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Why mutual funds are launching quant funds

03-Feb-2020

India’s mid-sized money managers are counting on rule-based mathematical models to tap a new breed of investors embracing equities. Tata Asset Management Ltd. is the latest to start a quant fund. The firm is seeking to expand in a market where industry assets have more than doubled to $378 billion in the past five years. The fund will be the first in India to use artificial intelligence and machine learning to pick stocks, according to Tata Asset.

“We want to really try and get bigger," Prathit Bhobe, the firm’s chief executive officer and managing director, said earlier this month. “In order to do that, you need to look at how you can capitalize on every opportunity the market presents."

For Tata Asset, that meant seeking new ways to benefit from the shift in local savings from gold and property to financial products, a trend that has sent India’s $2.2 trillion stock market to records earlier this month. The S&P BSE Sensex was little changed after falling more than 1% Monday as concerns over the spread of the coronavirus triggered a selloff in risk assets.

“In the next three years, when the rest of the industry starts to launch quant products, the funds that are in place will be the only ones with a track record," said Arun Kumar, head of research at FundsIndia.com, an online platform for investing in mutual funds.

Quant strategies, which fall somewhere in between active and passive trading, seek to reduce the role of human bias. They follow a data-driven approach to pick stocks, using pre-defined parameters such as momentum or valuation. Still, their performance globally has been mixed, and greater volatility has made it hard for them to compete with cheaper index funds.

In India, too, their success has been limited. The Nippon India Quant Fund, the nation’s oldest, has often struggled to beat its benchmark over both short- and longer-term horizons. It is now adjusting the methodology of its stock selection to bolster returns.

Corporate governance failures, which machines can’t factor in, have also been responsible for the poor performance. Conflicts within founders’ families have had a more significant impact than in developed markets, FundsIndia’s Kumar said.

Both DSP Mutual and Tata Asset - India’s 11th and 13th largest money managers by assets - say they use multiple strategies to optimize stock selection, and that back-testing shows their models would have beaten their benchmarks in the past.

But a quant fund can still unravel if it isn’t explained well to investors, Kumar said.

Source : Live Mint

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