The word sounds like 'quaint', but it isn't. It's quant, short for quantitative. Quant funds are an idea that has been around in the US and is now showing up in India. Lotus India AMC announced a quant fund (Lotus India AGILE) in December 2007 and then followed it up in February 2008 with an ELSS tax saving version. Now, Reliance Mutual is also jumping on to the quant bandwagon by announcing the conversion of an index fund into a quant fund named 'Reliance Quant Plus Fund'.
Quant Funds are funds that select the stocks in their portfolio on the basis of quantitative analysis. The fund managers managing these kinds of funds generally design a mathematical method based on which the stocks are taken in their portfolio. The model is developed on the basis of mathematical and statistical parameters. Reliance Mutual says that they have an in-house model which they are developing by looking at various parameters such as valuations, earning sentiments, price, momentum and share holders' value. They would also keep the portfolio's sector weightage in line with the Nifty's sector weight. However, in exceptional case this may be 20 per cent higher or lower.
In this volatile market the quant fund strategy can be useful as it doesn't choose the fund on the basis of any emotional or sentimental issue, is fast in decision making and is cost effective. Obviously, the decisions are correct only when the model is built properly and reflects the real world.
The concept of a Quant Fund didn't work when, in 1998, Long-Term Capital Management, a US hedge fund that bet on the predictions of its quantitative algorithm, suffered spectacular losses when its models failed to predict that the Russian government would default on its debt obligations. And that leads to the biggest criticism of quantitative models: their reliance on historical data and their inability to take into account new events.
Looking at the performance record of Lotus AGILE fund since its inception, it has negative returns (the NAV is Rs 8.50 on 26th March, 2008). The fund has 11 large cap stocks in its portfolio with about 6 to 10 per cent of holding in each. 97 per cent of its holdings are in large cap stocks. 70 per cent of the portfolio is invested in three sectors which are the Energy Sector, Metal & Metal products and Financial sector.
A quant fund is halfway between two kinds of equity funds, actively-managed equity funds and index funds. In case of actively managed funds a fund manager is required to manage it and in an index fund a fund manager is not required because the portfolio of the fund is a replica of the benchmark on which the fund is based. Quant funds are halfway between the two because they are managed by a mathematical model which has been developed by a fund manager. It should be interesting to watch how well Indian quants do.
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