Soon computers will manage your money. The recently launched mutual fund from Lotus India — the Agile Fund — is a quant fund, a term that is used to describe funds managed on quantitative analysis.
The new fund is a rule-based fund that rebalances a portfolio automatically as per preset formulas at regular intervals in line with the fund’s objective.
In actively-managed funds, buy and sell calls are taken by the fund manager. By contrast, in quant funds, a mathematical formula identifies buy and sell calls as set out in the objective of the fund. Usually, quant funds seek momentum-driven stocks and normally do not take a long-term position in any one stock.
Quant funds can be rigorously back-tested over different time frames to seek how the model works and whether it generates adequate returns.THE BASICS OF QUANT FUNDS |
| These funds are managed based on quantitative analysis by software models |
| Buy and sell decisions are generated by the software at pre-determined intervals |
| These funds are more active than index funds, but less than actively-managed funds |
| They seek higher returns and generally do not hold stocks for a long period |
The Agile fund is rebalanced monthly. It picks out 11 stocks as per the Agile quant model ranking. Of the total corpus, each of the 11 stocks is allocated 9 per cent of the total corpus, which accounts for 99 per cent of the corpus. The balance 1 per cent will be invested in debt and money market instruments.
As fund is concentrated into 11 stocks, investors take a high level of risk compared to diversified funds.
However, Lotus AMC has set some minimum benchmarks before investing — the stock should have a large market capitalisation, ample liquidity, a price history of one year before date of investment, and its industry should be present in the composition of S&P CNX Nifty.
ADVANTAGE QUANT FUNDS? | |
Pros | Cons |
| Stocks are bought and sold by a pre-determined set of rule; math overrules emotion | The rules could miss the volatility periods in the market |
| The funds’ performance has been back-tested; the rolling returns have been superior to those of the benchmark index | Funds may be slow to catch trends, particularly in static markets, but do so eventually |
| The models usually go through intensive filters and balances | Need sufficient filters for right selection of stocks |
| Good for the long term, minimises market risks | Not for those who wish to exit in a year |
Says Rajiv Shastri, Head (Business Development and Strategic Initiatives), Lotus India AMC: “We worked on the model for a year with a dedicated team,” explains Shastri. “The investment strategy is always consistent in a quant fund due to well-defined parameters.”
The Agile fund adopts a monthly portfolio rebalancing strategy — a quarterly rebalancing is too long and a monthly rebalancing proves to be too expensive. The monthly rebalancing will keep the costs low as well as prove to be more effective.
Says Shastri: “Quant fund could miss out on significant events such as sudden market crashes or equally sudden upsides, but it is quick to catch up with the trend.”
According to Shastri, the fund back-tested the Agile quant model over different time frames from May 1996 to September 2007. The results showed that the outperformance over the S&P CNX Nifty was 83.04 per cent for oneyear rolling returns (a method of computing returns at fixed intervals over a determined time frame) and 100 per cent for five-year rolling returns.
Quant funds have been popular in the developed countries where the returns were found to be higher than comparative discretionary or actively managed funds. “This is not to say that discretionary funds are not good— very often it is the discretion that makes a fund tick—but a quant fund is just another way of doing it,” says Shastri.
