A model portfolio that can beat the benchmark 100% of the time

Speaking at the NFO launch event, Radhakrishnan said that the fund aims to solve the challenge of timing markets by combining multiple investment factors. “Even professional managers can’t always predict whether growth, value or momentum will lead in a given year. This model removes the guesswork,” he said.

Sundaram Mutual Fund’s model portfolio based on its newly launched Multi-Factor Fund outperformed its benchmark (BSE 200 TRI) 100% of the time when the 3-year and 5-year rolling return periods were considered, said CEO Anand Radhakrishnan.

The Multi-Factor Fund combines four well-known equity styles or factors, namely, value, growth, quality, and momentum into a single, rule-based portfolio. Based on back tested data, the fund’s model portfolio delivered average 5-year annualised returns of 19% (21.5% including expenses), compared to 14% for the BSE 200 TRI. On a 3-year rolling basis, the fund returns were pegged at 18% (20.2% with expenses), again outpacing the benchmark’s 13.5%.

Speaking at the NFO launch event, Radhakrishnan said that the fund aims to solve the challenge of timing markets by combining multiple investment factors. “Even professional managers can’t always predict whether growth, value or momentum will lead in a given year. This model removes the guesswork,” he said.

While value emerged as the top performer in absolute terms, with returns around 20 percent, it also came with higher volatility. “The multi-factor approach, by contrast, matched these returns at around 21 percent with lower volatility, resulting in a better risk-adjusted return profile,” explained Radhakrishnan.

He further highlighted the challenges with investing in a single factor. “Value was at the top in 2021 and 2023, but at the bottom in 2018 and 2020. Growth and quality have had similar swings. What we’ve done is combined all four factors in equal weight so the performance doesn’t depend on any one of them,” he said.

The fund selects stocks from the top 250 listed companies (100 large-caps and 150 mid-caps) based on individual factor screens. From each factor list, the top 25 stocks are shortlisted, and companies appearing under multiple factors get proportionally higher weights. This results in a diversified portfolio of 80–85 equally weighted stocks, rebalanced every quarter.

The structured, rule-driven process also helps reduce behavioural errors and bias, said Radhakrishnan. “We’re not just picking winners, we’re also avoiding the worst performers, the lowest quality, least profitable, and most expensive stocks. That makes a big difference to long-term outcomes,” he said.

Radhakrishnan further highlighted the fact that back testing showed that the model performs well in both rising and falling markets. In all five years when the broader market delivered double-digit returns, the model portfolio outperformed. During weak or negative market phases, it still beat the benchmark in two out of four years - the model portfolio tends to fall less than the overall market or individual factor styles during corrections.

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