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    Nilesh Shetty, fund manager of Quantum Long Term Equity Value Fund, speaks about underperformance of the scheme


    Quantum Long Term Equity Value Fund has been suffering in the last three and five year periods.

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    Quantum Long Term Equity Value Fund has been suffering in the last three and five year periods. The scheme is underperforming its category and benchmark index. However, the scheme has been able to manage its downside well. Shivani Bazaz of spoke to Nilesh Shetty, co-fund manager of the scheme to understand what is happening.

    Quantum Long Term Equity Value Fund has been underperforming its benchmark and category average in one-, three-, and five-year periods. What is the reason for this poor show?
    The last one year was better but the three and five years, sure we have underperformed. The last five years, we have been in a market where growth investing has done really well. What was expensive became more expensive. We are trying to build a value portfolio and limit downside. We were trying to focus on valuations which have not been the case with the market in general. The narrow index unfortunately doesn’t show it. Whenever the risk aversion comes back, hopefully the portfolio will do well. This is not a unique situation; we have seen this is 2006 and 2014 as well where the portfolio didn’t do well in the environment of high valuations. This is a scenario where companies haven’t seen great growth but they are priced exorbitantly. We are trying to build a portfolio where we are limiting downside and hopefully where valuations are lot more comfortable for us.

    Data shows that the scheme didn't generate any alpha in the last three years. Why is the scheme lagging behind the other schemes in the value fund category?
    Things You should consider
    • Annualized Return
      for 3 year: -2.57%
    • Suggested Investment
      Horizon: >3 years
    • Time taken to double
      money: 4.5 Years
    Things You should consider
    • Annualized Return
      for 3 year: 1.54%
    • Suggested Investment
      Horizon: >3 years
    • Time taken to double
      money: 9.5 Years
    In the last three years I agree we haven’t. The broader indices have seen a much more meaningful correction than the BSE 30. And moreover we hold stocks that are reasonably valued. You have to look at our limited downside in volatile markets here. If there are other schemes which claim to be value schemes, perhaps you should look at their holdings and see whether they are holding value stocks. And it is not something unique to India, globally value schemes have not done well in the past two years because there has been massive P/E expansion. Value schemes will not do well where earnings are not moving but P/E is moving. We will continue our research and continue to bet on companies where we see long term value.

    The scheme is managing its downside well, but the upside is not satisfactory. Is the conservative approach killing the returns in the scheme?
    I actually don’t know what is conservative. In an environment where market values are near record peaks and we are trying to manage downside, is that being conservative or sensible? It is sensible especially when you are trying to manage retail money. Our sense is with a minimum downside, in a slightly longer term horizon, we will do well. Over 10 years, we were the best performing fund in India. You should ask how a very conservative fund ended up being the best. That wouldn’t have been the case if we were conservative. The fact is that we will not pay 50-60 times price for a company just because the market believes that they should be priced like that. We believe in not taking unnecessary risks on retail investors’ money and that is not being conservative.

    The scheme is investing more than 80 per cent of its assets in large cap stocks. Whereas the category invests around 50 per cent in large stocks. You have almost no exposure to small cap stocks? What is the strategy?
    We don’t have a market cap bias as such. What we have is a liquidity filter. We are very clear that the portfolio that we manage must be scalable irrespective of the AUM that we have. The same filter should be there if we are a one million dollar fund or a two billion dollar fund. The portfolio building is no longer valid if we buy illiquid stocks. This liquidity and corporate governance filter forces us to have a large cap tilt. There are small and mid cap companies which meet out liquidity criteria, we are happy to invest in them. Another thing was that in the last one year, mid cap companies have seen a rally and they were very expensive. Post January, there has been a meaningful correction but they are still expensive. Hopefully if the correction continues, we might have some names in that bucket. Then if we see liquidity in the segment we have no bias against any market cap.

    In comparison to the value fund category, the scheme has a higher exposure to the ailing pharma and healthcare sector. Do you think that has hit the returns?
    I think that is value investing. We added pharma after a lot of good names corrected in that space. As a value investor you will get attracted to segments which have corrected meaningfully. We added these companies after the correction had happened. But I think this is how value investing happens. You look for beaten down sectors where valuations are comfortable.

    What are the measures that you are taking to get the scheme back on track? Is there a plan?
    We do a lot of in-house analysis. The research team sees to the forecast in earnings and what is the delivery. Is there something that we missed? We analyse whether we missed an opportunity. By far we haven’t seen any massive misses. What we can do is control things that we can. We can’t go by what others are doing and buying. We continue to stick to our extensive research and hopefully when there is a reversal, the portfolio should do well. This is the same way we navigated 2006-07, 2014 when we were close to 30 per cent cash but over a cycle we caught up. That is what we plan to do.

    Many investors are worried about the performance of the scheme after the exit of Ajit Dayal. What do you want to tell them? How much time should they give for the scheme to get back?
    Right from day one, the purpose of quantum was to build an institution, not to be dependent on one person. He would also say that it would be a shame if people are investing in Quantum because of Ajit Dayal. Eventually, every one of us will move out, what will remain is the process which everyone will be true to. The process remains the same and that is what we follow. In 2007, when we had a very bad year, Ajit was part of the team. So, these things have nothing to do with one person’s exit.

    A lot of money is flowing into the market, there is massive P/E expansion, nobody is looking at the valuations, this is not the style that we manage the money in. When the market normalises we will get back. Investors need to be patient with our process and judge us on the long term performance. In equities, three years or five years is not long term. And don’t look at us in comparison to what others are doing. That is all.

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    1 Comment on this Story

    Dr M Chandrashekhar142 days ago
    You guys should change your strategies rather than talk BS...From 5 star this Fund has come to 2 Stars...Pathetic Performance
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