Equity schemes of Quant Mutual Fund have been underperforming for a while. Most investors, who were used to the stupendous performance of these schemes in the last few years, are concerned. What’s happening?
It is imperative to focus on long term wealth creation and not be distracted by intermittent blips of market volatility. At quant MF, active identification and participation in growth opportunities is done (through our Predictive Analytics toolkit) while exercising due caution (through our VLRT Risk Mitigation framework). This is the only recourse that can help build meaningful wealth and preserve it through the volatile years ahead. Our VLRT Framework and Predictive Analytics indicators play a huge role in the risk mitigation process and generate superior risk-adjusted returns. Though we focus on quantifiable quality, we do not believe in ‘quality at any price’ and therefore Valuation Analytics is the backbone of our framework.
While the underlying fundamentals of any stock would typically quantify known risks, only the unknown risks would be unforeseen bad news and events that fall outside the purview of the predictable universe. To grow long term wealth, it is imperative to participate in the periodic opportunities but only equipped with a predictive framework and behavioral strength that allows the right exit. We focus mainly in analyzing and quantifying risk and liquidity deploying the VLRT Framework, as a constant surveillance mechanism, to anticipate and manage all known risk factors. The dark hand that causes an event to manifest before its expected time (unknown risks) would be unforeseen bad news and cataclysmic events that fall outside the purview of the predictable universe. Under the VLRT Framework, we do not invest in companies that are in contrast to our Risk-On or Risk-Off views.
We have been vocal about the fact that for us, investment is about primarily managing risks and returns are therefore a by-product. Our VLRT Framework and Predictive Analytics indicators are used to dynamically maximize the opportunities across the portfolios. As you are aware, we have demonstrated the same in the past and emerged as an outlier in most of the categories in which we operate.
The underperformance started from February 2022. What is your analysis of the situation and what have you done to rectify it?
As we always mention, our wide-spectrum VLRT Framework is the overarching risk-mitigation framework that drives securities selection for our schemes and occupies pride of place in our product strategies. Our investment thought process and portfolio maneuvers are done within the constraints of the individual funds’ mandates, while drawing on the VLRT Framework’s strengths to manage short to long-term opportunities and risks.Therefore, our securities selection continues to be guided by examination of all fundamental factors, identifying growth opportunities and measuring its sustenance, onboarding promising growth stories into our portfolios, and executing inflection points identification strategies to aim for superior risk-adjusted alpha.
With a far more holistic understanding of timing volatility and market cycles, we believe that by positioning our portfolios conservatively at the current juncture, we will be able to deploy a higher quantum of liquidity in more yielding opportunities lower down on the cost curve later, thus better managing risk. In order to seize upon the opportunity and capitalize on lower prices and attractive valuations, our portfolio has been geared to momentarily curb risk appetite and conserve liquidity.
Quant Mutual Fund follows VLRT strategy- which eliminates biases. What are the changes the VLRT framework has prompted in this phase?
The VLRT Framework operates on inflexion points. The core innovation behind the VLRT Framework is the synthesis of various dimensions to identify inflexion points, long before the larger trend plays out. We can presciently spot time spans of high probability of transition to an elevated volatility regime or when volatility indices are likely to spike, which can be based on any event or perceived risk of changing global macros or even on some prevailing narrative in the media or research reports. We believe that this ability to accurately forecast global volatility is the key to protecting portfolio returns and capital.
Also, an examination of our schemes’ risk ratios will reveal that investment alpha hasn’t come with the baggage of additional risk. On the contrary, it evokes a compelling narrative about executing far-sighted timing strategies; honed to smartly capture early upsides, ride each growth story, and make timely exits. The VLRT Framework plays a central role in this.
Most schemes are still at the bottom of the performance chart. When will things improve because of the recent changes?
The observation of our schemes’ performance is incorrect. While reviewing the fund performance, one should not be swayed by short term fluctuations. One must remember that mutual funds are beneficial vehicles for long term wealth creation. Our schemes’ long term risk-adjusted returns are placed in the top-quadrant and the risk ratios reveal that we do not take undue risks in our bid to deliver superior risk-adjusted returns.
