We speak with Sandeep Tandon, CIO & Founder, quant Mutual Fund, to understand how managing a fast rising AUM shouldn't be a problem, their strategy to cope with any market correction and plans to provide international offerings
In the part-one of this interview, we learnt about the VLRT framework at quant Mutual Fund, Sandeep Tandon's unconventional investing views and how 'quantamental' helps them bring the best of man and machine together. In this part, we get to know about the reason for the outlier performance of their schemes, how they're geared up for any change in the market conditions and their plans about international investing.
Your success has also been attributable to the fact that once you identify these inflection points at the stock or sector level, you've been fairly nimble-footed in moving in and moving out until now. And how does this scale impact your ability to continue what you've been doing?
Again, it is really a big myth. The market believes that, if you are small, you will perform. Performance of a scheme is in fact dependent on the investment philosophy (which forms the investment style) and how quickly this adapts to the prevailing macro environment.
At quant, we practice a very dynamic style of money management. Dynamic money management entails active update of the portfolio based on prevailing market conditions. As an example, rebalancing the risk profiles of a portfolio through volatile periods allows for superior risk-adjusted returns. As an example, as per our Predictive Analytics, 2018 to 2023 will be a volatility-expansion phase. This is the time when the 'buy and hold' strategy won't work, glimpses of which have been evidenced by the strategy's underperformance globally in the past few years. We believe, dynamic money management will be key to navigate through the tides of volatility in the coming years. So, it's a mindset, rather than saying whether our strategy is scalable or not.
Moreover, having a small AUM is a curse because you don't get opportunities. Nobody will issue you a block trade on the exchange and nobody will offer you to become an anchor investor when they get listed. So, there are more challenges of being small rather than saying when you are small you have an advantage. Size gives you a certain advantage too.
So it's a mindset rather than saying whether our strategy is scalable or not. I have also seen many people talking about churning, saying that 'churning is bad'. I have seen a lot of influencers saying that our strategy is not clear, we don't know what to do, we just churn and that churning is bad. These are myths that have been created. Everybody will say that as a larger fund, we would not be able to churn. Churning is all about how we manage your risk-on-risk-off environment. If my environment is changing, I will rebalance my portfolio. And if you ask me, our "churning activities" may actually increase over time depending on the prevailing environment.
For example, I have been saying since the beginning of 2022 that this year will be more volatile than 2021 and even 2020 and it is turning out to be true now. So, you have to play for smaller swings in the market and if you can't, then it is difficult to generate alpha. So, it's not about churning. It is about the process of risk management. That's the way it happens globally.
Hence, it is nothing but a myth that churning is bad. In fact, churning, as part of our framework, is a process-driven activity that requires lot of data analytics to ensure one is able to identify stocks/securities on the cusp of their inflection point, thus better manage risk of the portfolio.
Everyone has taken note of the exceptional returns that you have delivered in the momentum-driven markets over the last couple of years. If markets were to enter a bearish phase or undergo a time correction, how is your fund-management style configured to handle such a scenario?
Our thought process is very simple. If data changes, we will change. We are slaves of data and at quant, we say, 'data is God'. So, if something is changing, we will be early and quick to react, rather than saying that we would like to wait and see how it unfolds.
Yes, outperformance was very meaningful during the bull phase because at the appropriate time, we took some corrective measures which have built our track record of being the best in most of the categories. But it's not our endeavour to be ranked number one or be in the top quartile. We want to be in the top quartile on a risk-adjusted basis. You have to look at the Sharpe or Sortino ratio, i.e., our risk-adjusted return. If not the best, it is one of the best in the industry. That is the way we judge our performance. It's just a coincidence that we have done extremely well in most of the categories. We are not in the race of being number one and our focus remains on creating wealth for our investor in the long run.
We are a risk-averse organisation and we want to play the cycles correctly. Our Money-Flow Analysis clearly identifies sectors and stocks that have the potential to outperform the market because they are about to come out from their neglected territory and move towards the admired category and I would like to participate in those names.
You've been very vocal and unambiguous about your views on the US market and feel that emerging economies, particularly Asia, are much better off with regard to the risk-return trade-off perspective. So, are there any plans in the foreseeable future to have international offerings?
We have taken SEBI's approval for investing in foreign equities in all the schemes where we can. Today, we believe that the opportunity in India, as well as in other emerging markets, is far better than that in the US markets. So, we're happier to be an 'India-centric' house at this point in time. However, we are flexible in our approach and will adapt as and when needed.
This is the final part of the interview. You can read the first part here.
This interview was conducted in February, 2022.