In June 2024, we had issued a ‘Sell’ call on the equity funds of Quant AMC. This was after an inspection by SEBI and media reports of front-running allegations against the AMC (asset management company). Our call was met with mixed reactions, primarily owing to the funds’ stellar returns. In a few months, we once again had many queries on whether we have changed our call, whether the funds lost any AUM due to the allegations, and whether you can resume investing in Quant funds.
This report will address our stance on the Quant funds now.
Since the inspection event, the AMC, in a move to proactively align with regulatory expectations, has stated making key hires to expand its senior management. In its Factsheet of December 2024, the AMC mentioned the following (see image below) changes in the past 9 months:
Are these events sufficient for us to reverse our call?
We don’t think so. At PrimeInvestor, we think Governance is what Governance does. And in this, we have not seen sufficient proof yet. Moves by the AMC in its portfolio and reporting have kept us a bit worried about their choice of investing. Why are we saying this? Let’s get into the reasons.
Re-entry into controversial Adani group
In 2023, Quant AMC was reported as the largest institutional investor in Adani group’s listed shares. Following the Hindenburg report’s allegations, which significantly impacted Adani-listed stocks, the AMC exited its positions in the group’s stocks then.
In October 2024, Quant made a surprising re-entry by subscribing to 47% of Adani Enterprises’ Rs 4,200-crore qualified institutional placement (QIP). This move is notable because it came after the Adani group had faced substantial market scrutiny and saw share prices swing sharply. Additionally, some of Quant’s funds began taking positions in Adani Power shares during the same month (Adani Power stocks did see entry and exits in some of its schemes earlier in 2024 as well).
As of November 2024, Quant Mutual Fund had the highest exposure to the Adani group among actively managed mutual fund schemes, with a market value of Rs 4,500 crore (source ICRA MFI database).
In contrast, while other fund houses like SBI had a higher total exposure of over Rs 6,000 crore, this was primarily due to the presence of Adani stocks in their index funds and exchange-traded funds (ETFs), rather than active investment decisions. None of the other AMCs have such high exposure to the Adani group through actively managed funds.
And how much did the Adani exposure account for in individual schemes? The table below has the data as of November 2024 portfolio.
The hit in November 2024
Quant was perhaps stretching its luck too far in taking significant exposure through the QIP in October 2024. In the month of November, the group promoter Gautam Adani and seven others, were indicted by the United States Securities and Exchange Commission (SEC) in an alleged multi-million dollar bribery and fraud scheme related to a solar energy project in India.
This led to the stocks of Adani group tumbling on November 21, 2024. On that day, Quant’s funds fell much more than their respective category’s average fall. Quant’s Flexicap, Focused, ELSS, Largecap and Multi Cap funds fell between 1-1.44 percent. In contrast, the average decline for similar MF categories was merely 0.24-0.3% on the same day. This highlights the disproportionate impact of the Adani group's market turbulence on Quant's portfolio. It could be argued that Quant’s strategy involves taking short-term calls and the fund house could have viewed Adani stocks from this lens. But it is concerning when concentrated exposures are taken in stocks already on thin ice.
Even outside the single-day Adani-driven fall, Quant Mutual Fund's key schemes experienced a notable performance decline in 2024 (see table below).
We further break down the performance of the Quant schemes quarter-wise (see table below). It can be seen that the underperformance of the Quant Funds started in the June quarter (incidentally, the news of SEBI search was reported on June 23, 2024 by media). And the margin of underperformance has widened since. The last quarter from October also shows that the fund was not able to contain downsides in the correction.
Returns are absolute for respective quarters. Source: ICRA MFI Explorer. Returns for December qtr. Upto Dec 13, 2024
While defenders might argue that this could be attributed to temporary cash strategies or that the timeframe is too brief to declare underperformance, a critical issue persists.
The core concern here, therefore, centres on the AMC’s choices and risk management after the corporate governance allegations that surfaced in June 2024. Under such scrutiny, one would expect an AMC to adopt a more prudent approach when selecting stocks, particularly those entangled in multiple controversies. Especially given that the then allegations were centred around stock activity
in fund portfolios. Quant AMC’s investment strategy, therefore does not give us comfort about risk management and due diligence.
