When Value Failed - but Quantum Succeeded

20 MARCH 2020

At the unique and much-appreciated Path to Profit seminars hosted by Quantum Mutual Fund, many of you have heard me and the team from Quantum Mutual Fund discuss how you should invest your savings.

How to invest your savings is really a combination of two questions:

  1. How much money do you have to save?
  2. What do you need the money for - and by when?

Based on this, you will arrive at your "asset allocation" model.

It sounds like a big financial word but, in reality, it is common sense solution of where to invest your money applied to your individual and unique situation. Given your future need of money, an asset allocation model, stripped of the jargon, tells you what is the best combination of:

  1. Money in your cupboard,
  2. Money in the bank (these days you have to also ask "Which bank?"! ),
  3. Money in stock markets,
  4. Money in gold.

People invest today to harvest tomorrow. And how you sow determines what you reap. Conversely, what you wish to reap for determines how much to sow and when to sow.

Some people need money to buy a home in 10 years; some for their retirement in 20 years; others for their children's education in 15 years. Some may have 2 or 3 goals that need to be met over time.

These are very individual needs and can significantly change the combination of money, equity stocks, and gold that you need to have in a diverse range of assets.

The allocation model worked for me.

You will recall a mantra that has worked well across many market cycles for over a decade.

My personal allocation, based on my needs, has been the "3 by 80-20".

What it means is:

  1. The "3": Money that I need to fund 3 years of my monthly expenditure is typically kept in the Quantum Liquid Fund or the Quantum Multi Asset Fund. I don't trust the way the banking system is supervised and, as we have seen, when there is a problem with a bank the money belonging to the depositors is frozen. The Finance Minister has recently proposed that government will guarantee deposits to the tune of Rs 5 lakh per person (up from Rs 1 lakh today). But, as I wrote in a previous Honest Truth, that may still cover less than 9 months of my normal expenditures. It's not good enough for me. The Quantum Liquid Fund has no explicit guarantee but it uses our subscription money to invest in debt securities of government paper and of companies owned by the government. So there is an element of "I can sleep well at night". And there is no limit on how much money I can redeem from the Quantum Liquid Fund; no one freezes the money!

    Then the rest of the money, outside of this cushion for 3 years of kharcha, I try to split between equity mutual funds (80%) and gold (20%). That completes the "3 by 80-20".
  2. Let's take the easy one first, the "20": For gold, there is the Quantum Gold Savings Fund and/or the NSE-listed Quantum Gold ETF where you can invest Rs 500 or buy as little as half a gram of gold at a time, just as you would buy a stock.

For equity mutual funds, my allocation of the "80" has been between two different "styles" of investing:

  1. The "value" style which identifies companies that are trading below what the research and portfolio teams believe is less than their true, underlying worth. This is the Quantum Long Term Equity Value Fund - launched on March 13, 2006; just over 14 years ago! I learnt "value" investing under the watchful eye of the late Tom Hansberger. For those who do the CFA, Tom was one of the founding supporters of the Virginia based institute which now is seen as the gold standard of academic requirement for being a fund manager or research analyst. Tom was a partner of the legendary late Sir John Templeton and the co-founder of Templeton, Galbraith and Hansberger. What you now see as Franklin-Templeton was the outcome of California-based Franklin (a fixed income investment firm) buying out Templeton (a value equity firm). The "value" style resonates with my personal approach to investing so I have a much larger allocation to this "style" of investing.
  2. The other "styles" of investing include "growth", "momentum", "sector", "mid cap", and "small cap" to name a few. To make the life on an investor looking for exposure to an equity fund and not get booged down in "style" discussions, Quantum launched the Equity Fund of Funds. This Quantum Equity Fund of Fund invests in a basket of mutual funds managed by other mutual fund houses which meet certain criteria established by a rigourous fund-selection research process. Out of the over 300 equity mutual fund products that are out there, this Fund selects what it thinks are the best 6 to 8 to give investors a one-stop solution of good equity mutual funds.

