Zerodha co-founder Nikhil Kamath, who also runs alternative asset management firm True Beacon, has launched Quant PMS, powered by factor investment principles. Factor investing is the generation of returns by identifying specific factors such as speed, price and quality. For example, a momentum strategy would try to buy stocks on a strong upward trend and ride the trend until its reversal.
True Beacon has recently appointed Rohit Berry, formerly a hedge fund manager in the US/Singapore, as Chief Investment Officer (CIO). He will manage the strategy. The minimum ticket size for this product will be 1 crore. Back tests on the strategy since 2011 show a return of 18.08% compared to 12.2% on Nifty.
Kamath launched its first investment product, True Beacon 1, a long-short fund (hedge fund), in September 2019. It has given a CAGR of around 22.3%, which is marginally better than the 19.22% given by Nifty before accounting as on 31st March 2022. for fees and taxes. The fund performed strongly in its first year of operations, but it missed some of the market rally in 2021 due to a relatively cautious stance. However, these returns were made on a portfolio with low market risk.
The True Beacon Equity Factor Quant Strategy will trade in a basket of 40-50 shares. Its universe will be limited to Nifty 200 stocks. No stock shall exceed 5% of the portfolio. The model portfolio for strategy currently shows technology as the top sector at 23% of the portfolio, followed by consumer non-cyclical at 18%.
The portfolio of the strategy will be rebalanced monthly. The team expects a monthly portfolio churn of 20%-50% which can translate into portfolio changes up to six times a year. There will be a management fee of 1% and a performance fee of 5% at the odds of 10%. For example, if the portfolio yields a return of 18%, the overall expense ratio would be 1.4%. There is also an exit load of 1% on withdrawals before one year.
“Nikhil and I are excited to launch the Equity Factor Quant Strategy and although it has recently launched, its performance has exceeded our expectations,” said Richard Petal, Co-Founder and CEO, True Beacon.
However, experts are cautious about this strategy. He explained that a higher level of churn could result in a gain in the money being taxed as business income instead of capital gain. Business income is taxed at slab rate and hence tax can go up to 42.7%. “Factors like price and quality take time to come into play and usually do not take effect in 1-2 months. Also, I am not sure that such high churn is needed for 18% returns,” said Anish Teli, Founder, QED Capital Advisors Pvt Ltd, a PMS manager focusing on quantitative strategies.
However, True Beacon is confident about utilizing factor investments in the short term. “We are not price momentum or quality based investors, we use these factors in our analysis but they are one of 10 key category of factors. We brainstorm on factors based on macroeconomic environment and factor performance. Probability is that we are using price as a factor, only one of nine. Markets have different cycles ranging from a few minutes to a few years. We take advantage of cycles that are 20-25 business days and want to generate alpha over that period,” Berry said.
Munish Randev, the founder of Cervin Family Office, was also skeptical of this. “As a homegrown strategy, we strongly believe in multi-factor strategies but with a sufficient level of performance in terms of both alpha and risk reduction. We seek alpha attribution to understand the cause of alpha , and also for a manager’s demonstrated ability to perform in all types of markets. This requires our platform to have live portfolio data over a period of at least 3 years.”
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