Nowadays, it has become an increasingly difficult task for fund managers to outperform benchmarks, given the relentless rally. In the current market conditions, asset management companies are working tirelessly to identify the right stocks and sectors to generate alpha, often developing novel schemes that rely on quant-based tools.
For instance, everyone knows that sectoral funds are risky as they are both volatile and cyclical in nature. So, it is challenging to predict winning sectors in the short-term. However, some fund houses are now taking a new approach of riding this sector rotation.
Trending sectors
Shriram Asset Management Company plans to launch a scheme called Shriram Multi Sector Rotation Fund. As the name suggests, the scheme will bet on three to six trending sectors that are selected by the fund manager based on the relative momentum of the sectors, the fund house said in a draft document filed with the Securities and Exchange Board of India.
The sectors will be selected by the proprietary quantamental strategy, according to the scheme information document (SID) of the scheme.
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However, the sectors will be vetted fundamentally by the fund manager based on macro-economic parameters (such as current account deficit, fiscal deficit, GDP growth, interest rates, inflation), investment indicators (such as earnings momentum, investment in capex, new projects cleared, government policies such as PLI schemes announced, duty/taxation changes, etc), sentiment (purchasing manager index, sales of various consumer discretionary products, automobiles, etc), prices (crude, metals, gas), freight rates, etc to understand the rationale.
“The final sector selection with sector weights, and decision to rebalance will lie with the fund manager .Once the sectors are selected, stocks will be decided by the Enhanced Quantamental Investment (EQI) strategy with the fund manager taking the final decision on portfolio construction,” it said.
Minimum variance
Another scheme from ICICI Prudential AMC is at the other end of the spectrum and will try to bet on less volatile stocks. The fund house plans to launch ICICI Prudential Equity Minimum Variance Fund, after SBI Mutual Fund, which had launched a similar scheme in 2019.
The open-ended equity scheme will predominantly invest in companies identified based on the minimum variance factor, that are part of Nifty 50 Index. Stocks would be assigned weights with an endeavour to minimise the variance of the portfolio of the scheme, it said.
The parameters used for selecting and assigning weights to the stocks will be a combination of risk and factor based parameters such as volatility, correlation and covariance. Minimum Variance Strategy will aim to minimise the portfolio volatility based on correlation and volatilities of the stocks in the portfolio, according to its SID.
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SBI Minimum Variance Fund has reported an annualised return of around 18.6 per cent. Since its inception in 2019, the scheme has generated an absolute return of over 150 per cent against Nifty’s 120 per cent.
‘Innovator’ funds
Fund houses are also launching “innovator” funds — selecting companies that are innovators of new products/service categories or are investing into research and development of new product innovation (existing or new product/service categories).
Recent strategies by fund houses reveal how they are going the extra mile to attract investors while keeping their lead. Interesting days lieahead for fund investors.