Quant MF also has a smaller exposure to other Ambani companies like Just Dial, Network 18 and TV 18. All this collectively takes its exposure to the group to about 16%.
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In 2022, Quant MF built a similar concentrated exposure to the Adani Group but pared it down after October 2022 following a negative report by Hindenburg on the company. After cutting its exposure to the group to nil post the Hindenburg report, the asset management company (AMC) has bought back into the group . It now has a 3-7% exposure in Adani Power across several schemes, but financial experts say this could be a short-term tactical play than a multi-decadal bet.
The bet
According to Sandeep Tandon, founder and chief investment officer of Quant Mutual Fund, RIL is not getting the desired valuation it should despite the group’s presence in sunrise sectors, which commands much higher valuation multiples.
“The group has presence in sectors such as solar, hydrogen, telecom, data analytics, hydrocarbon, retail. The same businesses in other groups are getting rich valuations. There is also potential unlocking as and when other businesses such as Jio Infocomm and Reliance Retail get listed on the exchanges,” Tandon said.
This bet on RIl seems to have worked well. Over the last six months, the RIL stock has delivered returns of 13%. Over the one-year period, it has delivered 34% returns.
The bet on Jio Financial Services, according to Tandon, is a multi-decadal opportunity. “Reliance group has shown its ability to create disruption in the industry it enters. We also expect financial services industry to go through major changes in the coming years and relevance of traditional banking will decline since leverage economy as a concept will lose its relevance,” Tandon says.
In fact, Quant MF has exited other non-bank financial companies (NBFCs) as it expects the entry of Jio Financial Services to increase competitive intensity for other players. Jio, though, has yet to show any significant up-move. Since its listing in August last year, the stock has largely been trending flat with negative 0.3% returns.
What if these large bets don’t work out? Tandon says due to Quant MF’s highly data-driven approach, there is never any attachment or bias toward any particular stock or sectors. “If our internal investment framework suggests an exit call or any unknown risks emerge, we can exit quickly.”
Among other bets, the fund house is also building up its position on Life Insurance Corporation of India (LIC). It has exposure to LIC in 14 schemes with an average allocation of 4.9%. Tandon says this bet is more tactical in nature, as the valuation of the stock is attractive and the asset management firm is bullish on public sector units (PSUs).
Hits and misses
While Quant MF is still a fairly new entrant in the ₹50-trillion MF industry with just six years of track-record, some of its funds are already topping the return charts in their respective categories.
The fund house has a different investment approach than others in the industry. Instead of the buy-and-hold approach that fund managers typically follow, Quant MF can quickly enter and exit a stock position to make most of short- and medium-term investment opportunities.
This unique approach often leads to the fund house taking investment calls that are different than others in the MF industry, but it seems to be working so far as can be seen in its scheme’s performance.
For example, the fund house had exited HDFC Bank across all its funds, another index heavyweight (11.6% in Nifty 50 index) in September 2023. Tandon says this was due to decline in the liquidity indicators and risk-appetite indicators of the private banking sector and HDFC bank in particular.
This call seems to have worked well for the fund house as the stock has corrected steeply in recent months, which has impacted the performance of several equity funds. HDFC Bank had higher weightage in the portfolios of several equity funds’ due to its large weight in the benchmark index Nifty 50. The stock is down 14.9% in year-to-date and 11.2% down over the last six months.
However, all exits have not worked so well for the fund house. For example although the fund house has begun to trim down its Adani stake from October 2022, it had a substantial residual stake (about 6% of AUM) in the Adani Group in Jan 2023 when the Hindenburg saga broke out. At that point, the AMC sold its stake entirely but Adani group stocks started to rally again after Quant MF’s exit and have bounced back sharply since February 2023. The fund re-entered Adani group stocks meaningfully in August 2023 with exposure to Adani Power and Adani Enterprises in some of its schemes.
Similarly, the fund house had partially pruned its PSU exposure after Adani group’s debt concerns had raised concerns for PSU banks and financial services companies. PSU stocks have since seen sharp rally over the last year.
“The Adani exposure was only 6% of the portfolio but collateral damage was bigger in PSUs as, at that time, we had 21-27% PSUs exposure in most of the equity schemes,” Tandon says.
The fund house has rebuilt its PSU exposure over past few months.
Risk of big bets
Large exposure to select business groups or select stocks can deliver strong outperformance if everything works as the fund manager expects it to. But concentrated bets can also hurt returns when there are negative surprises.
Back in January last year, several of Quant MF’s schemes had seen their net asset values (NAVs) decline 2.5-9% after the Hindenburg report came out. But the fund quickly exited all the group stocks of Adani within a matter of days. By February 2023, the fund had nil exposure to Adani stocks.
The Adani group stocks were a big driver of the fund house’s outperformance till then, with the stocks delivering staggering returns. Most other mutual funds steered clear of the group due to its rich valuations.
Analysts tracking the fund house say it has so far able to manage risks with its nimble-footedness.
“Quant MF deploys thorough research and analytical capabilities and once there is conviction, it seems to size the bet accordingly. Clearly, the fund house does not shy away from taking bold calls, be it about investing in out-of-favour companies, completely excluding an index heavyweight across portfolios, or allocating sizeable amounts to single companies. Such a strategy makes it vulnerable to steep declines if the bet goes south. However, it has been observed across instances that the fund house has been relatively agile to acknowledge and course-correct,” said Nirav Karkera, head of research at Fisdom.
“It would be interesting to observe how the fund house maintains current agility with so much more assets under management,” he added.