On Sunday, an online news platform reported (attributing it to sources) that SEBI had conducted search and seizure operations in the office premises of Quant AMC. The operation was supposedly conducted on suspicion of front-running operations. The AMC has acknowledged that it has received inquiries from SEBI and that it has been cooperating with the regulator in the review.
Front running is an illegal practice of using non-public information about a company (traded in the market) to make a trade for their own benefit, ahead of a larger order that will affect the stock price. In a fair market, the assumption is that everyone gets the same information at the same time. But in front running, someone sneaks to the front using special knowledge to get an unfair advantage.
From the reading of the article, it appears that there were other front-running beneficiaries to the AMC’s trades. So our assumption here is that relatives or friends of insiders in Quant benefitted from such front running, if such an allegation is indeed true.
In 2020, different entities were slapped with fine by SEBI for front running trades placed by HDFC AMC. A similar issue surfaced in Axis Mutual Fund in 2022. While in the case of HDFC AMC not much damage was done, Axis AMC faced significant outflows and also a fall in price of stocks that were suspected of being targets of front running by the individuals.
Impact of this news
While this news has been confirmed, the details of any front-running activity, any regulatory action and the impact is not known. However, the risk of such news is two-fold:
- There will be redemption pressure for the AMC’s funds.
- The stocks (if disclosed or rumored), on which such front running was allegedly done may come under selling pressure.
We are more worried about the former. For an AMC like Quant (unlike the larger ones we mentioned earlier), with a good proportion of mid and small-cap stocks or low float stocks, high redemption pressure can start impacting NAV and cause damage to the remaining investors.
It is noteworthy that a large AMC like Axis Is yet to see normalcy restored after similar incident in 2022.
Action needed on Quant AMC funds
We have 2 Quant funds in Prime Funds. They are:
- Quant Active, under Equity – High risk Turnaround, meant as a tactical play
- Quant Absolute, under Hybrid – Moderate risk
Other than these two funds in Prime Funds, our Buy/Hold/Sell recommendations have a few Buys on Quant funds.
We are now uniformly issuing an EXIT call on all the equity and hybrid funds of Quant AMC, whatever be their call earlier. The two Quant funds in Prime Funds will be removed as well. We have left the Prime Rating on all Quant AMC funds unchanged as the rating is based on performance alone and is quantitative in nature. You should check for our ‘Call’ on the funds (in MF review tool old style or Portfolio Review Pro), rather than the Prime Rating.
This call may seem rather hurried; however, in our opinion, simple news like this, the actual impact of such front-running notwithstanding, can cause enough damage to sentiment in the AMC and impact redemptions. An exit is further necessary in Quant funds given that many of their stocks are momentum plays, and sudden redemptions and disruptions in inflows can have a greater impact on such strategies.
You might want to wait and watch how events transpire, before taking a call. Our stance, however, remains an exit, taking a conservative view and the bigger potential fallout if the news is indeed confirmed and as details emerge. Do note that for the two Prime Funds, we have clearly stated that exposure should be very limited given the risks, and to avoid using them as part of your core portfolio. Hence, we do not see a big downside in terms of tax impact in your exiting these funds. We would also rather you err on the side of caution, even with the tax impact.
You can reinvest the amount in funds already forming part of your portfolio if they have a Buy call, or in other Prime Funds.
Risk to the call: If this unconfirmed news turns out to be false, then you would incur cost (taxation primarily) on the redemption made.
40 thoughts on “Front-running of Quant AMC – what you should do with your Quant funds”
If one sells a Quant Fund (for example Large and Mid Cap) and then uses proceeds to buy similar exposure in another fund with same strategy ….Isn’t it simply selling the packaging but keeping the underlying stocks?
If one changes the strategy then there’s nothing left to change to because you are advising all Quant Funds to be sold and Quant funds are across the board!
No. Each fund is different, so you’re not buying a similar set of underlying stocks. The same strategy does not mean the same stocks – two funds can have a value strategy, for example, but have minimal portfolio overlap. You can reinvest the amount in funds that are from similar categories, to keep your overall portfolio allocation along the same lines as before. This apart, the reason for giving a exit on Quant funds is because we see risks to performance in future. – thanks, Bhavana
Will Prime Investor again recommend Quant funds similar to what you did after your exit call on Franklin?
