NFO Pick – (SBI Quant Fund)

10 Dec 2024 , 09:43 AM

QUANT FUNDS – WHAT IS IT AND WHAT ROLE DOES IT PLAY?

A quant fund is a mutual fund that uses advanced and proprietary quantitative models to identify stocks to invest and to decide the timing of the churn. One of the big advantages of quant fund sis that they are based on objective criteria. Hence, unlike other active funds, these quant funds are largely free of the fund manager bias. The big question is how are such quants designed. Today, thanks to massive cloud computing facilities and bandwidth, it is possible to run complex algorithm iterations in a jiffy. Typically, in this case, the quant model is a multi-factor based model, where key factors are identified and applied. The quant funds will continue to be equity funds with predominant investments in equities. They are just a very unique form of thematic funds based on black box models. Such models are consistently applied and monitored on a continuous basis for best results. To understand quant investing, it is essential to understand what factor investing is all about?

HOW DOES FACTOR INVESTING WORK IN PRACTICE?

Unlike the traditional top down and bottom up approaches to stock picking and stock review, the quant approach is a lot more data driven. By adopting a rule-based approach, factor investor largely eliminates the fund manager bias in decision making. It not only diversifies the portfolio across sectors, but also across multiple factors. We shall look at specific factors later. Even the periodic rebalancing of such factor investment quant funds is done based on in-built risk drivers. The portfolio concentration is based on which factor is likely to be the most prominent at the current juncture in terms of future returns.

While there are a number of factors that are available; the 4 most popular factors are Momentum, Value, Quality, and Growth. If you look back at the last 13 years in the Indian markets; Momentum has been the outperformer in 1 year, Growth in 2 years, Quality in 6 years and Value in 4 years. However, a theme like Growth has much lower variance, compared to other factors. From an investment perspective, relying on a single factor can be a risky proposition and hence the quant model can be used to identify the right factor at the right time and also exiting the wrong factor at the right time.

UNDERSTANDING MULTI-FACTOR PORTFOLIO USING QUANTS

A multi factor model using quants is not just about identifying which factor to be long on, but how much weightage should a factor get in a portfolio and when to exit a factor and shift to another factor. Here are some of the merits of a multi-factor portfolio.

• The four factors we spoke about in the previous paragraphs, tend to operate in largely independent cycles. Hence, while certain factors outperform in phases, others outperform in different phases. Hence factor switching becomes key.
• This is a higher level of diversification. Normally, diversification is limited to sectors and capitalization. Here you diversify across factor themes like momentum, quality, value, and growth and use quants to identify the shifting points.
• A multi-factor quant-based approach, not only reduces the risk of portfolio concentration but also enhances risk-adjusted returns by helping you get in and out of different factors at the right time.
• In a falling market or in a stagnant market, the big challenge is not just about higher returns, but in ensuring lower drawdowns. Using a multi-factor model has been seen to reduce the overall drawdown of a portfolio substantially.
• Asset allocation becomes a lot simpler as you are not restricting to traditional classes of sectors and capitalization. Instead, you are looking at dynamic factors, which can predicted with the use of quants and shifting is also easier.

There are some interesting factor findings. For instance, Quality Factor is less volatile compared to other factors and the index. Also, Value and Growth Factors capture market upside better.

HOW THE SBI QUANT MODEL PERFORMED WHEN BACK-TESTED

Back testing may not be foolproof, but it is a great risk mitigator. If you back test and compare the SBI quant model with the BSE 200 TRI, here are the findings.

• Over a 3 year period, the SBI quant model has delivered 22.3% return CAGR, compared to 14.9% CAGR for the BSE 200 TRI index.
• Over a 5 year period, the SBI quant model has delivered 22.2% return CAGR, compared to 19.0% CAGR for the BSE 200 TRI index.
• Over a 10 year period, the SBI quant model has delivered 18.9% return CAGR, compared to 14.2% CAGR for the BSE 200 TRI index.
• If you look at 3-year rolling returns, then the SBI Quant Model has delivered above 12% returns on 77.2% of the occasions, while the BSE 200 TRI has delivered above 12% returns only in 58.9% of the cases. Findings are similar over a 5-year rolling period too.
• Above all, the nimble and adaptable strategy of the SBI Quant model has also ensured that over the last 20 years, the model has shown greater resilience in market downturns and also recovers faster than the BSE 200 TRI.