(Quantum has launched the Quantum India ESG Fund in July 2019 and I have allocated some of the equity money of "80" to this fund and will address that below).

So, from the "80" in equity, I had placed about 65 in the Quantum Long Term Equity Value Fund and 15 in the Quantum Equity Fund of Funds.

Given that I am a "value" investor that gave me the most comfort.

However, I have always advised others to flip that: invest 65 of the 80 in the Quantum Equity Fund of Funds and 15 in the Quantum Long Term Equity Value Fund. There is a reason for this.

Most investors are retirees, teachers, doctors, lawyers, engineers, salaried people... they don't have a "style" preference. Rightfully, their objective is to invest in the "stock market" for a sensible return. By creating this solution of the Quantum Equity Fund of Funds and the Quantum Value Fund, investors had an easy two-click solution.

Hurt by Value investing.

The neutral investors, who are not passionate about the "approach" or "style" of investing, have done well if they followed this combination.

"Style" bias has hurt the performance of my personal portfolio.

Table 1: Value failed, but Quantum delivered:
from the election of PM Modi in May 2014 till Feb 2020

Event / date16-May-1428-Feb-20Total ReturnAnnualised Return
Quantum Long Term Equity Value Fund, NAVRs. 31.55Rs. 48.4854.30%7.80%
BSE-30 Index 24,12238,29771.70%9.80%
Quantum Equity Fund of Funds (FoF), NAVRs. 18.80Rs. 35.4688.60%11.60%
BSE-200 Index2,8984,71975.90%10.20%
Ajit Equity Portfolio, 65 Value, 15 FoF  48.60%6.80%
Quantum Equity Solution, 65 FoF, 15 Value  65.70%8.70%
Source: Bloomberg, where date not available for a particular day, then next day is taken; Share prices in INR and Gold in USD per troy ounce;

My preference to be a "value" investor has not played out well in an environment, where, three stocks have accounted for 66% of the gain of the BSE-30 Index since May 2014. HDFC Bank gained 21% over the same time period while Reliance gained 18% and HDFC also gained 18%. Each of the 3 stocks had a gain that was nearly 2x of the BSE-30 Index. The Quantum Value Fund did not own 2 of these 3 stocks. That hurt the returns. In addition to not owning all the three big winners and missing the big upswing in the markets, value managers also owned stocks that they should not have - they bought losers!

As Table 1 indicates my higher allocation to the Value fund in my equity fund basket, gave me a point-to-point return of 6.8% per annum, annualised, because the Value fund dragged it down.

For most of you who had the "style-agnostic", reverse allocation of more money in the Equity Fund of Funds and less in the Value Fund, your return on a point-to-point basis was 8.7% per annum, annualized: this was 1.9% per annum more than my value-style bias portfolio. Well done!

Am I upset about my lower return?

Well, I am aware that I have chosen a style of investing that can be out of favour and can be penalized in an environment where a few stocks drive returns - or where the fund managers made a few investment errors to add to the poor performance. Yes, I wish my value allocation had given a higher return but I recognize the problem value managers faced.

Has this taught me a lesson?

Yes, it has.

I should change my allocation a little more towards the Quantum Equity Fund of Funds, and away from the Value Fund. Also, the Quantum ESG India Fund - which invests in companies that have a good track record of worrying about Environmental, Social and Governance factors - will also get more of my equity allocation. So, maybe my past equity allocation of:

65 to Value will change to 40;

15 to Fund of Funds will change to 25;

0 in ESG India Fund will change to 15.

That is where I am headed...

It should be noted that, in addition to delivering a good rate of return from the equity funds basket, the returns from the allocation to the other buckets did well (Table 2).

Considering that a FD with State Bank of India may have given a return of 7% per annum over this same time period, the Liquid Fund (take out as much money as you want!) and the Multi Asset Fund (with investments in a range of funds managed by Quantum) were good places to park my "3 years of expenditure" money.

