This little known mutual fund has beaten everyone else for two years in a row

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With a return of 93.78% in 2021, Quant Small Cap Fund topped the performance charts for that year. It is easy to dismiss this as a fluke, but the scheme was also the topper for 2020 with an eye-popping 76% return. In fact, 7 out of 14 schemes by Quant Mutual Fund have topped their respective categories in the past year including Quant Tax Plan, Quant Active Fund (a multicap scheme) and Quant Infrastructure Fund. Two more schemes, Quant Focused Fund and Quant Absolute Fund, are in the top 3 ranked schemes for their categories. In this piece, Mint digs deeper to locate reasons for the stunning performance.

Quant Mutual Fund is the result of a 2018 buyout of the erstwhile Escorts Mutual Fund by Quant Capital and hence its pre-2018 returns do not have much instructional value. Headed by Sandeep Tandon, Quant Capital was earlier a part of the Anil Ambani owned Reliance Securities. Escorts MF had assets under management (AUM) of 235 crore at the time of acquisition. Since the acquisition, the AUM of the fund house has skyrocketed. It went to 239 crore on average in Oct-Dec 2019, 453 crore in Oct-Dec 2020 and an eye-popping jump to 4,630 crore in Oct-Dec 2021. 

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Quant Mutual Fund’s equity schemes across the board are characterised by incredibly high portfolio turnover ratios. These ratios denote the percentage of a scheme’s portfolio that was changed in the past year. For Quant Small Cap, the ratio is 145% for 2021, meaning that the portfolio in its entirety was changed more than once. In case of Quant Active and Quant Tax Saver, the turnover ratios are 211% and 283%, denoting even more churn. This flies in the face of the traditional ‘buy-and-hold with conviction’ model followed by most fund houses in India. It also makes any discussion of the stocks held by the schemes irrelevant. They are likely to be changed very soon, anyway. The roller-coaster returns posted by Quant Mutual Fund attracted a horde of direct investors, many of whom invest through free online portals and are led by recent performance. 55% of the AUM of Quant Small Cap Fund is in its direct plan, corresponding figures for Quant Active and Quant Tax Saver are 49% & 82%.  “We give 2/3rd weightage to liquidity analytics and risk appetite (risk on or risk off) and 1/3rd to valuations. Our portfolios have a high turnover ratio for this reason but it is also the reason for our high returns,” said Anupam Saxena, national sales head, Quant Mutual Fund told Mint in May  2021.

“Using VLRT framework, we are able to manage our funds dynamically. Our portfolios always adapt and reflect the changing market conditions, investor sentiments and act upon any in global macros. By managing our portfolio dynamically, we are also able to better manage the risk profiling of our schemes, thus, endeavour to deliver superior risk-adjusted returns. Thus, our high churning is nothing but a representation of our portfolio re-balancing strategy based on a risk on/risk off environment,” said Sandeep Tandon, MD and CEO of Quant Capital. What’s interesting is that the same strategy seemed to have worked in schemes with very different mandates such as small cap, multicap and infrastructure. The returns posted by Quant’s outperforming schemes are similar despite their different categories. “Most mutual funds in India do some level of index-hugging. This means, a portfolio allocation close to the index with some positive or negative deviation. Quant does not do this. In addition, the Quant MF portfolio also gets churned rapidly based on a tactical outlook. The portfolios across funds are quite similar and hence a broad overall strategy works across the board. I started recommending Quant Small Cap and Quant Active Fund to clients who wanted a PMS-like experience in February 2021. What I mean by that is high risk-high reward. If the market turns, I’m not sure how Quant MF will do,” said a Mumbai based distributor on condition of anonymity. “Quant MF uses a host of data points, including macroeconomic ones to make its buy and sell decisions. Their model is proprietary and hence cannot be fully understood. It is characterised by a high turnover. However, its performance has held up over the past 2 years even as its size has grown exponentially larger and it tops the charts in numerous categories. Investors who are willing to go for this sort of trading-driven model would find a scheme like Quant MF more tax efficient than creating their own algorithms and personally conducting trades,” said Dhirendra Kumar, CEO, Value Research. 

There is no clear answer to why Quant Mutual Fund’s schemes are outperforming across the board. However, the high turnover ratio and high standard deviation (a measure of volatility) for each of them offer some clues about a momentum driven model. It is also not clear when or if the wheels driving this model will come off. However, for prudent investors, investing in what you understand is an important principle to follow. Deng Xiaoping, one of China’s former leaders is said to have once remarked that it doesn’t matter if the cat is black or white as long as it catches the mouse. Small online investors buying into Quant Mutual Fund schemes seem to be sticking to  same thought-process.

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