Quant Small Cap Fund review: Is it a worthy wealth creator?

Quant smallcap returned a whopping 52 per cent in the last one year. However, is it a consistent player? We shall find out in our in-depth review. So, keep reading.

Quant Small Cap Fund seeks to invest in a portfolio of smallcap companies to generate capital appreciation and thereby provide long-term growth opportunities. The fund is made up of 56 stocks which is low when compared to the category average of 67. It is benchmarked against NIFTY Smallcap 250 Total Returns Index (TRI). In this post, we would be dissecting the fund and have a 360-degree view which will help investors make a better investment decision.

How does the fund perform?

In order to understand the fund’s performance, we have compared its three-year rolling returns against its category average and benchmark index. The period of study ranges from January 2012 to March 2022.

The above two graphs give an idea about the performance of Quant Small Cap Fund as against the small cap fund category and NIFTY Smallcap 250 TRI. As can be seen in the first graph (Graph No. 1), Quant Small Cap Fund has consistently underperformed its category as well as its benchmark. However, in recent times it has been performing well when compared with its category and benchmark. It would be quite interesting to see how the fund manager works to sustain such a performance. It is to be remembered that the outperformance of this fund is only during the recent rally. However, need to see how the fund performs when the markets turn bearish.

Let us now look at the performance of the fund against its category and benchmark based on parameters such as median, minimum and maximum returns of three-year rolling returns (Graph No. 2). The results are quite discouraging as the fund failed to score over its category average and benchmark in terms of median and minimum returns and in the case of maximum returns it only outperformed the benchmark but failed to score over its category average. This shows that in the long-term Quant Small Cap Fund is not able to withstand its peers as well as its benchmark.

Note: The data used to calculate the performance of the fund and category is of the regular plan.

How risky is the fund?

To understand the risk undertaken by the fund against its category and benchmark, we have assumed the maximum drawdown as the primary parameter. However, to have a holistic view, we have also compared its standard deviation, downside deviation, Sharpe ratio and Sortino ratio with that of the category average.

As we can see the above two graphs show the risk metrics of the fund alongside its category and benchmark index. In terms of maximum drawdown, although Quant Small Cap Fund has one of the highest maximum drawdowns in the category, its drawdown is less compared with its benchmark index. Having said that, in last 10 years, Quant Small Cap Fund depicted drawdowns 79 per cent of the time, whereas the small cap fund category and Nifty Smallcap 250 TRI on an average showed drawdowns 97 per cent and 90 per cent of the time, respectively.

However, when we studied the number of times drawdowns were below 10 per cent, then in case of Quant Small Cap Fund it was 51 per cent, while in case of category and benchmark index it was 36 per cent and 47 per cent, respectively. This shows that, even though the fund falls comparatively less, when it does it falls more than the category and benchmark index.

Moreover, its standard deviation and downside deviation is also more than its category as well as its benchmark index suggesting that the Quant Small Cap Fund doesn’t do well at containing the downside risk. Even in terms of risk-adjusted returns as measured by Sharpe and Sortino ratios, the fund underperforms its category and its benchmark.

What is the investment strategy of the fund?

The investment strategy is based on the quantitative approach of Quant Mutual Fund’s proprietary VLRT (Valuation Analytics, Liquidity Analytics, Risk Appetite Analytics, and Timing) framework, wherein they incorporate the full spectrum of data along deeper aspects related to the three-axis of Valuation, Liquidity, and Risk appetite and view it in a dynamic setting – Time, thus, forming the multi-dimensional VLRT framework. The formulation of this macro narrative guides its micro-level stock selection.

According to the Scheme Information Document (SID) of Quant Small Cap Fund, Quant Mutual Fund’s predictive analytics toolbox formulates a multidimensional research perspective on various asset classes. All investment decisions are based on quant money managers’ investment framework – VLRT

How does this fund fair on the concentration front?

As of March 2022, the fund comprises 56 stocks with higher weightage to ITC, IRB Infrastructure Developers, Linde India, TV 18 Broadcast, etc.

If we look at the fund on the concentration front, then it seems to be diversified and is free from any concentration risk. The top 10 holdings form only 38.8 per cent of the overall portfolio, with six per cent being the highest weightage given to an individual stock. On the sectoral front, around 38 per cent of the assets are dedicated to the top three sectors (Construction, Services and Consumer Staples).

How is the fund manager?

Presently the fund is being collectively managed by Ankit Pande, Vasav Sahgal and Sanjeev Sharma having industry experience of 9 years, 5 years and 13 years, respectively. If we look at the pattern of change in fund managers, then since 2002 around 9 fund managers changed with only ex-fund managers Lalit Khanna and Jagvir Singh Fauzdar managing this fund for 14 years and 8 years, respectively. The current fund managers are managing this fund for not more than 5 years.