Secret behind stellar performance of India's oldest, smallest quant fund

India’s oldest equity quant fund that offered lacklustre returns for years outperformed most of its peers in 2020 amid the decade’s worst market rout. The secret lies in its investment model.

The 12-year-old Nippon India Quant fund, which is also among the nation’s smallest, dropped about 15 per cent this year, compared to a 27 per cent decline for the benchmark S&P BSE Sensex. When India shut down its economy to check the spread of coronavirus, the fund fared better than nine out of 10 equity mutual fund plans, while the sector as a whole clocked an average loss of about 19 per cent, data compiled by Bloomberg shows.

Nippon’s model places half of the emphasis on growth and quality factors while picking stocks, Ashutosh Bhargava, who manages the Rs 209 million ($2.8 million) fund said in an interview. Since the lockdown started in March, the fund had increased investments in stocks of IT firms and consumer goods makers. However, once valuations for consumer-oriented companies reached historic highs, the model dro-pped them in favour of pharmaceutical manufacturers.

Even as profit expectations got smashed due to the pandemic, the Nippon India funds model fared better as it didn’t have earnings estimates in its quantitative model, Bhargava said. Just five of the 18 Nifty 50 companies that have reported quarterly results so far this season have beaten analyst estimates.

 

 

Quality & Growth

Quality and growth measure how efficiently a company uses its capital, and how fast it increases profit. The quant fund’s model placed a 30 per cent weight for momentum, and at 20 per cent, value is the least influential factor. Momentum strategy bets on past winners, and value compares the relative cost of stock with historical data. 

Bhargava’s fund was established in 2008 as the Reliance Quant Fund, the first of its kind in India, and averaged an annual return of about 1.8 per cent over the past five years, compared with about 3.1 per cent for the Nifty. 

There are only a handful of quant funds in India, and Nippon’s rivals Tata Asset Management  and DSP Investment Managers, have launched theirs in the last 12 months.

“Any fund banking on quality has done relatively better,” said Arun Kumar, head of research at FundsIndia.com in Chennai. "Fund managers are increasingly seeing quality as the first filter, and don't mind paying a high price for little growth."