How a software engineer turned fund manager is getting ready to launch a new mutual fund house

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Capitalmind Financial Services, which has completed 10 years, recently received an in-principle approval from the capital markets regulator, the Securities and Exchange Board of India (SEBI), to set up a mutual fund. Shenoy intends to use the same strategies based on quantitative approach in the mutual fund, when the final licence comes in.

Warren Buffett once said, “Beware of geeks bearing formulas." However, Shenoy pointed out that geeks bearing formulas have outperformed the legendary investor in the last 10 years.

Here’s a glimpse of what Shenoy’s proposed mutual fund venture would offer investors.

Differentiated approach

Shenoy, who admits to be a technology-guy-interested-in-investing, started off with a blog a long time ago, called the “Indian Investor’s Blog”, which morphed into Capitalmind in 2009.

Today, Capitalmind has Rs 2,200 crore in assets under management (AUM) with around 1,300 clients. Shenoy doesn’t think that the lack of financial background has made him a better portfolio manager, but it has surely made him learn the basic principles of the capital markets first, which helped him do things differently.

How? Capitalmind is among the first portfolio management services (PMS) to charge only a management fee but no performance fee. This is akin to mutual funds, where only an expense ratio is charged to investors.

Shenoy is also among the few asset managers who do not have cash allocation in their portfolios at this point and believes in teaching trading to kids first before imparting investing lessons.

"Kids are about instant gratification. You're not going to hold their attention by telling them to invest and hold for 10 years. That's like their whole life. Kids are very perceptive and over time, they'll understand investing as well," he reasons.

Betting on quant for mutual funds

As per Shenoy, Capitalmind still has to set up the business for getting the final approval for the mutual fund licence and will start firming up plans for fund offerings only after the licence is in hand.

However, there are some ideas. "We have an AUM of about Rs 2,200 crore in the PMS, a lot of which will benefit from using the same strategies in the mutual fund," he believes.

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Capitalmind Financial Services runs three main PMS strategies—Adaptive Momentum, Resilient and Surge India. “It makes sense to build similar strategies as a mutual fund in the initial stages and then look at new and innovative products that will differentiate us. You can apply the quantitative approach to different assets, including debt, hybrids and commodities, like gold and so on,” he says.

Shenoy is confident that there are many investors who already appreciate the PMS products, and the mutual fund platform, with a much lower investment threshold, will open Capitalmind to a much wider client base.

Quant is an investment strategy that uses mathematical models and statistical methods to pinpoint investing opportunities. The global quant fund market size is projected to reach $31 trillion by 2031, up from $16 trillion in 2023.

In India, the AUM of active quant mutual funds has risen from around Rs 300 crore at the start of 2020 to over Rs 9,000 crore at the end of August 2024, while the scheme count has gone up from three to 10 at present.

To be sure, there are other fund houses as well that follow quant based investing style. NJ Mutual Fund, which was set up in 2021, also focuses on funds based on the quant approach.

Confidence in investing style

The founder of Capitalmind argues that reducing the number of human-made decisions makes an investing strategy more independent of the fund manager.

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“Tomorrow, if a fund manager moves out, the algorithm can still continue. Many times, we have seen that if a star fund manager leaves, there's a drop in the performance. A quantitative approach helps you with the lowering of fees because you're not dependent on a fund manager. There's a lot of downstream advantages to it as well,” he says.

Shenoy, however, argues that machine learning or artificial intelligence-based investing is possibly the worst thing to do in fund management. “Not because it's a threat to fund managers but because you will have no idea what happened when things start to go wrong. The only thing you can do is switch it off. You can't figure out why it took the wrong decision it did,” he says.

The portfolio manager believes that to qualify as a quant system, 90-95 percent of the decision making must be quantitative. “If only 50 percent of your investing decisions are with quant, then it's a qualitative strategy,” he says.

Performance matrix

Of its three main strategies, Capitalmind's Adaptive Momentum, launched in March 2019, is the biggest with an AUM of Rs 985 crore. The multi-cap fund looks at the universe of investable securities to identify those exhibiting strong price momentum. Next, Surge India looks to capitalise on the pulse of progress by investing in the mega-trends driving India's growth. Lastly, Capitalmind Resilient (erstwhile Low Volatility) analyses the universe of investable securities to identify quality companies with steady profits and lower price volatility.

Staying humble

Capitalmind recently completed 10 years, and Shenoy believes that he has learned a lot from his mistakes that he will take forward to the proposed mutual fund venture.

The expert remembers that in the first year itself of the PMS, he made a bunch of mistakes that cost dearly. “We had too little stocks and too many micro-caps in a portfolio, which got hammered in the 2018 market bust. It took five to six years (to recover) for clients who had invested before that. Those who invested afterwards have done really well, 2019 onwards,” he said.

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The learnings on how to construct a portfolio and figuring out the right mix for the strategies helped Capitalmind manage the Covid-19 crash. “We handled that very well because Adaptive Momentum went to cash before the event. So, we ended up at 15 percent drawdown versus 35 percent for the index,” he said.

Going forward, Shenoy wants to stay humble in the market.

“When you're new to the markets, you start off arrogant, and when you're old enough in the market, you are humble. There are bold investors and there are old investors. There are no old and bold investors. You always need to have that layer of humility that the market knows more than you,” Shenoy said.