Secret behind an India's oldest equity quant fund outperforming peers in 2020

By Ronojoy Mazumdar
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% this year, compared to a 27% 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%, 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 20.9 crore ($2.8 million) fund said in an interview. Since the lockdown started in March, the fund had increased investments in stocks of IT companies and consumer goods makers. However, once valuations for consumer-oriented companies reached historic highs, the model dropped 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 eighteen 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% weight for momentum, and at 20%, 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% over the past five years, compared with about 3.1% for the Nifty. There are only a handful of quant funds in India, and Nippon’s rivals Tata Asset Management Ltd. and DSP Investment Managers Pvt., have launched theirs in the last 12 months.

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