Quant Smallcap Fund – 60% returns in 3 months – What is the secret behind this?

Quant Small cap mutual Fund Performance review

Quant Smallcap Fund – 60% returns in 3 months


Small cap mutual funds have been struggling in the last couple of years. Post SEBI re-categorization of mutual fund schemes in early 2018, small cap mutual funds has been lagging. Stock markets have crashed during Mar-20/Apr-20 due to the Covid-19 crisis. Markets have recovered very fast now in the last 3-4 months. However, in this process, some of the small cap mutual funds started performing extremely well. Quant Small cap mutual fund is a super performer and gave 60% returns in the last 3 months and 40% in the last 1 year. How did Quant small cap fund able to get such superior performance. Why other smallcap mutual funds could able to delivery lower returns compared to this fund?  What is the secret behind Quant Small Cap fund success?

Also Read: Best Small-cap mutual funds in India

Small cap mutual fund universe in India

Currently there are around 24 small cap mutual fund schemes in India (direct plans). These funds have been struggling in the last 2 years post SEBI recategorization and generating negative returns. Mutual fund investors might be thinking to exit such mutual fund schemes.

Quant Small Cap Fund – Key things to note

Here are some key things:

1) Change in fund manager (Mr. Ankit Pande) from 1-May-2020 (3.5 months back).

2) Several changes in the portfolio mix in the last 3 to 6 months.

3) Fund focused on few sectors that has performed well in the last 3 to 6 months (pre and post covid). It has majorly chemicals, healthcare sector and FMC sectors amounting to 63% of its total portfolio.  One should note that entire small cap mutual funds segment has invested only 30% in these 3 sectors. Means this fund has en-cashed covid-19 situation very well.

4) This fund focused majorly on Chemicals, Healthcare, FMCG, Financial, Services, Metals and Technology sector. If you observe except for Banking and financial service sector which suffered a lot due to covid-19 pandemic, all other sector stocks have almost recovered (due to bull market). Its financial services sector portfolio amounts to < 10%. Means, it has encashed 90% of its portfolio by investing / entering fresh investments into those sectors that recovered very fast.

Performance of Quant Smallcap Fund

Here is the performance in the last 5 years based on simple annualised returns (point to point basis). Data points are as on August 13, 2020 (date of writing this article)

1) 5 years annualized returns – 5%

2) 1 Year returns – 40%

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3) 6 months returns – 20%

4) 3 months returns – 62%

Now let us look at the rolling returns of the fund. It is the fund’s ability to generate the returns those many times, which is computed based on every day returns (data source: Rupeevest)

If you look at this chart, this fund has consistently under performed BSE Smallcap index in the last 5 years except for in the last 3 months.

Quant small cap Mutual Fund Performance - Rolling Return Graph 2015-2020

Just look at the number of times (%age)  the fund generated returns in the specific category. As per the rolling returns, 90% of the times, the returns were lesser than 10%. This gives a clear idea about the funds consistent performance compared to its benchmark.

Quant Small cap Mutual Fund Performance - Rolling Returns - Table - 2015-2020

Franklin India Smallcap Fund Vs Quant Smallcap Fund

Franklin India smallcap fund was once upon a star performer. However, it is the worst performer in the last 3 months to 1 year period in the entire smallcap segments. I felt it is good idea to compare them.

1) Funds focus – Quant smallcap fund has focused 65% of its investments in 3 major sectors that impacted very less or recovered fast post due to covid-19 pandemic. Franklin India invested two third of its investments in Banking/Financial, chemicals, construction, healthcare, technology, services and FMCG. Out of this banking, financial services, construction, etc., are still struggling to recover and might take longer time from covid-19 impact.

2) Overall portfolio: Quant Small fund portfolio consists of 90% of the portfolio that is almost recovered or in the process of recovery. However, in Franklin India small cap fund, it invested two-third in 6 sectors where almost 50% of such portfolio have major impact due to covid-19 and yet to recover. Even balance one-third of investment portfolio consisting of energy, textiles, metals, engineering, automobile would take longer time for recovery as underlying companies are yet to recover from covid-19 pandemic impact.

3) Rolling Returns: It is clear from the above charts that in the last 5 years, rolling returns has highest returns category for Franklin small cap fund compared to Quant small cap fund. In fact Quant small cap fund as started moving above BSE Small cap index performance only in the last 3-4 month period.

4) Simple annuliased returns compared to benchmark: For simple annualized returns compared to the benchmark, due to abnormal performance by Quant small cap fund in the last 3 to 6 months, it was able to beat the benchmark’s returns in the last 5 year period. However, Franklin small cap fund has failed to beat its benchmark in a similar period.

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Should you switch to Quant Smallcap Fund?

Quant Mutual Funds management keeps indicating that their style of investing is slightly different from most of the traditional mutual fund houses. They claim that they have defined themselves as part of the VLRT framework, i.e. looks at valuation analytics (one-third of component) and liquidity analytics and risk appetite analytics and time (two-third).

Let me come to the specifics of this Quant Small Cap mutual fund. This fund did extremely well in the short term of 3 to 6 months. However, the consistency is important. On other hand Franklin India smaller companies have greater consistency that provided higher returns compared to the benchmark in the rolling returns, however failed to generate positive returns. It even did not beat the benchmark returns too. It has not encashed the covid-19 opportunities which were expected to boom in short period. Investors not worried about consistency nor rolling returns, but more about what is happening today and highest performance today. If you are one among such investor, no doubt you would go and invest in such funds with short term performance. I would personally feel that both short term and long term performance should be considered while picking up a small cap fund. In this case both mutual funds have failed from this aspect. Lets wait to see how the small cap funds would tend to move in next 1-2 quarters.

Note: This article is neither a recommendation nor criticism about small cap mutual funds. This analysis is just to give an idea how such funds can behave in the short term to long term. This would help investors to take right decision. You can take any other funds from this category, do similar analysis which gives idea about such small cap mutual funds.

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Suresh KP

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