After earning a reputation of being a quality-focused fund manager, Saurabh Mukherjea has launched a quant-based fund that will blend both quality and value. Called MeritorQ, the fund relies more on historical numerical data than forward-looking, qualitative calls, a marked departure from his stated investment philosophy thus far of investing in companies with proven management that generates strong free cash flows.
Founded in 2018, Mukherjea’s fund house Marcellus Investment Managers has been super successful in terms of gathering assets and is currently one of the biggest PMS fund houses in the country with assets under management of Rs 25,535 crore.
In terms of performance, Marcellus’ funds Consistent Compounders and Little Champs have given 9.3 percent and 16.4 percent CAGR return over the last three years, versus a 23.75 percent return for the Nifty 50 and 31.03 percent for the Nifty Midcap index. Over the past three months, they have bled 11 percent. Moneycontrol talked to Mukherjea, and Krishnan VR, the fund manager of MeritorQ.
Edited excerpts:
How are the parameters set for MeritorQ different from the parameters set by Marcellus for its other funds?
In MeritorQ, we look for companies with clean accounts, low leverage, and consistent profitability. These are some of the parameters we consider for other Marcellus products as well. MeritorQ’s selection criteria favour companies that generate high returns on capital and are currently undervalued basis of P/FCF, that is price-to-free cash flow ratio. In our other funds, we look at ascertaining the longevity of a company’s business and cash flow generation by doing in-depth, bottom-up research on the company’s distinctive capabilities, management quality and governance.
Which sectors is MeritorQ overweight on?
Materials (cement, fertiliser and chemicals), consumer staples and information technology have the highest sectoral weightage in the current portfolio. Top holdings include EID Parry, Gujarat State Petronet, Coromandel International and Heidelberg Cement.
The framework throws up the consumer and IT sectors because they usually have a higher proportion of companies that are both profitable as well as undervalued when compared to their free cash flow generating ability.
Also, we screen out highly levered and cyclical companies in the screening step itself. So one will notice a lower proportion of energy or other commodity companies in the final portfolio.
Finally, our forensic screen penalises sectors with a higher incidence of poor accounting quality like real estate and industrials, as a result, these sectors tend to also get a lower allocation in MeritorQ.
Also Read: PMS moguls underperform minnows in Feb; fund managers turn aggressive
You have said that the fund combines uncorrelated factors, can you elaborate?
Because we pick companies that are both profitable as well as undervalued in MeritorQ, one can think of the strategy as combining quality and value factors. Quality and value factors returns have typically seen a lower correlation in India and in other major markets as well. In fact, we have found monthly excess returns of Nifty 500 Value 50 and Nifty 200 Quality 30 indices, which can be thought to represent long-only value and quality factors in India, to be negatively correlated from July-2006 to September 2022.
One reason for this negative or low correlation is that value approaches typically outperform when the economy is coming out of recession while quality does well during the recessions as these typically tend to be stronger, profitable and hence more resilient businesses. The benefit of combining uncorrelated approaches like selecting value and quality is it helps in delivering better risk-adjusted returns, across the entire economic cycle.
Also Read: What record FPI short position means for the market
What are the risks associated with quant-based investing?
A frequent criticism of quant investing approaches is that they rely on the black box or complex models where it is difficult to explain how the final portfolio was arrived at. Many quant models might also employ leverage either explicitly or implicitly by using derivatives. The quant meltdown of 2007 and the collapse of Long-Term Capital Management in 1998 are classic examples of how such risks can destroy investor wealth.
We employ a systematic and transparent approach to portfolio construction. The rules are based on good investing principles and are designed to address risks specific to investing in Indian companies. No leverage or derivatives are employed in MeritorQ. Historical backtest performance is one of the data points we consider for deciding the rules in MeritorQ along with the robustness of the process and analysis of the portfolio holdings, among others.
Since quant funds rely on historical data to pick stocks, how do you address an investor's forward-looking market appetite?
Forward-looking data is inherently based on judgement, which may or may not be correct and if it is a consensus forward-looking view then there is no opportunity to make money either. MeritorQ uses historical but factual data and applies the rules on this factual data repeatedly in a disciplined fashion over a wide investment universe to increase the odds of outperformance.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.
