Now, rich individuals seek more quant-based strategies for their PMS investments

Quant-based schemes refer to those that use an algorithm to design and execute their investment strategy.

An increasing number of investors in the portfolio management services (PMS) arena are now looking at quant-based schemes instead of the plain vanilla ones where a fund manager manages bulk of the investment strategy.

As per data from PMS Bazaar, the number of quant-based PMS schemes has doubled in the last one year, rising from 16 in August last year to 32 in August 2024. More importantly, in terms of returns as well such quant-based PMS schemes have given a median return of nearly 51 percent in the last one year, significantly higher than the non-quant PMS schemes that gave a median return of 38.56 percent in the same period.

Simply put, quant-based schemes refer to those that use an algorithm to design and execute their investment strategy.

Industry participants attribute the trend to a combination of factors, including better transparency and minimal influence of human emotional bias with respect to stock selection and churn.

“In active strategy, the fund manager will hold on to a stock where he has some bias, and even if the stock underperforms, he might still hold on to it thinking it will perform. This lowers the alpha creation,” said Rohan Mehta, chief executive officer and fund manager at Turtle Wealth PMS.

He added that in a quant-based PMS there is transparency of research as clients already know the rules regarding when the fund manager will add, replace, hold or sell a stock, which gives a higher edge in terms of client conviction.

Krishnan VR, chief of quantitative research team at Marcellus Investment Managers, said that quant strategies typically hold more stocks in portfolio and have a higher churn as compared to more discretionary fundamental strategies, and hence the quant strategy benefits more when stocks do well.

However, not everyone investing in quant-based PMS is a new investor, say market participants.

“Investors looking at quant-based strategies are mostly the ones, which already have enrolled in a buy and hold PMS strategy and are now looking for diversification,” said Pallav Rajan, founder, PMS Bazaar. He added that quant-based strategies are mostly not the core product for an investor.

However, quant-based PMS schemes still represent only a small fraction of the total assets under management (AUM) of the industry that are currently pegged at Rs 35 lakh crore.

The AUM in quant PMS strategies could be lower than one percent of the overall discretionary PMS AUM and nowhere near other developed markets like US where quant funds are around 35 percent of listed market cap, said Krishnan.

According to Alok Agarwal, head of quant and fund manager at Alchemy Capital Management, these strategies are still at a nascent stage and have only begun to gain traction. He believes that in the coming years, they are poised for significant growth as more investors seek higher alpha generation.

In terms of inflows, the top five quant-based PMS schemes included Invaset LLP's INV Approach that saw inflows of Rs 199 crore since April, followed by Prabhudas Lilladher's Aqua Strategy with Rs 169 crore since April as per data by PMS Bazaar.

True Beacon Investment Advisors' Equity Factor Quant witnessed inflows of Rs 137 crore with Capitalmind Financial Services' Adaptive Momentum and Wryght Research's Wryght Factor Fund seeing inflows of Rs 129 crore and Rs 80 crore respectively.

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