Quant MF CEO says, 'For us, timing is everything,' days before front-running allegation

Boasting over 27 years of experience in the capital markets, Sandeep Tandon is a known name in the industry. Previously, he has held positions at various reputed financial services firms, including GIC Mutual Fund, IDBI Mutual Fund, ICICI Securities and Kotak Securities.

In an exclusive conversation with Value Research, the CEO and Director of Quant Mutual Fund sheds light on the strategic use of predictive analysis in forecasting market trends. Further, he also addresses the prevailing market speculation and leverage, noting that both are currently minimal. Here are some interesting snippets from the interview.

Can you explain your investing framework?

Our VLRT (Valuation, Liquidity, Risk Appetite, and Time) framework is a risk mitigation investment framework. Let's understand that from a market point of view when we talk about certain data points.

In September 2021, the technology stocks peaked, and based on our analytics, we saw extraordinary hype and exited the sector. The market realised this six months after we exited, but stocks were down by 30 per cent by then. One-and-a-half years later, they were down by 50-60 per cent, so if you didn't sell at the right time, your risk assessment and timing were bad.

I believe that the biggest challenge of valuation analysis, which most people do today, is that most valuation metrics depend on one dependent variable called the stock price. So, when the price fluctuates, you keep changing your views. Now, we have to remove those human biases.

How? In our VLRT framework, we allot one-third of the weight to valuation analytics, one-third to risk appetite (which is sentiment data) and one-third to liquidity analytics. Even for us, timing analytics is a risk mitigation tool.

Let's take an example from the Covid-19 period. When the pandemic happened, our analytics showed that liquidity was at an all-time high (thanks to central bankers), and risk appetite collapsed to a 30- to 40-year low. So whenever there is a high liquidity and risk appetite, it's an indication of a lethal bull run. So we were 100 per cent deployed in April 2020, while others were in panic mode. In June-July 2020, the risk appetite improved, indicating that mid- and small-caps will start rallying. So we started buying mid- and small-cap stocks when every other guy was buying large-cap stocks. One has to understand that you can use liquidity and risk appetite analytics tools to arrive at money flow analysis. The money flow analysis shows us how to efficiently do sector, stock rotation and asset class rotation.

But, given all the data and analytics, how do you select stocks in the portfolio?

Many people think we adopt momentum strategies, but we are predominantly a behavioural fund house. With the help of our analytics, we try to capture all the sectors and stocks (an investment universe of 800 stocks) trading in admired and neglected territories. I believe that everything either trades in admired territory or neglected territory. If the stocks move into the most admired zone, we exit them, and if they are in the most hated zone, we turn aggressive buyers for them.

I will share the example of ITC. When we spotted ITC in September 2021, it was trading around Rs 200. We bought it because it was trading in the most hated zone. If we analyse the history of the last 24 years, it has traded in the hated zone only twice - once in 2007 and again in 2021. History shows it traded in the most admired territory in 2000 and 2013. Another indicator at Quant Mutual Fund, known as the Quant Fear Index for ITC, was at an all-time high. So, we had never seen this kind of fear in the stock, but it fit our VLRT framework, and we went all out and built exposure. It was a top holding across all our schemes, and at the price of around Rs 480, we exited completely.

Then, we shifted our focus to Reliance Industries, which wasn't in the most hated zone but rather in the neglected one. In a bull market, you will not get extremely hated zones so easily. This gives you the perspective that, for us, timing is everything, and everything else is conjecture.

With your performance-driven model, do you face any constraints in running any of your funds? For instance, the small-cap fund, because of the underlying liquidity of small caps?

I will say this is a big myth. If we look at the disclosures made in our mid- and small-cap schemes, we could liquidate the portfolio in 21 days and 11 days, respectively, in February. Despite the size of our fund, the number of days has been reduced to 20 and 10 for mid- and small-cap schemes in March. Our assets in small-cap funds have moved from Rs 40 lakh to Rs 19,000 crore in the last three years, and we have not faced any issues. I always say that buying is an art and selling is data science.

Many people can buy stocks at attractive prices but cannot exit because of their love and affection for stocks. At Quant Mutual Fund, through our analytics, we don't have any emotional attachment to any particular stock. The entries are important at Quant, but exits are even more important, and I think that makes a big difference. From the market perspective, liquidity is high at the peak of the cycle. So, if you can exit at the peak of the cycle and buy at the bottom of the cycle, that's an ideal situation. But that never happens in real life all the time. So, when there is euphoria in the market, we are sellers; when there is capitulation, we are buyers.

In many of your funds, how risky are your big positions in a few stocks (like Reliance, Jio and Adani group stocks)?

This is another myth. As a student of applied maths and statistics, I can tell you that extraordinary diversification is bad for the portfolio. People say we take high-concentration bets; yes, we take concentration calls, but the conviction to bet big comes from the data. Based on the analysis or intensity of the data, when multiple data points are skewed in one direction, we take a far bigger call. On the other hand, when multiple data points do not give me clarity, we lie low or dilute the holdings. So, it's very important to understand that when you run analytics, you either believe in analytics or don't believe in them.

Our strength comes from the analytics we have built over a period of time. When the crisis comes, one can get carried away, but when the analytics are built, you have a stable mindset. If you build something and then you don't practise it, it doesn't make sense. The whole idea is that you build systems and monetise or capitalise on them at the appropriate time.

Mid- and small-cap stocks have been performing exceptionally. Do you think this momentum is here to stay?

I will dissect this question into two parts. When I say this half-century belongs to India, mid and small caps will have to perform. If we say they will underperform, then my thesis is not correct. Some years down the line, we will become the third-largest economy, and things in India are changing for the better. With this background, it should be obvious that mid and small caps will outperform large caps from a long-term perspective. So, in today's environment, the easy phase (to generate high returns) in mid and small caps is over. But if someone comes with an investment horizon of 10 years or more, I would ask them to double or triple their holdings.

Which market segment is overvalued right now, and where do you see excessive speculation?

I believe there is no excessive speculation in the market, and leverage positions are also very low. So, I call it a disbelief rally, as the best money managers have not participated in the market and are still cautious. Top most family offices are negative on markets, and HNIs (high-net-worth individuals) have become short-term traders because they don't have conviction.

That said, I can see the froth in the SME space. Imagine an SME company that wanted to raise Rs 50 crore and got a subscription worth Rs 1,500 crore. So, I think only this segment of the market is quite overvalued. There are no signs of what happened in 2018 (the sharp sell-off in small caps). Even if the markets correct by 15-20 per cent, it's fine, as in any decisive bull market, these corrections are considered normal. After the election results, I expect we will see more inflows from FPIs (foreign portfolio investors) and FDIs (foreign direct investments).