Firstly, thank you for your continued faith in the Quantum philosophy and our unique approach to investing.
As 31
st March looms closer and we approach the end of the financial year, everything comes under the scanner or the review. The performance at your work place - filing in those appraisal forms. Your children having their own stress with exams; everything tends to come to a head around the end of March.
Measuring Performance
There are various ways of gauging performance, for someone coming first is important, while for others the ability to run the race is an achievement in itself. Performance - whether good or bad is always gauged against a benchmark, the benchmark could be a fellow employee or student, or achieving a pre-determined number, either in terms of sales or calls. There has to be barometer (or any meter!) by which one measures performance.
Mutual Funds are no exception; each fund has its own benchmark, which the fund manager either strives to beat (as in actively managed funds) or meet (as in passively managed funds). Over the last quarter, the performance of Quantum Long Term Equity Fund (QLTEF) has not been stellar as compared to the peers or even the benchmark - the S&P BSE 30 TRI, is one of the tougher Index in the stock market to beat, since the Total Return Index (TRI) reflects the return to an investor where gross dividends are reinvested. At Quantum it is our duty to explain to you - our investor, the reason for this performance and the way we see things developing in the future.
Measuring the performance of Equity Funds
When the performance of an equity fund is measured, what is actually measured is the performance of the underlying stocks in the portfolio of the fund. If the stocks of the underlying portfolio are on an upward swing then the fund tends to beat the benchmark comfortably and vice versa. So, by the way of an example, in a bull run, small cap stocks will tend to perform the best since the percentage rise in their prices will be much higher than say large cap stocks. Therefore Equity funds with exposure to small cap stocks will do well. Similarly, if during a bull run the stocks of a particular sector (telecom or energy for e.g.) do not perform then the fund which has a heavy allocation to companies belonging to those sectors will not do well.
There is, however, a third reason why funds don't do well - and this is the reason for the drag in the performance of the Quantum Long Term Equity Fund - is that there are lesser stocks in the portfolio itself and a substantial amount of the portfolio is in cash. This means that the fund invests less money in the stock market and more in CBLO or other liquid instruments as it stays heavy on cash.
"Why would the fund manager take such a call in a rapidly rising market? Isn't it better to stay invested rather than sitting on cash?" you rightly ask.
The answer to this very pertinent question is twofold:
Point 1 - The nature of the Market
India's GDP has grown by leaps and bounds and overtaken China. Is this because agricultural and industrial production is at an all time high? Is this because the 'Make in India' campaign by the Government has brought in MNC's by the planeload? No. It's because we changed the way the GDP is calculated by updating the base year and switching other matrices around.
While this is a brilliant move by the government probably to attract more FDI, one must take cognizance of the fact that the ground realities haven't changed that much. Agricultural production is still heavily dependent on the monsoon. Industrial production has not kicked off just yet and corporate investment has only now started to pick up.
Recent data compiled by Reuters on the quarterly earnings of India's largest companies reflects this unpleasant reality. The last three quarters, i.e. since the formation of the new government, their earnings have failed to match expectations. More than half of the firms, including some of the largest names you can think of, disappointed forecasts. (
Click here to read the Reuters article.)
Yet the S&P BSE Sensex seems to be touching the 30,000 figure! This is clearly a bull run that is not essentially driven by fundamentals but sentiment. As asset managers we tend to follow the fundamentals, be it that of the economy or of a company in which we plan to invest.
Till we don't see agricultural and industrial production and corporate investment rise significantly, chances are we will continue to remain in cash.
Point 2 - The nature of Quantum Long Term Equity Fund
In QLTEF, we follow the value style of investing, which means that we will buy a stock only if we see value in its price. If, after extensive research, we find that a stock is overvalued we will not buy the stock. To understand this, let us delve a little deeper into the research process.
The Research team has a basket of stocks that it arrives at after a
rigorous process of stock selection. Thus we buy when we believe a company's valuation is cheap relative to its long term earning potential and historical valuations, and we sell when we believe a company's valuation is expensive based on the long term earnings potential and historical valuations. The risk control criteria employed for stocks selection has seen us avoid certain blue chip stocks in the past. These, and the conviction of the research team in the stocks selected help us keep the portfolio turnover low; and thereby keep your costs low too while not compromising on the risk parameters.
The analysis is at a stock level and not sector or theme based. At any time if the portfolio seems to be inclined to a particular sector it would be coincidental ie several stocks that we bought happen to belong to that sector. Also, we are not averse to mid cap & small cap stocks however there are very few such stocks out there that fit our investment criteria. Yet at times some of these stocks have found their way into the portfolio.
This analysis is not done at the Index level either. Whenever our pre-determined buy limit for a stock is triggered, the company becomes part of the portfolio and whenever a sell limit is triggered we exit the stock. Whatever remains is cash. The last few months have seen us exit quite a few stocks as we believe they became more expensive relative to their investment value, raising the cash levels in the fund to a historic high.
Therefore our performance with reference to the benchmark and peers has dipped.
What about the future?
To tell you about the future, we need to rewind to the past where in 2007, when the markets were racing upwards - the cash levels at QLTEF was around 15-20%. Thus the fund was poised to take advantage of the dive in markets in late 2008 due to the Lehman crisis. Cash levels of QLTEF were at all-time lows at that point in 2008 as most stocks then came into the 'buy' limit of the fund. Since then, till now, the fund manager has continued to manage the scheme prudently.
The stock market is cyclical and since the formation of the new government at the center, it has been hitting new highs almost every week regardless of the fact that the fundamentals are not backing it. Hence the cash levels of QLTEF are high, yet again.
Our philosophy of thinking long term, being value investors, and our stance towards choosing the stocks that are the best for the portfolio while also not taking extreme risks will not change. So if markets continue their upward trajectory it is likely that we will continue to sit on high levels of cash.
So let me take this opportunity to thank you yet again for your trust and continued faith in the Quantum philosophy and request you to be patient with us as we wait for the right opportunity to re-enter the market at the right time, and continue delivering the returns you have come to expect from us.