If one compares the SBI Quant Portfolio with the BSE 200 TRI, then the SBI Quant Model is relatively overweight on financials, IT, consumer discretionary, and energy. At the same time, the SBI Quant Model is underweight on consumer staples, materials, utilities, and communication services. The flexibility makes all the difference.

HOW HAVE QUANT FUNDS PERFORMED IN INDIA?

The SBI Quant Fund is an active equity fund NFO that focuses on quant models for stock selection and portfolio rebalancing. Such quant funds rely heavily on proprietary quant models developed based on cutting logic that can beat the market on a consistent basis over a longer time frame. . There are a total of 8 quant funds in India as shown in the table.

Scheme Name	NAV (₹) Regular	Return (%) 1-Year	Return (%) 3-Years	Return (%) Launch	Daily AUM (₹ in Crore)
360 ONE Quant Fund	19.01	33.50	25.31	23.68	624.74
Nippon India Quant Fund	71.52	30.34	23.09	12.44	91.12
Kotak Quant Fund	15.18	29.42	N.A.	36.31	866.72
ICICI Prudential Quant Fund	22.39	27.00	16.93	22.39	98.52
Quant Quantamental Fund	23.33	26.65	28.33	26.41	2,357.85
Axis Quant Fund	16.48	20.47	15.15	15.64	1,084.32
Tata Quant Fund	15.75	19.16	15.58	9.76	69.11
DSP Quant Fund	21.76	18.28	9.58	15.20	1,083.05

Data Source: AMFI

The table above provides the performance and corpus of the 8 active quant funds based on 1-year returns, 3-year returns, and returns since inception. Here we have ranked these quant funds on 1-year returns; and have considered regular funds due to their complexity. Quant Funds in India have a total AUM of ₹6,276 Crore. Returns beyond 1 year are CAGR returns. This is still an emerging area within Indian mutual funds. How about returns?

• Let us first look at returns on quant funds over a 1-year period. On a 1-year returns basis, these funds generated maximum returns of 33.50% and minimum returns of 18.28%. The average returns over a 1-year period was 25.60%, which is fairly impressive.
• How about returns on quant funds over a 3-year period. On a 3-year returns basis, these funds generated maximum CAGR returns of 28.33% and minimum returns of 9.58%. The average returns over a 3-year period was 19.14%, but variance has been very high.
• Let us turn to returns on quant funds since inception. Quant funds generated maximum returns of 36.31% and minimum returns of 9.76%. The average CAGR returns were 20.23%. The high variance can be attributed to the varying time periods since inception.

Quant funds are generally benchmarked to the BSE 200 TRI; although it can vary. Apart from high risk in this category of funds, there is also the strategy risk in such funds.

GLANCE AT THE SBI QUANT FUND NFO

Here are key details of the SBI Quant Fund NFO.

• The NFO opened on December 04, 2024 and closes on December 18, 2024. The fund will open for sale and repurchase at NAV-linked prices within 15 days of NFO closure.
• On the risk-o-meter, the SBI Quant Fund is classified as a high risk fund due to its predominant exposure to equities, entry at higher valuations and the use of black box strategies, which can be inherently risky, despite being back tested.
• The investment objective of the fund is to generate alpha and better the returns on the BSE 200 TRI by deploying proprietary quant strategies for stock selection and for continuous portfolio rebalancing.
• There will be no entry load on this fund. However, there will be an exit load of 0.5% on redemptions made before 6 months. For redemptions after 6 months from the date of allotment, there is no exit load. Leaving aside the exit loads, investors are advised to hold the quant fund for 5-7 years to derive maximum long term benefits.
• The SBI Quant Fund will offer regular and direct plans. In terms of the options, the fund offers the growth and the IDCW plan to investors.
• Sukanya Ghosh will be the overall fund manager for the SBI Quant Fund, and will be assisted by a team of multi-disciplinary specialists. Pradeep Kesavan will be the dedicated fund manager for overseas securities.
• The minimum investment amount in the NFO will be ₹5,000 and multiples of ₹1 thereof. Additional purchases will be a minimum of ₹1,000 and in multiples of ₹1.
• Under the new tax rules effective from July 23, 2024; being a pure equity fund, short term gains (held for less than 12 months) will be taxed at 20% plus cess; while long term gains (held for over 12 months) are taxed at 12.5%, with ₹1.25 lakhs base exemption.

The SBI Quant Fund offers a good product option to diversify your overall equity strategy by adding an element of quantitative variety to your equity portfolio.