A $69-mn India Quant Fund trounces Sensex in pandemic year
A $69 million Indian quant fund has delivered more than double the returns of the nation's benchmark stock index this year by avoiding volatile shares and focusing on sector diversification.
The DSP Quant Fund has returned more than 19% in 2020, compared with a 9.3% gain in the S&P BSE Sensex Index, which surged to an all-time high on Friday. It is the largest among a handful of quant funds in India's $364 billion asset management industry.
"The fund generally was overweight on the sectors which did relatively better such as IT and pharma," said Aparna Karnik, head of risk and quantitative analysis at DSP Investment Managers Pvt. in Mumbai. "Remaining diversified across sectors and factors, not chasing momentum and staying low volatility has helped keep up a consistent performance."
The DSP fund's strong showing comes in a year that has seen unpredictable market reversals whipsaw quant investors globally, with profound changes wrought by the pandemic leading to a debate about whether some elements of rules-based investing are still relevant.
A "tilt towards high quality names" in sectors other than tech and healthcare also helped the fund's performance, Karnik said. That's because the market in India was less polarized versus the U.S., where the rally in stock prices was focused toward a very narrow set of popularly called FAANG stocks, she added.
Making it work
Starting with a universe of India's 200 biggest companies, the fund's selection methodology eliminates stocks that have shown high price volatility over time or which raise red flags when subjected to forensic accounting. That cuts the list by more than half. The system then scores the remaining stocks based on factors, giving weightings of 40% each to quality and valuation, and 20% to growth. The highest scoring stocks are included in the portfolio, which is rebalanced every six months.
"The fund doesn't chase momentum," said Karnik. "That's a mistake that both humans and models make."
A similar focus on growth and quality factors has helped the Nippon India Quant Plus Fund also beat the Sensex with a 13% return so far this year. While much smaller in size than the DSP fund, this is the nation's oldest equity quant fund.
Shift to value
"US and Europe-based quant fund managers tend to have a lot of exposure to value, which has done horribly in the last few years and particularly this year," said Rupal Agarwal, a quantitative strategist at Sanford C. Bernstein in Mumbai.
"This difference in how the DSP and Nippon India funds are structured, focusing more on quality and less on value to begin with, partly explains why they have performed better."
However, the violent global rotation into value stocks triggered by positive vaccine developments raises some doubts over whether quants can sustain the outperformance with their current strategy. The DSP and Nippon funds have both underperformed on the Sensex so far this quarter.
"There is no precedence for the current environment: uncertainty is very high and predictability is very low," said Ashutosh Bhargava, who manages the Nippon fund. "If I have to choose a couple of factors which will do well in 2021, I would say value and sentiments may do slightly better than quality, low volatility and momentum." (Bloomberg)