Transparency in information necessary
Beyond the portfolio allocation concerns, we have identified a smaller but notable issue regarding Quant AMC's recent reporting practices. Quant AMC stopped disclosing its turnover ratio in its factsheet from 2024. The AMC, in its note to unit holders states this:
“Portfolio turnover ratio is an irrelevant measure because whether the portfolio turnover is high or low does not inherently provide meaningful information about the portfolio's ability to generate returns or manage risk. Globally for all active money managers, Portfolio Turnover Ratio is naturally high as they dynamically rebalance their portfolio based on Risk-On or Risk-Off environment”. The turnover ratio can only be found by referring to each scheme’s detailed portfolio buried in its website under statutory disclosures. This move to make it hard for investors to get this data that is otherwise normally disclosed across AMCs, is concerning.
Two things are worth noting:
- One, while portfolio turnover is certainly not a measure to assess returns, it gives a fair idea of the strategy of the fund. Not every active fund has high churn. We have traditionally seen Quant having triple digit churn in line with its momentum-driven strategy. This is not wrong. However, when other funds disclose this data, it is only expected that the AMC does too.
- Second, we believe that while returns are important, how the returns are generated are equally important. The reason is that it helps us assess whether such returns are sustainable and reliable than merely assessing numerical performance.
Coming back to the questions some of you raised:
Did the fund house lose assets after the June 2024 search operations by SEBI? Nothing notable.
Are we recommending the funds now? No, we are not. As explained above, Quant AMC’s actions after the allegations surfaced still do not provide us any comfort on better risk management or sustainability of returns. While the funds may follow a strategy of short-term calls which can pay off if market conditions sustain, the inherent high-risk nature of this strategy is heightened when stock choices are questionable.
Governance issue is something we would take seriously even when there is performance. But in the absence of even such performance at present, there appears little case for us to tell investors to take exposure. There are other, less risky funds that beat markets comfortably which are worthier of your investments.
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45 thoughts on “Our call on Quant AMC funds: Has it changed now?”
In background of marketing around SBI Quant Fund, I initially thought the article was about such ‘Quant’ strategies. You could have specified ‘Quant AMC equity funds’ in title
Agree sir. Vidya
Vidya ma’am, thank you for sharing your thoughts. Much appreciated. At the same time, I can’t help but feel the analysis is a bit shallow. There are really only 2 points being made. One, governance is weak because of investments in Adani group companies. And two, that returns haven’t been great in the recent months.
The jury is out on Adani. Sebi mostly gave them a clean chit before. And the group companies own hard tangible assets, not just some fictitious shell companies. And having 1-2 stocks in a portfolio while keeping risk limits in mind, is fine. Or should be considered fine. Even if the investments may not align with your own view. In fact, Quant AMC are probably the only MF in town that does anything different from the usual “Warren buffet buy and forget” style that everyone loves talking and tweeting about. That style hasn’t made much money. Look at many top quality names of the past and those are all disasters in this bull run.
The turnover ratio is honestly irrelevant as it is simply an outcome. We know these guys trade a lot, but if that’s the style, and that’s what makes them money, then so be it. The returns have been fantastic so I wouldn’t just write them off. In fact Quant’s funds are the rare diversifiers in my otherwise boring/stereotypical Indian MF portfolio.
I have no personal connect with Quant, nor with any other AMCs, but it’s important to be balanced out here so that people see the other side too. Just giving a sell call because someone owns an Adani stock could be the “cool” thing, but what if that call is wrong? Yes if it’s correct it might save your client’s some capital erosion, but if wrong then it could severely hurt returns (opportunity cost).
In certain aspects, I think reporting of Quant is excellent. Like their monthly factsheet. Always comes on the 2nd business day. I never get that from any other AMC. And there’s plenty of info in there.
You have a right to your view of course, but I’d say it needs to be more nuanced. Not just linked to 1 or 2 broad points. Hope you’ll take this feedback constructively. All the best!
