Mutual Fund Weekly Analysis: Quant Small Cap Fund

[Read: 5 Best Small Cap Mutual Funds to Invest in 2023 - Top Performing Small Cap Mutual Funds in India]

Past performance is not an indicator of future returns
Data as of August 02, 2023
(Source: ACE MF)

Despite being small in size, Quant Small Cap Fund has registered extraordinary performance and handsomely rewarded its investors. In the last 3-year period, Quant Small Cap Fund has outpaced the benchmark by a remarkable margin of around 14 percentage points and also stood as the category topper. Its superior performance in recent years has boosted its long-term returns. The fund has now found a place among top-performing schemes, boasting superior returns across time frames. The fund now stands among the top-quartile performers over the long-term time periods of 5 years and 7 years.

The volatility registered by the fund is higher than the category average as well as the benchmark. However, Quant Small Cap Fund has managed to reward investors remarkably for the level of risk taken. Its Sharpe ratio, a measure of risk-adjusted return, is currently among the best in the category.

What is the investment strategy of Quant Small Cap Fund?

Categorised as a Small Cap Fund, Quant Small Cap Fund is mandated to invest a minimum of 65% of its assets in stocks of small-cap companies, i.e., companies ranking 251st onwards in terms of market capitalisation. The fund also allocates around 20-30% of its assets in stocks of large-cap and mid-cap companies. Quant Small Cap Fund adopts a quantitative approach to select high-growth potential stocks based on the relevant market, industry, sector and economic parameters. This quantitative approach is based on the fund house's proprietary VLRT framework, viz. Valuations, Liquidity, Risk, and Timing. Here are the key features of the framework:

Valuation Analytics: Knowing the difference between price and value

Liquidity Analytics: Understanding the flow of money across asset classes

Risk Appetite Analytics: Perceiving what drives market participants to certain actions and reactions

Time: Being aware of the cycles that govern how the other three dimensions interact

This framework enables the scheme to understand the various investment trends, thereby allowing it to select high-growth potential stocks. The fund holds many of its stocks with a short-term view, and as a result, Quant Small Cap Fund usually has recorded a high turnover of 100-500% in the past, though it has come down significantly in the past few months.

Quant Small Cap Fund usually holds a well-diversified portfolio of 55-70 stocks at any point in time. As of June 30, 2023, the fund held 71 stocks in its portfolio, with the top 10 stock holdings accounting for around 37.7% of its assets. Two large-cap stocks viz. Reliance Industries and HDFC Bank currently form the fund's top holdings followed by small-cap names such as Bikaji Foods International, Usha Martin, and Arvind among others. While Quant Small Cap Fund does not hesitate from holding unconventional bets, it has restriction allocation in each small cap stock to 3% or less.

In the last two years, Quant Small Cap Fund benefitted the most from its holdings in Stylam Industries, Nitin Spinners, The Indian Spinners, and EID - Parry (India), among others. It booked profits in Blue Star, RBL Bank, GAIL (India), Bharat Dynamics, SBI, Welspun Corp, Praj Industries, Ambuja Cements, Divgi Torqtransfer Systems, and IDFC, among others.

The top 5 sectors in Quant Small Cap Fund's portfolio accounted for around 46.9% of its assets. It holds higher weightage in Banks, Petroleum, Engineering, Pharma, and Consumption. Textiles, Metals, Media & Entertainment, Transportation, Chemicals, Cement, Construction, and Telecom figure among the other prominent sectors in the fund's portfolio.

Is Quant Small Cap Fund suitable for my investment goals and risk tolerance?

Quant Small Cap Fund stood strong during the 2020 market crash, wherein it outpaced the benchmark and many of its peers. Moreover, the fund topped the category returns in the ensuing bull phase, thereby generating significant alpha for its investors. Quant Small Cap Fund is quick in its approach to shift allocation between market caps and sectors depending on the market conditions.

With significant exposure to stocks in the small-cap and mid-cap segments coupled with the active investment approach followed by the scheme, the volatility registered is higher than the benchmark and many of its peers. Nonetheless, the remarkable returns generated by the fund have helped it score high on risk-reward parameters.

The aggressive investment mandate followed by Quant Small Cap Fund makes it suitable only for investors with a very high risk appetite and an investment horizon of at least 7-10 years.

[Read: Market at All-time High: Is This a Good Time to Invest in Mid Cap and Small Cap Mutual Funds?]

Note: This write up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

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DIVYA GROVER is the co-editor for FundSelect, the flagship research service of PersonalFN. She is also the co-editor of DebtSelect. Divya is an avid reader which helps her in analysing industry trends and producing insightful articles for PersonalFN’s popular newsletter – Daily Wealth letter, read by over 1.5 lakh subscribers.
Divya joined PersonalFN in 2019 and has since then used stringent quantitative and qualitative parameters to analyse funds to provide honest and unbiased research to investors. She endeavours to enable investors to make an informed investment decision and thereby safeguard their wealth.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.

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About the Company including business activity

Quantum Information Services Private Limited (QIS) was incorporated on December 19, 1989.

QIS was promoted by Mr Ajit Dayal with an objective of providing value-based information/views on news related to equity markets, the economy in general, sector analysis, budget review and various personal products and investments options available to the Public. It was the first company to start equity research on an institutional level.

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