Given that a large cap fund invests in stable, revenue and cash flow generating businesses which have large market share and resources to navigate tough times such as now, it is considered one of the relatively safer investment options in equity.
However, as an investor, you are not just looking at the category but also which fund stands out and delivers.
Over the years, the large cap category has seen huge churn in terms of best performers.
The masters of old times are no where in the scene today. The relatively newer fund houses have been capturing the space.
There is another trend apace now. Passively managed index funds are getting more mind share and money share from the investors.
Passsively managed funds are simple to understand and execute. But many investors are still not satisfied with index less expenses returns. They want more.
And hence the active strategies are still around with lion’s share of investors assets. Take for example, Axis BlueChip Fund. On account of its recent years performance, it has quickly reached Rs. 14,500 crores of assets under management.
Mirae Asset Large cap Fund is also an investor favourite at Rs. 16,300 crores. ICICI Prudential Bluechip Fund (one of the older ones out there) is at Rs. 22,800 crores. (All figures as of June 30, 2020)
But what is different?
Mirae Asset Large Cap follows a diversified portfolio strategy (50+ stocks) including using allocation to mid caps to generate better returns.
Axis Bluechip follows a concentrated portfolio strategy (around 25 stocks) within bluechip large caps along with cash holdings. It has helped manage drawdowns better than peers and generate higher returns too.
However, in the large cap space there is another strategy that has got little attention so far and has the potential to do better in the long term.
I am not just talking about returns but also about the consistent execution of the strategy over a period of time.
It is not compared with any other large cap fund in the category because of its categorisation as Thematic (quant based). But for all practical purposes, it should be.
I am referring to the DSP Quant Fund. We had done a review of the fund’s NFO in 2019. It is time to take stock again and see has the fund lived up to its promise.
DSP Quant Fund – What is on offer?
DSP Quant Fund positions itself as a rules driven fund based on good investing principles. It applies factor based scoring and an optimisation formula around growth, quality and value. It expects to outperform the BSE 200 benchmark over 7 years plus time horizon.
The investment objective of the fund is:
to deliver superior returns as compared to the underlying benchmark over the medium to long term through investing in equity and equity related securities. The portfolio of stocks will be selected, weighed and re-balanced using stock screeners, factor based scoring and an optimization formula which aims to enhance portfolio exposures to factors representing ‘good investing principles’ such as growth, value and quality within risk constraints.
The fund owns stocks from BSE 200 which represent a large pool of quality and liquid securities.
The fund is rebalanced semi annually, that is, twice a year.
DSP Quant Fund – The rules driven fund
If you haven’t figured out so far, this is a heady mix of active + passive fund management.
The fund has built a set of rules which define inclusion of stocks and their allocation in the portfolio.
AS per the Scheme Information Document,
The fund’s endeavor is to create an automated stock picking and weighting model that generates portfolios which maximize characteristics of the chosen factors while adhering to liquidity and risk concentration constraints.
From the BSE 200 index, they exclude companies which display the following characteristics:
- Exclude companies that fail to pass through proprietary earnings quality and forensic accounting screeners based on reported accounting statements
- Exclude companies exposed to higher default risk (higher than a predefined leverage threshold, ex-Financials)
- Exclude companies with higher than a predefined volatility threshold
- Exclude companies which do not meet certain pre-defined ownership/shareholding criteria
- After applying the exclusion criteria for recent backtests, the universe is reduced to about 80-100 companies
In using the multi-factor portfolio construction approach, this is how they implement it (also called the inclusion criteria). For the remaining set of companies in the universe:
- Percentile score assigned for each company across selected factors, which is combined into an aggregate score for relative company percentile ranking (equally weighted for each factor). The factors include 5 metrics capturing Quality , Growth and Value characteristics through objective ratios.
- Include for consideration only top ranked companies (highest aggregate score) which constitute 50% of BSE 200 index by weight. This further reduces the stocks that will be considered for inclusion in the portfolio to about 30-50 stocks in recent rebalances as per back-tests.
This is how they optimise the portfolio for maximising portfolio level factor exposures and minimising risk.
Stock level constraints
Stock level weights in the portfolio to be capped at 10%, or 10x of weight in BSE 200 index, whichever is lower (avoid concentration, ensure liquidity/capacity)
Sector level constraints
The optimizer tries to minimize active sector risks by keeping max sector active weight to 10% (diversification, avoids risk of sector rotation)
Maximize portfolio level factor exposure such that portfolio level factor exposure is highest for the given set of constraints to get the optimized weights for each stock
Did they stick to the process?
Over the last 1 year of its existence, it appears that the fund has stuck to its outlined process and rules. Take a look at the tables below.
In terms of Top 10 stocks, there has been a consistency with major changes only on semi annual basis.
On sectoral exposure, top 5 sectors continue to be same with more than 70% exposure.
The no. of stocks are in the 40 to 60 range as envisaged.
The sore point is the rise in expense ratio even though the AUM has been increasing at a good pace. They can be more competitive there.
How does the fund fare against other large caps funds?
In terms of performance, this is too early to give it any weight. Having said that, the fund did much better than most other popular funds in large cap category.
Should you wait or invest?
As you are already aware as a subscriber, that this fund is part of the Unovest Mutual Funds Shortlist. If you are keen to take exposure to large cap using a non index way, DSP Quant Fund is a worth a serious consideration.
It has already found way into some of the investor’s portfolios as a replacement of older styles/mandates.
A minimum 10% allocation to the fund is desirable. An ongoing SIP will be a great way to take exposure to this strategy.
With low cost and a rule driven strategy (akin to a private index), it has a better chance to deliver a good risk adjusted return.
If you have any further questions on the fund, feel free to reach out.