stocks when they pick up and drop them when their pace slows. Stock examples given in the portfolio section will tell you this.

This fund is not for 'buy and forget' investing. This fund cannot be a primary part of any portfolio and exposure needs to be limited to 5% allowing it to grow to not more than 10%. Given its high upside capture, periodic sweeping of profits would be necessary from your side, proactively.