Prashanth Narayan, CIO, PMS, multi manager strategies, ING Investment Management, spoke with Abhay Rao of the Financial Express about the new quantitative PMS products launched by ING, how they work differently and can form an important part of a persons equity portfolio. Excerpts:
•Why has the India Large Cap Quant equity portfolio and BSE 200 quant portfolio been launched under your PMS scheme?
The reason we have launched products like this under PMS is as in the broad sense mutual funds are for the mass and retail investors while PMS and structured products are more for the sophisticated investor. Given the product we have launched, which are quant portfolios, from our perspective we believe, that the investors need to understand what they are getting into, as apposed to a normal mutual fund where people have more experience and understanding. So number one here we need to make sure the investor understands what he is getting into and number two, it is a product which is for a focussed portfolio and it’s not for a retail investor. Also, it is a product which will take a little more risk than a normal mutual fund. This means you need to have investors who can absorb a risk of this sort and hence a vehicle like PMS is far more suited for a product of this sort, rather than a normal MF. In PMS, the investors are more hand held and that is the motive of launching a more sophisticated bunch of products on the PMS platform rather than the funds platform.
•What makes these products more sophisticated and different from other products in the market?
The way we have constructed this product and the approach we take over here makes it equivalent to a long only equity product. However, the difference is that this is a very focussed portfolio, so we are talking about 15-17 chocolate portfolios only, which I feel is more than enough to diversify the market related risks. The fact is that the way we construct the portfolio is very different as well. So we do not do much of stock picking here, but what we do is focus more on portfolio construction. So what we are saying is that the Indian cricket team is better than a Sachin Tendulkar. So, we won’t be picking the Sachin Tendulkar of the market, but we will pick a team that will perform well over time. And the process of how we build the portfolio is quantitatively done. It involves some amount of mathematics and understanding of the market, and that’s the way the product is done. The Large Cap product is basically benchmarked on the Nifty and deals with only large cap securities. The BSE 200 captures a large part of the market capital in India. So what investors mainly need to understand is the process we use. In terms of any quant product, it is seen that the products are far more consistent as compared to a fundamental driven investment. This is a portfolio approach and is more consistent, so if an investor understands the way we build the portfolio, then he also understands what he can expect in terms of portfolio performances in terms of different market phases and scenarios. Obviously, this can only be based on what has happened in the past, and there can always be a different turn or phase. Like say the 205 jump, which happened during the election time, which is a unique case that nobody can really foresee. However, at most times, an investor will understand what he is getting into. Our entire emphasis is far more in the risk management aspect. Therefore, we give far more emphasis on risk and trying to focus on market-related risks, company-related risks and things like that, so we can give a better cushion to the portfolio in terms of risk management.
•What are the minimum investments and lock-in periods for these products?
The minimum investment required for the India Large Cap fund is Rs 10 lakh and for the BSE 200 is Rs 25 lakh. There is no lock-in period as such, as say if we are investing in large cap stocks and you as an investor come to us and say you want to get out, I can sell the stocks in a few minutes, cut a cheque and give you back the money, so in that sense there is no lock-in. However, we do have an exit load of 1% if the investor redeems before a year. So no one is stuck with this investment at any given time.
•How has the reaction been so far towards these products?
As of now, the reaction we have seen in the large cap has been very good. Putting it in context, we brought out the Large Cap product in March, which was a bad time for sentiments even though equities had great valuations. We started marketing it from there on and in three months we already have around 330 investors and have raised over Rs 50 crore. In fact, in the last month, that is June itself, we have seen 100 customers come in. Investors have so far made phenomenal returns given the fact that the market jumped by 70%. We are managing proprietary money via this product as well, and have been managing ING Australia’s money via this product since September last year. Then in March we decided to take it to retail but PMS was the first step.
•Is there more interest now in these products due to market sentiments changing alone, or is there something in particular drawing people towards this product?