You are free to have your view 🙂 But one thing I can tell you with surety, in the business of managing people’s money – NOBODY who talks of governance will allow an AMC to take exposure to stocks mired in controversy, whether shell company or not. This is why others haven’t save for index exposure or hedged fully. Can you please share SEBI’s clean chit for Quant? I am afraid I am not aware of it. Thanks, Vidya
Hello Ma’am,
Thank you very much for the timely update on Quant equity funds, although I have not exited your earlier recommendad quant active
fund. Here I fully agree with your view that Corporate governance should be the top most criteria when assessing any investment. Also it is quite puzzling why Quant has made an underperforming counter like ‘Reliance’ as their top most holding immediately after the Sebi investigation. Were they anticipating huge redemption pressure. Also when are we likely to know of the outcome of Sebi’s search and seizure operation.
Hello Sir, Thanks. I don’t have insights on their rationale for top holdings. On SEBI search – there may or may not even be a report that is published. It could be merely internal at times. We would like to think that the AMC may have provided assurance on strengthening management team etc. We do not have further info. Thanks, Vidya
Good, balanced insights. Just borrowing from a popular old saying about Wealth, Health and Character:
If returns are missed a year or two, nothing is lost
If Capital (AUM) is eroded something is lost
But if Governance is suspect everything is lost !
Thanks
Thanks. Nice quote that! thanks, Vidya
> Portfolio turnover ratio is an irrelevant measure because whether the portfolio turnover is high or low does not inherently provide meaningful information about the portfolio’s ability to generate returns or manage risk
I can’t tell this kind of public reasoning is arrogance or stupidity.
Unrelated: On the other hand — I wish Govt allowed switching index fund providers for the same index or index factor! Customers could go to funds with lower ER and TER. I know this is not practically feasible with active funds but could have been great help with index funds. Because Indian index funds have disgustingly high TERs.
Also look at the way AMCs keep increasing TERs as the AUM increases — they know consumers are pretty much locked now. I mean they should decrease when AUM grows but no, they increase!
I wish there was a way to easily switch funds and AMC without too much tax hit (if not fully tax free switch) — I mean maybe complete movement of money from one fund to another and could be with some fee or tax etc.
I know it’s wishful thinking but this could protect consumers when AMCs go rogue, bonkers, or good old incompetent and help them make a faster move or decision.
Maybe after a net-worth threshold it’s actually better to engage with a sane and stable PMS.
Thank you for unbiased article
Thanks! regards, Vidya
Excellent article with relevant data to back up all the points !
The only point which I don’t agree to is the phrase “..churn in line with its momentum-driven strategy..”. Theirs’s is not a Momentum driven strategy – at best it can qualify as a Monkey-dart strategy – but not at all driven by any factor, let alone Momentum. Just because the churn is high, does not mean they are driven by Momentum. Their returns would have been much better if they were following momentum :-).
Great article though !!
🙂 I appreciate your feedback that cuts through the diplomatic phrasing. Thanks, Vidya
A related query… Quant AMC has hired many senior folks specifically from PPFAS (there were other exits as well from PPFAS) and although Rajeev explained the reason during unitholder’s meet, for some of the exits (indicating that with increased AUM, there is skill set mismatch).. do you think these personnel swap between AMCs will impact the fund performances and their overall governance? What are your thoughts?
It’s a very subjective thing. When a scheme is very fund manager dependent than process driven, fund maagers exits can impact performance. In other key member positions, it rarely does – except when internal compliances and rules of investing undergo significant change.
Thanks for the update.
What about other fund categories of Quant?
The entire issue starting from June is on equity holdings. Our call was only on that. For others, if we have any call, you can chedk our MF review tool. Vidya
Thanks a lot!
🙏 regards, Vidya
Bravo ! For a non-compromising and investor-friendly approach, and not getting swayed by hype. This is the core reason we subscribe to PI – UNBIASED advice to subscribers. There is so much garbage out there – someone has to call a spade a spade. We hope you continue like this forever and never sell out. Thank you once again.
Thanks! Vidya