Don’t invest in Quantum funds - The Honest Truth By Ajit Dayal
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Investing in India - Honest Truth by Ajit Dayal
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29 APRIL 2008

Over the past few decades, I have made a career of analysing companies and managements all with a view to deciding whether to make an investment in them or not.

With the launch of the Quantum Long Term Equity Fund, we are now at the receiving end of such analysis. We are under the scanner of some really well known groups that "rank" mutual funds.

Investing in Indian stock markets - a low cost, disciplined approach.
Before I move to what the critics have to say about us, I wish to reiterate what we were trying to achieve.

  1. Low-cost funds that will benefit investors: we revolutionised the mutual fund industry in India by turning away from the traditional methods of distributing funds. The traditional distribution method - which is never going to die - is a structure that essentially robs the investor, enriches many distributors, and shovels money into mutual funds that don’t necessarily deserve the flows they get from investors

  2. Back the investment process, not the investment manager: many fund houses have stars that attract money and are seen as the shining light of a mutual fund house. Well, what if a star fund manager gets knocked down by a truck or a train? Or leaves his job and jumps to another fund house that pays him more?

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  1. Invest in what is sensible, not in fashion: the portfolio of investments need not have any relation to the Index or to what other fund managers do. We ask the analysts to stay away from "noise" and, instead, to determine the underlying business reasons for investing in a stock at valuations those businesses deserve - over the long term. We don’t change our clothes like the models on a fashion show ramp. Neither are we looking to be sexy. When people call us boring we love it - because that means the stocks we own are not loved by anyone and we have time to buy them. And the patience to watch them blossom into beauties.

  2. Don’t buy rankings, buy comfort: If you wish to back the winner, bet on the race horses at the Turf Club. The probability of backing a winning ticket may be higher than that of backing the mutual fund that always ends up in the number one slot year after year. The great thing about backing the winning horse is that you get a pay-out that can be rich. However, if you don’t back the winning horse, you lose. Luckily, in mutual funds, you can invest in a fund that may never be ranked number one but can still deliver you returns - based on consistency of results - and give you comfort.

  3. Understand the risk: there are so many risks in investing. There is the risk of backing the wrong fund house; of selecting the correct fund house, but the wrong fund or scheme; of selecting the correct fund house and the correct fund product but this is run by a fund manager who has no investment process. And there are so many risks at the stock level, where these risks only occur once they have blown up in your face. How many investors expected Reliance Power to lose money for them? How many investors think that real estate stocks can only go up? There is no correct measure of risk - but we can all measure returns. From an investor’s perspective the return needs to be seen for the risk taken. But, the risk cannot be quantifiable, till it is too late. Like a Reliance Power or a Bear Stearns or an Enron. Risk is sometimes a "hind-sight" or "rear view mirror" enlightenment.

Investing in India - the Quantum way.
So, we began this journey of trying to build a mutual fund group that launches simple products. With as low a cost as possible. With no distributors to help us shove our products down your throats.
It has been two years now since we have started.
And we are lovin’ it, as the McDonald slogan says.
And we hope our investors love it, too.

But the press and the financial community do not quite know what to make of us.
"Struggling" said one press report (Please read Swinging ....or Hanging? - Part II)
"Avoid" screamed a well-visited web site that ranks mutual funds.

Really? Are we the biggest mistake since pre-cooked dosa?
Hmm, let’s see.

Table 1: The Quantum success!
  BSE-30 Total Return Index Quantum Long Term Equity Fund The 5 largest equity funds when we started  
Total assets on March 31, 2006 Not relevant Rs. 10.9 crores Rs. 17,008.2 crores We were small
Total assets in the fund
March 31, 2008
Not relevant Rs. 41.0 crores Rs. 13,482.9 crores We are growing but still small, while the giants have shrunk but are still giants
Change in Assets under management Not relevant 276% -21% for the average of the 5 funds Quantum moves in the
right direction
Performance: from March 13, 2006 to April 24, 2008 as measured by change in NAV 61.90% 42.90% +36.2% for the average of the 5 funds The Index trumps Quantum,
but Quantum does better
than the average
And how did we do in "down" market from Jan 1, 2008 to March 31, 2008? -22.70% -20.50% -27.7% for the average of the 5 funds Quantum managed the crisis
a little better.

The table above suggests that rather than "avoiding" an investment in Quantum Long Term Equity Fund, you should consider investing in it.
But don’t expect your distributor to recommend that to you.
We pay no commissions to the distributors.
Why would they "sell" you our fund when they can "sell" you any other fund and get paid for it by the fund house - mostly from your pocket?

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And in case you want to know why the Quantum Long Term Equity Fund has done worse than the BSE-30 Total Return Index?
Well, we don’t own any Reliance stocks. And we own no ICICI.
These 2 stocks account for about 25% of the Index.
Their surge in the past 2 years since launch of the Fund has hurt "performance".

We like what we own. We like the risk-return profile over the long term of the unloved stocks we own.

We are not the winner you back in a race course on which you get a large pay-out. We don’t pretend to be that animal - and nor do we wish to be that animal.

Hopefully, a steady return with sensible risks - and avoidance of risk - will continue to generate a more predictable investment pattern for our investors.

Quantum is not the failure that pre-cooked dosa was but has yet to get to the success of a compact tea bag.
Our success will be a function of how quickly you dip into us - irrespective of what your distributor, the ranking agencies, and the press say about us.

Suggested allocation in Quantum Mutual Funds
Quantum Long Term Equity Fund Quantum Gold Fund Quantum Liquid Fund
Why you should own it: 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% 15% 5%

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"

Note: Ajit Dayal, the author is a Director in Quantum Information Services Private Limited and Quantum Asset Management Company Private Limited. Views expressed in this article are entirely those of the author and may not be regarded as views of the Quantum Mutual Fund or Quantum Asset Management Company Private Limited or Quantum Information Services Private Limited.

Mutual Fund Investments are subject to market risks. Please read the offer documents of the respective schemes before making any investments.


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