It is two things, when we started marketing this product before elections, we needed to convince people of two things. Firstly, investing in equity and then the next convincing was the product. Based on our interaction with distributors and clients, we found people were willing to invest in the product, but the first task of whether to invest or not itself was a decision that most people wanted to postpone. The elections were a big market booster and people reacted positively to it. However, even today, we find that there is money lying with investors to be invested, but, investors have still not fully recovered. For example, say a few days ago we met a big distributor and their relationship managers were saying that their client base, which they spoke to, have not regretted missing this rally. So basically, people are still willing to wait and watch and wait out these riskier periods out here, before making investments and this is the trend of sentiments.
•What are investors looking for?
From what we have spoken to distributors, HNIs are still skeptical about investing and are holding back investments. However, the good thing that has happened is that most people, who over the last year had moved almost totally out of equity and into fixed income products, are now looking to move back into equities. This is a good sign. However, people are still not easy with equities, as say if a distributor or bank proposes moving 30% into equities, they are say willing to go in 15% or 20%. Investors are now looking at equities but at a slower pace than earlier. Going forward, we are seeing another good change within investors and that is now they have stopped being greedy. Greedy in the sense in 2007, if a person went to them with a product with steady 15% returns they were just not interested, as they wanted their 40%, 50% and even three digit returns. That was greed taking over. Now people seem to understand the importance of asset allocation and they want to be completely head nosed into equities at one point and totally out of it at another time. People now understand that 15% returns for 5 years is better than 100% returns in one year and are no longer looking for the glamour of the equity markets alone where they burnt their fingers, and are looking at asset allocation seriously.
•These products are what you call qaunt-based. So does this mean they are derivative-based or something else? How do they work in that sense?
When we say quant here we mean something else. Say in most cases a normal fund manager what he would do is identify certain stocks based on many subjective aspects. By subjected aspects I mean the manager may decide here are stocks that will outperform the index, or this is a stock I really believe in and it should do really well, and these are the decision point’s fund managers make and buy a stock. Of course, it is not so easy, they have a research time, they do their research and valuations and check out the companies growth, value, etc and assess and buy a stock accordingly. Then the next step is deciding how much of the stock will you buy, be it 3%, 5% or 10% of your portfolio, and in most cases it turns out to be closer to their benchmark index. So if it is aligned to BSE 200 it will always be Reliance and SBI, etc, as they have a lot of influence on the index, and the tail of the portfolio would be companies and stocks the manager loves. However, when we say quant, nothing is just decided. So say, if I like a stock, we try to assess by actually how many points it will outperform the index. So what we try to check is say will Reliance Industries outperform the index by 200 basis points in the next two months. That’s the question we try to answer based on the all the information and data we have, and use them in mathematical techniques to arrive at the answer. Since we arrive at an actual number it is quantitative in nature. Another things we do is since it is a forecast, it has a risk to it. Therefore, we use a risk management technique we use, which is mathematically driven and fundamentally driven as well in terms of what data we feed. Then we make an estimate as to by what percentage can things go wrong and to what extent. Mathematically yes, this is standard deviation, semi variants and other statistical tools we use to calculate risk. Here, what happens is that say I estimate two and it reaches five, I am happy, but if it reaches -3 I am worried and hence we measure the negative tail of it as well. It is probability and an improved version of standard deviation we use. So say in the BSE 200 there are 200 stocks and we will do this exercise for all the stocks, and then if we have to buy only 25 stocks out of those, there are over a billion combinations. So what we do is use a logarithm that will out of these portfolio choices pick the combination that has the lowest risk or a lower risk than the benchmark index. That’s why I call this a portfolio construction and not a stock picking technique. So from our perspective, whatever we do is measured and mathematical in nature to that extent. We do not pick a stock and hence in an industry we might not pick the fastest growing stock due to its higher risk and might pick a company, which will generate better returns than the index while cutting down the overall portfolio risk.