DSP Quant Fund: A Worthwhile Proposition In The Long Run?
May 21, 2019

Author: Aditi Murkute

(Image source: Image by ar130405 from Pixabay)

DSP Mutual Fund has launched an open-ended scheme, DSP Quant Fund (DSPQF), that will invest in equity, based on a quant model.

What is a Quant fund?

A quant fund is a thematic /sectoral type of an open-ended equity mutual fund, as it follows a specific approach of investing.

Quant funds follow quantitative analysis to select stocks while constructing the portfolio which is based on several factors combined. Fund managers create a mathematical model that determines the fund's investment.

Since there are a host of factors used in investing a quant fund, this fund uses a multifactor approach of investment. Factor strategies (also known as smart beta) today combine active and passive investing models providing the investors with the tools to express investment preferences and philosophies in an efficient manner.

Current volatility in the markets has made the stock selection procedure difficult, especially in the large-cap space due to shrinking alpha. Hence fund managers are seeking and implementing various strategies to outperform the indices and generate better returns. A quant-based strategy of investment is between actively managed funds and index funds; as the investment decisions are determined by a scientific model than by human judgment created by the fund managers.

DSP Quant Fund will be using rational principles combined with scientific risk management efficient strategy. It is designed to seek benchmark-beating returns for an investor who wants to invest in a well-diversified large- cap oriented CORE portfolio and have an investment time horizon of seven years or more.

Table 1: NFO Details

Type An open-ended equity Scheme investing based on a quant model theme. Category Sectoral/ Thematic
Investment Objective To deliver superior returns as compared to the underlying benchmark over the medium to long term through investing in equity and equity-related securities.

The portfolio of stocks will be selected, weighed and rebalanced using stock screeners, factor-based scoring and an optimization formula which aims to enhance portfolio exposures to factors representing 'good investing principles' such as growth, value and quality within risk constraints.

However, there can be no assurance that the investment objective of the scheme will be realized.
Min. Investment Rs 500/- and any amount thereafter Face Value Rs 10 per unit
Plans • Regular

• Direct
Options • Growth*

• Dividend (Pay-out and Reinvestment*)

*Default option
Entry Load Nil Exit Load Nil
Fund Manager Mr Anil Ghelani Benchmark Index S&P BSE 200 TRI Index
Issue Opens: May 20, 2019 Issue Closes: June 3, 2019
(Source: Scheme Information Document)


How will the scheme allocate its assets?

Under normal circumstances, the scheme's asset allocation will be as under:

Table 2: DSP Quant Fund's Asset Allocation

Instruments Indicative allocation (% of total assets) Risk Profile
A. Equity & Equity related instruments including
derivatives
95 100 Medium to High
B. Debt and money market instruments 0 5 Low
C. Units issued by REITs & InvITs 0 5 Medium to High
(Source: Scheme Information Document)


What will be the Investment Strategy?

The fund manager aims to create a model-based fund that is anchored around fundamental principles of good investing. The endeavour is to create an automated stock picking and weighting model that generates portfolios which maximize characteristics of the chosen factors while adhering to liquidity and risk concentration constraints.

Stepwise description of the investment strategy

Step 1: Universe

The scheme will invest in stocks selected from a universe of S&P BSE 200 as it represents a universe of reasonably liquid and well-researched companies.

Step 2: Exclusion Criteria

Weed out stocks based on exclusion criteria; companies that fail to pass through proprietary earnings quality and forensic accounting screeners based on reported accounting statements, exposed to higher default risk, are highly volatile, and which do not meet certain pre-defined ownership/shareholding criteria. The universe of stocks is reduced to 100-80 companies.

Step 3: Inclusion criteria

Based on 5 factors to evaluate Quality, Growth and Value characteristics, percentile score is assigned for each company across selected factors, which is combined into an aggregate score for relative company percentile ranking. Only the top-ranked companies having the highest aggregate score which constitute 50% of BSE 200 index by weight will be considered (i.e. 30-50 stocks)

Step 4: Portfolio construction: Optimizer inputs and constraints

Will choose stocks based on its weight (10 times its weight in the BSE 200 index or maximum weight of 10%, whichever is lower) and +/- 10% deviation of stock' sector weight in the BSE 200 index.

Step 5: Optimizer objective function and Output

Run the optimizer with the utility function to maximize portfolio level factor exposure (average percentile rank across all five factors) aggregate score

Step 6: Rebalance Semi-annually

Rebalance the portfolio end of every March and September.

Stock level exposures to various factors can be measured by one or any of the following descriptors. As markets evolve, the data availability, as well as academic research, becomes more sophisticated, the understanding and definitions of factors may keep evolving.

Factor Fundamental measures
Growth • Historical Earnings Growth
• Estimated Consensus Earnings Growth
• Growth in revenues
• Growth in assets
Quality • Return-on-Equity (ROE)
• Earnings Growth Variability
• Return-on-Invested Capital (ROIC)
Value • Price/Book ratio
• Estimated FY1 Price/Earnings ratio
• Dividend Yield
• Free-Cashflow Yield
• EV/EBITDA
• Price/Sales ratio
(This is not an exhaustive list. The DSP Quant Fund uses 5 factors out of the given list)
(Source: Scheme Information Document)


Who will manage DSP Quant Fund?

DSP Quant Fund will be managed by Mr Anil Ghelani.

He is a graduate in Commerce (BCom) from Mumbai University at HR college, a Chartered

Accountant (ICAI India) and Chartered Financial Analyst (CFA Institute the USA)

Mr Ghelani has 21 years of work experience in financial investments. Currently, he is the Head of

Passive Investments & Products at the DSPIM. He has been with the asset management company since 2005. Prior to joining the fund house, he was associated with IL&FS Asset Management Company as an Assistant Manager of Fund Operations and has worked with Batliboi (member firm of Ernst & Young).

The Outlook for DSP Quant Fund:

As mentioned earlier to achieve the objective of the scheme, it proposes to invest in an active portfolio of equity and equity related instruments by screening, selecting and weighting stocks based on a pre-defined fundamental factor model. The model has been designed based on rigorous back-testing, research of fundamental investment principals and tenets of factor investing. And the portfolio construction will be done using Elimination, Selection & Optimization processes based on the model.

Image 1: Illustration of the portfolio construction

stragicy
(Source: DSP Quant Fund's Presentation)


Despite the rigorous research and semi-active management of the scheme with semi-annual rebalancing involved with a core focus on using "Good Investing Principles", it remains to be seen how the portfolio is being constructed.

In an environment where the near-term sentiments in equity markets will be driven by macroeconomic conditions, global and domestic political developments, along with the outcome of upcoming Lok Sabha elections, the markets are expected to remain highly volatile. Earnings now need to justify, valuations aren't cheap. The trail P/E of the S&P BSE Sensex and the large-cap index is currently at 28x and 26x.

PersonalFN believes that it provides an opportunity to do some value buying to the fund managers. However, amidst the extreme turbulence constructing the portfolio would not be easy and may inflict extremely-high-risk. Therefore, although there may be good opportunities in the long run, the risk also is very high.

[Read: Why Comparing Returns to Risk Is More Meaningful!]

DSPQF is suitable who are willing to take extremely high risk and have an investment time horizon of more than 7 years. But before investing it would be wise to assess your own risk appetite and investment horizon.

[Read: 5 Basic Steps To Pick The Best Mutual Funds To Invest For The Long Term]

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This article first appeared on Certified Financial Guardian.  


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