We are cognizant of both short term and long term risks and emerging opportunities along these timeframes. For identifying cross-asset, cross-market inflexion points, our VLRT Framework is the most suitable tool. Leveraging our deep insights into macro cycles and business cycles, the identification of changes in volatility regimes is a powerful source of Adaptive Alpha.
The portfolio turnover ratio continues to be very high, indicating a lot of churning. What is the thought process that is driving it?
A portfolio churn is not a bad thing as it’s thought out to be. Rather, in our case, we have demonstrated long term success across all our funds through our dynamic style of money management which is our forte. Also, market volatility provides the perfect context and setting for such an adaptive strategy to prosper through opportunism. This has set the tone for it to become a more mainstream strategy that is backed by actionable intelligence.
Based on the Risk-on or Risk-off environment, a desirable level of churn keeps portfolios relevant and allows them to presciently capture opportunities and preserve gains through volatile times. The dynamic movement in our portfolios is a reflection of our long held belief, ‘Timing is Everything’ and is a culmination of a resilient investment discipline by which we have efficiently navigated through turbulent and highly volatile environments via our VLRT Framework. We are in the culmination phase of an ongoing Volatility Expansion Phase (2018-2023). During this phase, a dynamic and adaptive style of money management stands a far better chance at delivering alpha than the conventional ‘Buy & Hold’ strategy.
The market is scaling new highs every day. What’s your view on the market?
Current consensus market opinion is relatively rosy with little discussion on key emerging economic, financial and geopolitical risks. Just 3-4 months ago in India, fear was extraordinary and market participants, including institutions, were reluctant to participate in the India equities, particularly mid and small cap names.
In our ‘Predictive Analytics’ newsletter released last month, we mentioned the possibility of an outsized risk of a high volatility event in the near to medium term horizon – most likely in the timeframe between June and September, 2023. We view this as more of an opportunity than as a risk and have perfectly positioned our portfolios to ride this through, survive the volatility spike event, and come out on the other side with more resources than others to seize upon the opportunity. We had thus articulated in the newsletter, “Capitalize on the opportunity rather than capitulate”.
We believe that today, we are at an important juncture, as the VLRT multidimensional framework clearly points out that a medium-term bottoming process of Risk Appetite is near, providing the impetus for a new cycle. The last time the VLRT framework multidimensional variables were coming together to indicate such a turning point was in March-April 2020, post which there were strong resulting trends to the upside.
quant Global Research (qGR) has been showcasing the VEP (Volatility Expansion Phase) between 2018 and 2023. So far, this outlook has played out quite well and we are now in the climactic phase of the volatility expansion cycle. In this phase, volatility will spike sharply before it settles down and gets into its multi-year contraction cycle.
The interest rate scenario is still confusing. What’s your view?
The RBI has been doing what’s necessary to rein in inflation within its 2-6% target range without hampering growth. The MPC keeping the benchmark repo unchanged twice at 6.5% was expected amid easing cost pressures. Going forward, the RBI is expected to continue its stance of withdrawal of accommodation, while setting its sights on a growth forecast of 6.5% for fiscal year 2024. India seems to be on a surer footing than either the US or Euro region when it comes to balancing between demand, unemployment, and rates.
While the global interest rate scenario appears nebulous, we do believe that a nimble approach towards optimizing portfolio strategies is probably the best way to play 2023 and beyond.
What’s your advice to mutual fund investors?
Given the easy availability of data, my advice to investors is – attempt to devise your own investment processes and continuously work on this process to improve and evolve it. This will not only enable them to sustain in the markets from a long-term perspective but the process will also ensure that they don’t get swayed away during bouts of volatility.
Investors should remain open to the thought that volatility should be treated as an opportunity and not as a threat. This way, they can continually tweak their asset allocation mix opportunistically, without taking undue risks and yet be able to generate healthy returns. But, it may not be effective due to taxation and hence mutual funds are better vehicles for superior risk-adjusted returns.
