Our new fund will try to avoid sector traps based on quant model: Shriram AMC

With nearly three decades in the asset management industry, Shriram Asset Management Company (AMC) currently manages assets worth Rs 782 crore as of September 2024. In a bid to bolster its portfolio, the fund house is set to launch its third equity fund, the Shriram Multi Sector Rotation Fund, on November 18, 2024.

We recently sat down with Deepak Ramaraju, Senior Fund Manager at Shriram AMC, to discuss the strategy behind the new fund as well as his outlook on the equity market.

During our conversation, we understand that Shriram AMC is transitioning to a "quantamental" approach by combining quantitative models with fundamental analysis. Looking ahead, the fund house plans to expand its offerings with large-cap, mid-cap and small-cap funds, each leveraging this unique investment methodology.

Here is the edited transcript.

What is the investment philosophy of the fund house?

We are a quantamental fund house, and this strategy involves a combination of quant and fundamentals.

Firstly, our process involves running a quant engine rank across all the stocks or sectors in which we wish to invest. Once we get the data, we filter the stocks based on the fundamental thought process and then build a portfolio.

For example, we consider the NSE 500 as our universe, which includes all 22 sectors defined by the Association of Mutual Funds in India (AMFI). But since three sectors are smaller in size, we have built 19 sectors to choose the stocks. We run multi-factor models on these 19 sectors and rank different sectors in descending order. Therefore, the stocks in the portfolios are positioned within the top 3-6 trending sectors based on our model.

The proprietary quantitative strategy will then select the sectors, considering various parameters such as valuation, momentum and growth, among others. Once we select the sectors, we conduct a fundamental analysis to understand why they are trending at the top. The trending sector may be attributed to the fundamental story within the sector, macroeconomic changes supporting the sector, or the catching up of valuations.

So, once a sector is selected, how do you buy stocks in the portfolio?

Once we've selected the sectors, we take all the stocks from those sectors and apply quant engines to them. We employ distinct sets of factors for various sectors and apply them at the stock level. Once we run the quants across the stocks, we subject those stocks to fundamental analysis, which includes evaluating management quality, determining the leverage of the balance sheet and identifying the reasons for future outperformance in those sectors. After assessing the stocks' risks and long-term prospects, we add them to the portfolio.

Please explain the investment philosophy of the new fund (Shriram Multi Sector Rotation Fund) you are launching next week.

The Enhanced Quantamental Investment (EQI) strategy will determine the stocks from each sector, maintaining the same overall investment philosophy.

Currently, our model identifies the top five trending sectors as healthcare, FMCG, consumer services, consumer durables and IT. We will run the quant on all stocks in these five sectors and zero in using the multi-factor approach. The only difference in this fund is that it will have 20-30 stocks in the portfolio, unlike our present tax-savings and flexi-cap funds, which have a higher number of stocks. In this fund, we will do rebalancing every month.

Are there any other differences from other funds?

There are multiple sector funds in the market that are either sector- or theme-focused, like defence.

In the defence sector, the focus is primarily on government spending, which may experience a slowdown. Even if we look at sector funds, they go through different cycles.

For example, the IT sector does well when inflation and interest rates go down, as IT spending usually increases during those times. But when there is a slowdown and interest rates are rising, the IT sector underperforms.

But in this (new) fund, we are trying to avoid the sector traps. Our quant model shows which sectors are trending and which are not, so investments are based on those models. We will invest in one sector, but once the trend in that sector halts, (we will) shift our focus to another sector.

How big is your investment team right now?

Currently, we are an 11-member team, including four quant analysts and three fundamental analysts. The remaining members are fund managers.

Why did you launch a multi-sector rotation fund when you already had two pure equity funds?

We decided against launching any sector or thematic funds because we wanted to stand out from the competition. The idea of this fund launch came through our distributor partners, and it took us around a year to develop this product.

We already have a flexi-cap fund that allows investors to manage a multi-cap strategy; the only difference is that investors can choose to invest in mid- and small-cap stocks within the flexi-cap fund instead of the multi-cap fund. For instance, if our quantitative models detect a trend favouring mid- and small-cap stocks over large-cap stocks, we will adhere to this recommendation. I am simply stating that flexi-cap funds offer sufficient flexibility to manage across a range of capitalisations.

The markets have experienced a correction in the past few days. Do you think the worst is over for the markets?

I would say that lower government spending and a very high base from the previous financial year have put pressure on earnings. (However,) government spending will support improved earnings growth potential for FY26. Also, we might see rate cuts start happening next year, and I believe that will be a key trigger for growth in the equity markets.

What kind of funds are you planning to launch going forward?

We may not launch anything in the short term. But we will eventually launch large-cap, mid-cap and small-cap funds. We are currently working on this project.

Having said that, these funds will adopt a unique investment approach. These funds may not be your typical investment options but rather a unique approach we are currently working on.

Also read: Large caps look interesting in the current market: CIO of Baroda BNP MF