Quant Tax Plan Review:Not a regular tax plan

Equity Linked Savings Scheme, better known as ELSS or Tax Saving Mutual Funds have seen their prominence and popularity rise in the last couple of years. Reasons attributed for the same is the successful ‘’Mutual Funds Sahi Hai’’ campaign carried out by AMFI and decent performance by the said scheme in specific and markets in general.

Investors often look at past returns and the name of the fund house primarily before deciding to take the plunge despite this proving to be a futile experience.

Now let us which are the top 5 ELSS Schemes based purely on the returns on last five years

Not many would have expected Quant to be in the top two or for that matter have even heard of it.

So let us try and understand Quant, their history, functioning and reasons for such top drawer performance.

Quant Mutual Fund

Quant had taken over Escorts Mutual Fund in the early months of 2018 which was based out of Delhi.

Escorts Mutual Funds was one of the early entries into the Indian Mutual Fund scene but had struggled to accumulate a corpus to sustain itself.

It was a subsidiary of the Escorts Group currently headed by Mr. Nikhil Nanda. Even though their stock prices took a beating in 2018, it continues to be a strong contender due to its expansion and strong fundamentals among stock pickers.

Coming back to Quant ELSS, let us try and understand their working and reasons for their stellar performance so far.

Quant Tax Plan

The above image showcases three different stocks that held the top position when it comes to stock allocation.

Mind you all this was only over a period of 6 months, churning of such proportion in such a short period of time is not a usual phenomenon.

Quant Tax Plan had a portfolio turnover of 4.39 (past 1 year) as on 31^st April 2021.

Additional reading: Click Here to read about the various types of equity mutual funds

What is a portfolio turnover ratio?

A turnover ratio basically tells you the extent to which your portfolio has been churned. A ratio exceeding 1 would mean the fund manager has changed his portfolio at least once.
You must have often read and been told to stick long term with your equity investments so you must be probably wondering why does the fund manager does not do the same.
It is because he/she is much better at that than us and also a high turnover ratio is not exactly a bad thing.
It is higher for aggressive schemes like mid, small, value and contra and lower for the rest.

Before trying to understand the reasons for its high turnover and frequent switches of stocks and sectors, first let us try to understand the strategy of Quant schemes.

What does the term Quant mean?

The Merriam-Webster dictionary defines Quant as

‘’An expert at analyzing and managing quantitative data’’

A Quant based Mutual Fund Scheme is one that is far more driven by number, statistics and data than a macro- economic approach.
Now what constitutes these numbers varies from Fund House and at times, even schemes. For some it might be the quarterly results to the PE ratio.
This approach for example would be more reactive to the effect of a change in RBI Governor has on the market prices rather than predicting what effect it would have in the future.
Meaning the mere change in RBI Governor has absolutely no bearing on its functioning but if the change has an effect on the stocks it holds and wishes to sell or buy then it would react accordingly.
The stock selection process is quantitative driven and human intervention is limited, it picks up stocks based on their number irrespective of other factors.

So therefore HDFC Bank did not even feature in the top ten of its stock holdings when in fact it had allotted a sizeable exposure to it in the preceding few months. Most equity schemes which previously bought the stock had held on to it and some even added.

It is worth noting that this approach by the Fund House is applied to all of its scheme and not just its tax saving scheme.

This is why even some of its other schemes also have a high turnover ratio.

Quant Mid Cap Fund	5.64
Quant Active Fund	3.49
Quant Large & Mid Cap Fund	6.41
Quant Focused Fund	7.46

All data as on 31^st April 2021

What does the Quant Mutual Fund Fund say about its philosophy?

‘’ We believe consistent outperformance requires complete freedom from relatively looking at the world. It is why we design investment strategies for superior returns no matter how volatile or benign the market environment. With this absolute objective, comes clarity of thought. Being relevant requires an absolute focus on returns.’’

Source: Website

Official site screenshot grab

Quant strategy and the International Market

Quant strategy as an investing style is not a recent phenomenon when it comes to the international markets.
Robert Merton is considered one of the founding fathers of quantitative study and this was way before the advent of modern computers. With modern changes, it was imbibed with technology and is today used by financial institutions around the world including Fund Managers.
The fundamental approach of this practice is to break down complex mathematical data to look for alpha or excess return. There has to be something more than what a Fund Manager can provide and that is where its value comes into the picture.
At the International stage it has done more than decent along with the Index Funds.

Quant Strategy and the Indian Market

Reliance Quant Fund is run completely on this model.

This is what its Fund Manager had to say in an interview with Economic Times

“The approach eliminated any human bias from the management. Every 45 days, the data is churned by the system and based on the earnings growth, valuations and price momentum; it selects a set of 30 stocks from BSE 200 Index. This is a totally evidence-based model,”

Source to Interview

Let’s analyze the performance of Reliance Quant Scheme

Although returns should never be the sole criteria for your choice of scheme, the fact that it does not have a great track record when one compares it to other actively managed schemes over a ten year period, diminishes its value point.

It has failed to beat the benchmark anytime over a ten year period.

India is still an emerging economy,it is way more sensitive in its reactions as compared to other developed economies. This is far more the case when it comes to mid, small, large&mid and even value schemes.

Expecting an algorithm to handle aggressive schemes that take the most beating in a market slump may not exactly be the most prudent thing to do.

Why Quant strategy Funds may do well when it comes to the Large Cap schemes?

After SEBI’s re-categorization of schemes, a Large cap scheme needs to invest 80% of its corpus into large cap stocks thereby diminishing its alpha generation capacity. There is also not much scope when it comes to choice of stocks so the active role of a fund manager for alpha generation seems futile.

Recently ICICI Prudential Mutual and DSP Mutual Fund have also filed papers with SEBI to launch schemes that would adopt the Quant investing strategy.

Additional reading: Click Here to read our complete report on ELSS funds and how they work

What goes against the Quant ELSS Tax plan though?

ELSS has no sector bias, meaning it can invest in mid and small cap stocks as well which can be extremely sensitive and volatile. This would require a far more hands on approach than say the large cap stocks.This system cannot predict the market mood after say a regulation or regime change and this is all the more important in sensitive sectors like say Oil and Petroleum.

Although this scheme has been around for quite some time now, the Quant style of investing was only applied since 2018 though when the Fund House had taken over from Escorts Mutual Fund. Therefore judging the performance of the scheme on the basis on just 1 year would be extremely naïve.

With ELSS schemes, the fund manager basically takes a Multi Cap approach. Therefore the minimum time horizon a fund manager keeps when picking a stock is 5 years. ELSS has a lock in period of 3 years and even though one should stay invested longer, numbers prove that investors often redeem their investments as soon as the lock in period expires.

This style does not have a buy and hold approach but rather is heavily dependent on quantitative data. A very high turnover ratio is testament to that. Every sector and stock has a lean phase, that’s the very nature of equity markets.

It may miss out on massive growth potential of certain stocks and sectors because it may most likely get rid of them once the numbers at the present time do not make for a good reading even though it may have potential for growth.

This article was originally published in April 2019 and has been periodically updated with latest data

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