And gold remains my insurance. I expect low returns from my investment in gold because I want to know that, when equity markets are declining sharply, gold is not falling as much and - I hope soon - may generate a positive return after the speculative buyers of gold have completed their indiscriminate selling in a panic-driven market downturn.

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Table 2: The rest of the portfolio delivered what it was designed to May 2014 till Feb 2020

Index / FundTotal ReturnAnnualised Return
Returns from allocation to the safer buckets
Quantum Liquid Fund, 46.70%6.80%
Quantum Multi Asset Fund55.50%7.90%
Quantum Gold Saving Fund, 2036.60%5.50%
Source: Bloomberg, where date not available for a particular day, then next day is taken; Share prices in INR and Gold in USD per troy ounce;

I have used the sell-off in the stock markets as an opportunity to invest more in equity funds and have dipped into some of that 3-years of expenditure money to increase my overall allocation to equity mutual funds.

Table 3: Moving money to equity, steadily from January 2020 to March 2020

Allocation, as of Jan 31, 2020% allocationMy target
Bank deposits (not in FDs)2%2%
Quantum Liquid Fund25%5%
Quantum Multi Asset Fund5%10%
Total, Safer and Liquid32%17%
Quantum Equity Funds, various47%62%
Quantum Gold Fund / ETF21%21%

Every individual is different and you need to understand your financial situation and risk-appetite better to decide what you should be doing.

Be sensible and be safe: don't let greed, the panic, or the coronavirus get to you!

It is a uncertain world out there and life is a bumpy journey.

Suggested allocation in Quantum Mutual Funds (after keeping safe money aside)

Quantum Long Term Equity Fund, Quantum Equity Fund of Funds, Quantum ESG India Fund Quantum Gold Fund
Quantum Liquid Fund
Why you
should own
An investment for the future and an opportunity to profit from the long term economic growth in India A hedge against a global financial crisis and an "insurance" for your portfolio Cash in hand for any emergency uses but should get better returns than a savings account in a bank
Suggested allocation 80% in total in both; Maybe 15% in QLTEF and 75% in QEFOF and 10% in Q ESG 20% Keep aside money to meet your expenses for 12 months to 3 years
Disclaimer: Past performance may or may not be sustained in the future. Mutual Fund investments are subject to market risks, fluctuation in NAV's and uncertainty of dividend distributions. Please read offer documents of the relevant schemes carefully before making any investments. Click here for the detailed risk factors and statutory information"
Disclaimer: The Honest Truth is authored by Ajit Dayal. Ajit is Founder of Quantum Advisors Pvt. Ltd. which is the Sponsor of Quantum Asset Management Company Pvt. Ltd – the Investment Manager of the Quantum Mutual Funds. Ajit is also the Founder of Quantum Information Services which owns Equitymaster and PersonalFN. The views mentioned herein are that of the author only and not of Quantum Advisors, Quantum AMC or Equitymaster. The information provided herein is compiled on the basis of publicly available information, internally developed data and other sources believed to be reliable by the author. The information is meant for general reading purpose only and is not meant to serve as a professional guide / investment advice for the readers. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investment. Whilst no specific action has been suggested or offered based upon the information provided herein, due care has been taken to endeavour that the facts are correct, accurate and reasonable as on date. None of the Author, Quantum Advisors, Quantum AMC, Equitymaster, their Affiliates or Representative shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary losses or damages including lost profits arising in any way on account of any action taken basis the data / information / views provided in The Honest Truth.

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1 Responses to "When Value Failed - but Quantum Succeeded"

Pradeep Kumar Nair

Mar 23, 2020

Thanks for sharing your learning from your personal investment model, style :). In itself, takes great courage to admit one's losses and mistakes.

A question, do equity FoF's still continue to be treated for higher tax purposes? If yes, are the returns you are suggesting, post tax?

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