For most retail investors, investing in stock markets is a task that they leave for experts like fund managers or their friends and family who’ve had prior investing experience.
However, such decisions are often based on factors like biases, past valuations and individual growth assessments that might not always be correct. The scope of error is leading fund houses to explore the role of technologies and quantitative-based models and experiment with quant funds.
A relatively niche category, quant funds use a systematic approach towards portfolio management, thereby enabling fund managers to remove emotional biases and ensure optimal returns. To minimize human biases in investment decisions, quant funds use data points like price-to-earnings, price-to-book and other ratios.
While these funds are making a splash globally, they’re yet to gain the same traction in India. However, that hasn’t deterred companies from exploring the segment. Axis Mutual Fund is the latest entrant in the quant fund space with the Axis Quant Fund.
Chandresh Nigam, Managing Director and CEO, Axis Mutual Fund talked to YS Media to decode the buzz around quant funds and their future prospects in an insightful fireside chat titled ‘Cracking the stock market code with Axis Quant Fund’.
Here are the key takeaways from the discussion:
New quant fund on the block
Already launched on June 11, 2021, the Axis Quant Fund does not work on just a technology-based or momentum-based strategy. “It’s based on some classic principles and aims to select a portfolio of quality stocks with good growth prospects but at a reasonable price,” said Chandresh.
With a unique quantitative approach, Chandresh said that the quant fund would do everything that a fund manager would do, be it evaluating a business, checking growth forecasts and understanding risks. “The only difference is that it uses computational power to do these tasks more objectively and efficiently. And thanks to technology and availability of data, we have a bigger pool of companies to choose from,” he explained.
Rising popularity of quant funds
Chandresh noted that there was a misconception that quantitative models were based on technology, when in broad terms they just use numbers and data mining to make smarter investments. “What really sets quant-based models apart is the way fund managers processes numbers, build rules around data and remove biases in investment decisions. The model also boosts a fund manager’s effectiveness in ensuring optimal returns,” said Chandresh.
Explaining how a quantitative-based model works, Chandresh says that fund managers have access to a lot of data which they use to gauge market trends, draft some rules and then run a portfolio through them.
Chandresh also delved into the factors that have led to the rising popularity of quant funds over the past few years. “I remember 20-25 years ago, we used to get very poor quality of information and companies used to announce results every six months. Over the years, factors like regulatory intervention, transparent markets and the availability of data at much higher frequency have enabled fund managers to explore several new opportunities to use computing power in investment strategies.”
He explained that unlike popular belief, quant funds are not just suitable for large-cap stocks. “The power of this strategy is that it goes beyond the usual stock segmentation. It allows you to invest dispassionately without taking any sides. As long as you have good quality data available, quant processes can evaluate a business very quickly, be it small-cap, mid-cap or large-cap.”
Market sentiment volatile, but investors unfazed
Talking about how the second wave of COVID-19 has affected the market sentiment, Chandresh said that while trading bourses are always volatile and unpredictable, currently the market sentiment is climbing a ‘wall of worry’ and investors are still bullish on returns and other money-making opportunities in the market.
“Investors are of the view that companies are expected to perform better in the medium to long term. So, they are ready to wait out the storm. The markets are extremely resilient despite the uncertainty around us,” he added. He opined that the investors’ optimism could be attributed to the way COVID-19 has positively impacted a few other sectors.
Pandemic no bar for new products
On being asked if the business challenges posed by the pandemic would impact new fund offers like the Axis Quant Fund, Chandresh said that according to his team’s observations, the number of new ideas and product activities launched in 2020-21 has probably been the highest in the past 10 years despite COVID-19.
“The markets are luring sophisticated investors, who’re trying to find out new products that suit their requirements. As investors discover a new universe of strategies, they are figuring out new permutations and combinations. So, a pandemic or no pandemic, the pace of innovation is driving investor behaviour,” he added.
The future belongs to tech
Highlighting how there is much more data available today about how people are living, moving around and spending their money, he says frontier technologies like artificial intelligence and machine learning are likely to play a bigger role in driving investment behaviour in the future.
“Unlike India, quant funds have been making waves in global markets over the past five years. However, the day isn’t far when computation and analytics are driving more impact in the Indian stock markets,” he added.