For Ex I hold their Multi asset fund and any redemption would be feeding more into the corpus of Ministry of Finance in terms of both LTCG and STCG. Hope this is not a short sighted approach and a more balanced one unlike Franklin
I am afraid you are comparing two totally unrelated events. With Franklin, your money was blocked. That was morally wrong. No fund house should curtail redemption in an open-ended fund. We said that we are removing coverage until the issue is resolved and we showed our disapproval. And please note we had already warned about FT a few months before the event if you had followed us.
In this case, our job is to ensure that risks are curtailed. If there is uncertainty, it is our job to let you know. You have every right to decide whether it is hasty or short sighted or a risk mitigation strategy rather than blame us for our views. After all, the decision is entirely yours on how to weigh risks and taxes in a balanced way 🙂 thanks, Vidya
How are these unrelated? I am purely talking of Equity funds Was your call only for Fixed Income funds of FT ? . No MONEY was blocked there. However their Equity funds have again been recommended 🙂
Excuse me 🙂 Our call was on FT for their practice of blocking investor money. It is a fiduciary responsibility broken. I think I have stated that clearly. There is no doubt about it and it is by no means a moral act in the investment world. We showed our dissent by stopping ratings for a good period. In fact they could have been sued for blocking redemption in an open-ended fund. SEBI allowed it for want of choice.
Where would you suggest redemption proceeds to be deployed without damaging portfolio level strategy ?
There isn’t an absolute like-to-like replacement for Quant funds in terms of strategy. You will need to pick from the same risk level/category that your Quant fund is in, currently. For example, if you hold Quant Active, you can replace it with any fund from the Equity Aggressive set or add to midcap/multicap funds from your existing portfolio. – thanks, Bhavana
Hello Vidya,
Thank you very much for your exit call in a timely quick manner. I really like your Pro-active approach to err on the side of caution rather than wait and watch. At least we should book the gains. Fully agree, it is better to be safe than sorry and be nimble footed.
Just started Quant midcap recently. 2L currently at 2.13L lol
Hold or sell?
Our call on the Quant AMC funds is a sell. This will include Quant Midcap as well. You can choose to hold, if you want to – but in this case, we’d suggest you at least halt any SIP if you have it. Our call is based on a conservative approach for reasons explained in the post above. – thanks, Bhavana
Thanks for the timely info — actually, this was coming ; the fund’s operating mode has been non-transparent since beginning, however the returns were spectacular for an MF, so everyone was trying to jump in . In fact, investing online thru their website was so tedious that I gave up half-way —
This created unnecessary panic among retail investors. Historically, such front-running allegations on HDFC, Axis etc. have not had a direct impact on NAVs. Fund inflows have slowed down in some cases. Fresh investments to Quant will of course have to wait, but to redeem existing investments before SEBI investigation details are out seems very short sighted.
Hello sir, We fully expected these views and it is a fair point considering your angst with the cost of such redemption.
However, I fully also disagree with your view on AXIS. It lost significantly on AUM and performance. Youc an go back and check 🙂 On HDFC, the AMC simply managed to quickly put it behind and quieten it 🙂 Had an investor waited for Axis investigation to be over, the investor would be the loser. Even if this turns to be baseless, we had to err on the side of caution and we did that. thanks, Vidya
Thank you for the timely article. What should one do if one is holding Quant ELSS and 1 year completed out of 3 year tenure? Is there any exit route?
There isn’t unfortunately. Just hold. You have time to recover at least, if there is any redemption pressure. Vidya
Thank you, team, for this sharing this important information in a timely manner.
Isn’t this an knee jerk reaction? Prime investor had similarly given a call to exit all Franklin Templeton funds about a 3 years back , but nothing of the sort that you feared happened, and Franklin funds are back in your list of recommendations.
Please give a considered opinion , since investments are substantial and how do you liquidate holdings overnight ??
Sir,
Kindly note that Franklin DID NOT have front running issues. It closed the funds so you don’t cause an exodus on outflows 😀 So they are not the same. Also, we clearly said we did not approve of a fund house closing redemptions and it was a call to stop coverage until the AMC paid back and we brought it back. With Axis, we did give Sell calls on funds that were vulnerable (mid and small) In the case of Quant, all equity fudns are vulnerable given their investment philosophy. So even if this issue turns out to be baseless, it is necessary for us to take a stance before any damage, in this specific AMC.
As for your holdings, we have time and again stated YOU SHOULD NOT hold a large proportion of your portfolio in such funds. So it is entirely your call to decide if and when to exit. Thanks, Vidya