In an interview with ETMarkets, Srivastava said: “This move towards technology isn’t merely about operational efficiency; it’s about reaching unprecedented levels of accuracy and consistency in the inherently unpredictable landscape of financial markets” Edited excerpts:
Thanks for being part of the segment. Wright Research is moving from a research firm to PMS – the right extension of the services. Tell us why AI-driven, Quant-based PMS?
It’s great to be here! Wright Research’s evolution into an AI-driven, Quant-based PMS feels like the right next step, in line with our commitment to informed decision-making rooted in data and quantitative analysis.
Our journey over the past four years has underscored the strength and potential of quant strategies in the Indian market, fueling our eagerness to witness their transformative impact on PMS.
Factor investing has consistently been a key driver of long-term market outperformance, with factors such as momentum, quality, and size demonstrating substantial effectiveness in India.
By merging these factors with AI-enabled predictive tools, we’re able to discern patterns and connections that could elude human analysis, facilitating more precise forecasts and smarter investment decisions.
Our tactical approach equips us to thrive in bullish markets, leveraging high-risk, high-momentum factors while maintaining rigorous risk management during bearish phases.
Ultimately, this move towards technology isn’t merely about operational efficiency; it’s about reaching unprecedented levels of accuracy and consistency in the inherently unpredictable landscape of financial markets.
We have heard stories about ChatGPT and the consensus is that it can’t be trusted. How well does it work with numbers?
It’s important to understand that AI tools like ChatGPT are not standalone solutions, but rather a part of a larger toolkit. While it’s true that they’re not infallible and shouldn’t be used in isolation, they can be incredibly effective when used correctly.
In our operations, we utilise AI not as the decision-maker, but as a powerful analytical instrument. It assists us in dissecting data and deriving insights which, when coupled with human expertise and judgement, guide our investment decisions.
As it pertains to numerical data, the integration of quant methods has been revolutionary. This approach enables us to swiftly and accurately process and analyse large quantities of numerical data far beyond human capabilities.
In our processes, we meticulously assess hundreds of factors for each stock across various factor groups, their consistency, performance across different scenarios, and place a keen emphasis on risk management before any system deployment.
System-based investing, therefore, offers consistency and predictability – we can anticipate the system’s response to market shifts.
Ultimately, the real power lies in successfully blending financial expertise, data, and AI to construct a robust, sustainable investment system.
Wright manages over Rs 300 cr in AUA (asset under advisory). Has the investment trend changed recently?
Over the years, we’ve noticed a significant shift in investment trends among our clients. Five years ago, no one understood or wanted quant but now there’s a growing recognition of the power and potential of AI and quantitative analysis, and we’ve seen an increase in demand for services that incorporate these tools.
Investors are becoming more tech-savvy and are looking for strategies that can give them an edge in the market. The power of any investment strategy comes from its performance and just as our analysis showed our methods do extremely well in the Indian market.
This trend towards quant has been particularly pronounced over the past year, with the pandemic accelerating the digital transformation of the investment industry.
Nifty is trading near record highs. Although we say one should not look at the index level, sentiments are driven based on how Sensex and Nifty are performing. How will the quant work? Is it successful in managing the investing bias?
Market fluctuations tend to sway investor emotions, inducing overconfidence in some, while leaving others on the sidelines awaiting a correction. However, our quantitative models are immune to these emotional biases.
They are designed to uphold objectivity, relying solely on data insights. This equips them to make impartial predictions and decisions, even in the face of market volatility or prevailing negative sentiment.
It’s a more systematic and scientific investment approach that subtracts the emotional human element, which often culminates in decisions driven more by feelings than factual analysis.
Given our in-depth study of these systems across various scenarios and market conditions, we place great trust in their impartial evaluations.
What is your view on the markets? Is it running ahead of fundamentals?
Currently, we are witnessing a very dynamic period in the financial markets. There is a significant disparity in valuations within the market, especially between large-cap and small-cap segments.
The Nifty’s one-year forward Price to Earnings (PE) ratio, representing the large-cap segment, stands at 20.2x, considerably above its long-term averages.
This could suggest that large-cap stocks are overpriced, and we could anticipate a short-term correction. However, there are numerous positive factors, such as macroeconomic stability, robust earnings momentum, and global economic recovery, that could justify these higher valuations.
So, is the market running ahead of fundamentals? It’s not an easy ‘yes’ or ‘no.’
Certain sectors appear stretched, while others seem to have room for growth.
Hence, it’s crucial for investors to strike a balance between seizing growth opportunities and managing risks to effectively traverse this complex market environment.
Tell us more about how you pick/filter stocks for investment?
At Wright Research, our approach to stock selection is rooted in a systematic exploration of 10-factor groups within the BSE 500 sphere.
This covers a wide range of factors including Momentum, Quality, Value, Growth, and Low Volatility, among others. By conducting exhaustive analysis and testing numerous variations within these groups, we are able to devise the most apt strategies for any given market scenario.
A crucial part of our strategy is anticipating future market risks. If we forecast low risk in the market, we increase the risk target for our strategy. This results in higher allocations to high momentum and high-performance stocks.
Conversely, when we predict market risks to be high, we lower our risk targets and shift towards safer stocks. In extreme market conditions, we may even systematically transition to cash to minimise risk exposure.
While our approach is highly tactical, we ensure our investment churn remains moderate – frequent trading is not our modus operandi. As market conditions evolve, our allocation to sectors, factors, and market capitalisation adapt unbiasedly in response.
Tell us more about the risk management practices that the fund will follow?
Risk management forms the bedrock of our investment strategy at Wright Research. We employ a broad spectrum of risk mitigation practices like diversification, hedging, and systematic portfolio rebalancing.
Our AI tools significantly augment these practices by detecting potential risks and areas of vulnerability in our portfolio. Our risk management approach also includes forecasting forward-looking market risks.
When the market appears to bear low risk, we increase our risk targets, channelling higher allocations towards high momentum and high-performance stocks.
Conversely, in a high-risk market, we lower our risk targets and strategically shift towards safer stocks. In the face of an extreme market scenario, we might systematically pivot to cash to curtail the risk.
In addition, we remain vigilant about changing market conditions and adapt our strategies to limit exposure to risk.
We strongly believe in maintaining transparency with our clients about investment risks, and we work closely with them to ensure that our strategies align with their individual risk tolerance and investment objectives.
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)