By Siddharth Vora

When you’re driving a car and approach a bumpy road, you shift to a lower gear to gain better control. This helps you maintain a slower, more manageable speed, making it easier to handle bumps and obstacles safely.

On the highway, though, you shift into a higher gear for better fuel efficiency at cruising speed. Now, think of your portfolio the same way! Just like the road conditions, market regimes are constantly changing, then why should your portfolio look the same? Why not shift gears with your investments to match the market ahead?

Often in bull markets, momentum stocks tend to outperform, capturing the enthusiasm of investors. In market recoveries, value style tends to do better, as investors hunt for bargains. Conversely, in consolidating or sideways markets, quality style may be more effective, as it provides a safety shelter amidst fluctuating market sentiment. Finally, in bear markets, low-volatility stocks shine, as they offer resilience in challenging conditions.

Each of these styles have different risk-return profiles too, which means a portfolio cannot simply be overweight on one style due to personal biases or short-term trends. For sustainable outperformance across market cycles, one can take a core-satellite approach.

The core portfolio can focus on diversifying and balancing exposure across style groups. Meanwhile, the satellite portfolio must have the ability to tactically increase exposure to the prevailing style regime based on market conditions. This can result in superior risk-adjusted returns.

For instance, when market conditions are favourable and the strategy is return maximisation, investors can focus on styles such as momentum, midcaps and smallcaps. During market recoveries, investors can take exposure to value stocks.

And when market conditions are unfavourable and the strategy shifts to risk minimisation, investors must focus on quality, low-volatility and largecap stocks. This just goes to show that no single investment style can win all the time.

The Basics of Ǫuantitative investing

While quant investing is often confused with passive investing, they are very different. Passive strategies simply replicate a particular index, while in active strategies, investment decisions are made at the discretion of a fund manager. Ǫuant investing refers to systematic strategies that use objective rules and processes to make investment decisions for unbiased and repeatable outcomes.

Every asset management house has a different approach, making quant models unique from each other. At PL Asset Management, we use rules-based dynamic multifactor strategies to objectively change the portfolio’s style, market cap, sector and risk levels, thus eliminating traditional behavioural biases. The goal is to achieve superior risk adjusted returns and sustainable alpha across risk- on, risk-off as well as risk-transition phases of markets, backed by a statistical edge.

According to our study, over a 5-year period, 100% quant schemes have outperformed the benchmark compared to only 47% active schemes. With this ideal combination of relative outperformance, robust risk management, repeatable outcomes and reduced correlations to traditional strategies and benchmarks, quant funds are poised to gain significant market share.

Why India is becoming a mature quant market?

While the Assets Under Management (AUM) of mutual funds in India has surged to ₹66 lakh crore, a significant portion is concentrated in active funds which carry a key man risk. This risk arises when a fund manager leaves and is replaced by someone whose investment philosophy differs, potentially affecting the fund’s performance and outperformance.

This is where quantitative funds fit the puzzle with data-driven models designed to reduce key man risk and with the ability to rigorously test across market cycles.

In the US, quant strategies were virtually non-existent until 1989. Fast forward to today, and over 35% of assets are managed using this approach. In contrast, India is just starting its journey, with quant strategies holding only about 1.5% market share.

This gap indicates there’s a significant headroom for growth! So, welcome to the new world, not that of man versus machine, but with that of man-with-machine.

(About The Author: Siddharth Vora, Head – Quant Investment Strategies & Fund Manager, PL Asset Management, Executive Director, PL Capital – Prabhudas Lilladher)

(Disclaimer: Views, recommendations, and opinions expressed are personal and do not reflect the official position or policy of Financial Express.com. Readers are advised to consult qualified financial advisors before making any investment decisions. Reproducing this content without permission is prohibited.)