Quant investing was a domain exclusive to institutional investors originally. Thanks to mutual funds, it is within the realm of retail investors today. In India, we already have half a dozen quant offerings on the MF space, and recently IIFL Asset Management has announced the launch of IIFL Quant Fund. This fund is an actively-reviewed, quantitative rule-based fund. The fund aims to invest in quality stocks that show secular growth or defensive characteristics with a disciplined approach to portfolio construction. Let us understand how IIFL Quant Fund is different from others and how you can gain from the latest offering.
What is quant investing
Quantitative investing refers to investment strategies in which buying and selling of shares/investments is done primarily on the basis of a process-driven analysis of numerical data.
A big advantage that quant investing brings to the table is elimination or reduction of cognitive human bias in investing decisions. Volatility in markets can trigger human emotions of greed and fear and influence decision-making. Unchecked emotional decisions can lead to painful results.
IIFL Quant strategy
The new quant fund’s investment universe will be top 200 stocks by market cap and liquidity. It will try to do successful momentum investing. To do this, it will use allocation weights (a 3 percent limit on each stock at rebalancing) and rebalancing (every 6 months). All this with a view to maximize exposure to risk-adjusted momentum. The momentum score will define momentum of stocks based on past returns, adjusted for risk.
Since IIFL Quant Fund will do momentum investing, investors will do well to understand the risks of momentum investing that include momentum crashes and tracking error risk.
Here are some key points to understand about IIFL Quant’s investment strategy:
1. From a long-term investment viewpoint, IIFL Quant Fund will aim to keep its portfolio remains reasonably sector-balanced and have stocks that have a history of being high-quality. It does not want to walk on the path of sector rotation as it may add to more portfolio risk in the long-term.
2. From a long-term investment viewpoint, IIFL Quant Fund will aim to have lowest churn without compromising returns. If rebalancing of portfolio is done every month, portfolio produces an outperformance of 6.7% per year (post expenses) but the churn rate goes as high as 268%. This is equivalent to buying and selling the entire portfolio ~2.7 times a year. For 6 months rebalance period, there is a significant drop in the churn rate without compromising the outperformance much. While IIFL Quant will be rebalanced every 6 months, there are peers such as Tata Quant and Axis Quant that are rebalanced on a monthly basis.
Existing quant funds
There are 6 quant funds already. These are Axis Quant Fund, DSP Quant Fund, ICICI Prudential Quant Fund, Nippon India Quant Fund, Tata Quant Fund and Quant Quantamental Fund.
Please note that quant funds differ in 4 main areas.
1. Choice and design of variables2. Portfolio construction methodology3. Allocations and constraints4. Rebalancing frequencies
Even though two quant funds may both be value funds, or momentum funds, their portfolios and performance can be very different. Why two value funds should be different? This is because there are lots of parameters that define a value strategy. For example, some funds might define value factor as low price to book ratio while others might take a combination of variables like price to book, price to earnings, EV/EBITDA, dividend yield, etc., to define value factor. The choice of variables a fund manager uses can cause the resulting portfolios to have a very different outcome.
Fund Manager – Parijat Garg
Benchmark – S&P BSE 200 TRI
NFO period – November 8, 2021 to November 22, 2021
Exit load – 1% if redeemed/switched out, on or before 12 months from the date of allotment
Minimum investment amount – First time Purchase INR 1000/- and in multiples of INR 100/- thereafter; Additional Purchase INR 1000/- and in multiples of INR 1/- thereafter
Minimum SIP amount – Monthly option Rs. 1000 per month for a minimum period of six months; Quarterly Option Rs. 1000 per quarter for a minimum period of 6 quarters
Fund house speak
Commenting on the IIFL Quant Fund, Manoj Shenoy, CEO, IIFL AMC, said, “The Passive+ approach that the fund follows is based on multiple quantitative factors that have been back-tested and historically proven to improve stock selection capabilities. The model has a fundamental basis with parameters clearly laid out and relies on a defined process while applying the same across a set of comparable stocks.”
Parijat Garg, Fund Manager, IIFL AMC, said, “Based on a quantitative model, the strategies of the IIFL Quant Fund are fully systematic and rule-based and would have additional filters for selecting quality momentum stocks.