Our call on Quant AMC funds: Has it changed now?

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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