quant funds: No bias, no emotion; With quant funds the ‘matrix’ takes the calls

Mumbai: Mutual fund investors looking to diversify portfolios beyond traditional diversified equity strategies can consider quant funds, which primarily use mathematical models to select stocks, eliminate fund manager bias, and have lower costs than active funds.

Wealth managers believe investors can allocate 15-20% to such schemes.

Quant funds build a portfolio by selecting stocks on predetermined rules based on mathematical models. They use automated programs to enter and exit stocks and hence eliminate human or fund manager bias.

While there is not much human involvement in running the fund, designing the quant model usually involves a significant amount of thought and the fund manager can make or enhance the model as and when required.

“Quant investing offers a systematic and data-driven approach to decision-making, reducing emotional biases and ensuring consistency,” said Kunal Valia, founder of Statlane.

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By back-testing models and maintaining transparency in methodology, quant investing enables investors to make informed decisions and adapt strategies over time for potential long-term success, he said.Kotak Quant Fund, the latest to enter the space in the last year, uses a combination of man and machine to select stocks and build its portfolio. Starting with a universe of 800-1,000 stocks, the fund manager weeds out companies with low liquidity, poor quality balance sheets and weak corporate governance to zero in on about 150-200 stocks. Once this is done, the scheme uses its algorithm to choose 35-50 stocks for its portfolio using a mix of momentum, quality and volatility factors.Axis Quant Fund has a universe of 340 stocks, where the fund manager uses fundamental plus rule-based criteria to build its portfolio.

“Every stock in our universe is assessed based on three main metrics: quality, growth and valuation,” said Karthik Kumar, fund manager (equities) at Axis Mutual Fund.

While there are underlying parameters in each of these styles, the fund manager measures quality based on analysis of historic balance sheet, cash flow and income statement data while the growth metric is completely forward-looking and is based on growth outlook going forward, Kumar said.

The main reason why quant funds find favour is that many times fund managers have biases on sectors or stocks, due to which they tend to stick to them even though they underperform. Quant funds largely eliminate these biases and emotions, due to which they merit allocation in portfolios, analysts said.

“Since different models can have significantly different return and risk outcomes, the model rules should be aligned to the investor preference,” said Aparna Karnik, senior vice president at DSP Mutual Fund. “Given the importance quant funds have in investor portfolios, wealth managers believe it is important for investors to understand the model they are choosing.”

Valia of Statlane believes as these funds build a track record, investors can keep increasing exposure towards such funds and could allocate 25-30% of their equity portfolio to such funds.

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