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Why does Quantum AMC Hold so Much Cash?

Is Quantum Mutual Fund missing the bus by holding so much cash and debt in its equity funds?

Is Quantum Mutual Fund missing the bus by holding so much cash and debt in its equity funds? That's the question many investors are asking now. While the two equity funds managed by the house - Quantum Long Term Equity and Quantum Tax Saving have an impressive long-term record, their one year returns have been not so great when measured against the category averages. Quantum Tax Saving Fund has earned a 35.1 per cent return in the last one year against 56.01 per cent averaged by the ELSS category. Quantum Long Term Equity Fund has earned 34.4 per cent while the large- and mid-cap funds as a category returned 49.7 per cent.

A key reason for this seems to lie in the persistently high cash/debt positions in both funds. As per our data, the equity positions in Quantum Long Term Equity have steadily declined from 82.64 per cent of the assets last February to 69.5 per cent by February 2015. The debt and cash holdings in the fund have crept up from 17.4 to 30.5 per cent in this period. In Quantum Tax Saving, the cash/debt component is up from 17.9 to 19.6 per cent. Clearly, with only 70 and 80 per cent of the monies invested in equities, both funds have lagged fully invested peers in a rising market.

Why is Quantum holding so much cash and debt? Is it not bullish on equities? The fund says that this position is designed to offer better risk-adjusted returns to investors over the long term. It offers two explanations for this. One, since the election results have been declared last May, markets have soared sharply with little fundamental changes like increased corporate spending, to back this jump. Hence, the fund has lightened exposure to sectors like industrials, capital goods and financials, because it is not comfortable with current valuations.

Two, the cash calls are a function of fundamental calls on the stocks it owns. Quantum follows bottom-up stock selection process where the fund management team sets the buy and sell limits based on valuation levels the fund is comfortable with. It generally buys a new stock at the pre-determined Buy price (or below) and generally sells an existing stock at the pre-determined Sell price or above. If stocks do not meet these price targets, they are held and the residual money is parked in cash.

Quantum's long term track record has been built on containing downside risk to the NAV during market falls. For instance, the fund did manage to raise its cash positions and cushion its portfolio ahead of market tops such as January 2008. Therefore, though the cash position may hurt in the short term during market rallies, it should hold the fund in good stead during market corrections.