This document describes the investment process of the DSP Quant Fund. It involves a 3 stage process:
1) Eliminating stocks that may destroy value based on factors like high debt, volatility, or poor earnings quality.
2) Selecting the highest quality companies based on factors like growth, value, and quality by ranking them on metrics in each factor.
3) Optimizing the portfolio weights using constraints to manage risk while maximizing factor exposure.
The process aims to select good companies at good prices using a rules-based quantitative model and combining multiple factors with low correlations to reduce risk and provide diversification.
Know more on the benefits of investing in ICICI Prudential Quant Fund:
● Limited Human Intervention to avoid any biases.
● Diversification across various sectors, styles and businesses.
● Systematic approach of investing by combining investing experience and avoiding human error.
● Passive Investing through a model using a combination of factors.
● Team with prior experience in managing quantitative models for asset allocation.
Know more on the benefits of investing in ICICI Prudential Quant Fund:
● Limited Human Intervention to avoid any biases.
● Diversification across various sectors, styles and businesses.
● Systematic approach of investing by combining investing experience and avoiding human error.
● Passive Investing through a model using a combination of factors.
● Team with prior experience in managing quantitative models for asset allocation.
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4 things to look for before investing in a stock.Stocks, stock market, business, investing. More about stock market at https://www.thestockmarketontheinternet.com
There's a reason why 6 out of 10 of the top performing hedge funds are quant firms, and on a typical trading day 90% of trades are made by computers . In the next decade quantitative investing will become THE way to invest. Don't get left behind, learn how to use algorithms to invest.
Looking for long term wealth creation?
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Axis_QuantFund_NFO_PPT presentation now heredvg6363238970
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Abhay Bhutada Leads Poonawalla Fincorp To Record Low NPA And Unprecedented Gr...
DSP Quant Fund - Investment Process
1. [Title to come]
[Sub-Title to come]
Strictly for Intended Recipients OnlyDate
* DSP India Fund is the Company incorporated in Mauritius, under which ILSF is the corresponding share class
November 2019
| People | Processes | Performance |
DSP Quant Fund
Investment Process
2. 2
Investment Process
ELIMINATE STOCKS
from the S&P BSE 200 Index
SELECT GOOD COMPANIES
from the above shortlist
ASSIGN WEIGHTS
to create the final portfolio
200 stock
universe
~ 100 stocks
30 – 50 stocks
Exclude stocks which may destroy value
× High debt
× Excessive volatility in stock prices
× Inefficient capital allocators
× Poor quality of reported earnings
Select final list by ranking stocks based on average scores for:
✅ Quality
✅ Growth
✅ Value
Weights assigned to manage risks
Single Stock exposure limits
Single Sector exposure limits
Exposure limits based on stock liquidity
Model converts sound investing principles into a RULES BASED investment process
BASED ON A QUANT MODEL
REVIEW & REBALANCE every six months (Mar & Sep)
3. 3
Stage 1 : Elimination process
Eliminating likely value destroyers is a principal consideration of the strategy
Identify characteristics that often
lead to value destruction
Companies which display these
characteristics are eliminated
from the investable universe
200 STOCKS
(Components of the
S&P BSE 200 Index)
~ 100 STOCKS
(Shortlist for
next stage)
WHY ELIMINATION IS A CRITICAL PART OF THE PROCESS
22.0%
20.3%
11.2%
18.6%
11.1% 10.2%
6.7% 5.5%
3.5%
10.9%
4.6%
7.9%
16.8%
-1.4%
1.6%
-5%
0%
5%
10%
15%
20%
25%
2005-2010 2010-2015 2015-Now
Returns
QUANT MODEL VS. BSE 200 TRI VS. ELIMINATED STOCK BASKETS
Quant Model BSE 200 TRI High Beta High Leverage S&P BSE PSU index
ENTIRE PERIOD QUANT MODEL S&P BSE 200 TRI S&P BSE PSU INDEX HIGH BETA BASKET HIGH LEVERAGE BASKET
RETURNS 17.9% 13.1% 5.0% 5.2% 7.6%
STD. DEVIATION 18.7% 22.5% 24.2% 33.6% 28.8%
RETURN/RISK 0.96 0.58 0.21 0.16 0.26
*Note: The performance
numbers are Total return
series from 30-Sep-2005 to
31-Mar-2019. Eliminated
stock portfolios created
using BSE 200 constituents
that meet the elimination
criteria described in the
previous slide at every
rebalance. Weighting is
proportional to their
weights in BSE 200 index.
The portfolios are
rebalanced every March
and September.
Data Source: FactSet, MFIE.
Past performance may or
may not sustain in future
and should not be used as
a basis for comparison with
other investments. These
figures pertain to
performance of the model
and do not in any manner
indicate the
returns/performance of the
Scheme. One cannot invest
directly in an index.
2015 onwards*
4. 4
Stage 1 : Criteria used for elimination
Difficulty to service
interest payments
Raises risk of defaults
which further
tightens liquidity
In case of defaults,
creditors get
preference over
equity holders
× High DEBT TO EQUITY
(applicable to all sectors
ex financials)
HIGHLY LEVERAGED
COMPANIES
× High BETA
HIGHLY VOLATILE
STOCKS
NON-ALIGMENT OF
MANAGEMENT
INCENTIVES
POOR QUALITY OF
REPORTED
EARNINGS
× High PRICE
VOLATILITY
Typically highly
cyclical businesses
Disproportionately
high stock price
volatility on a relative
& absolute basis
Potential red flag
Haven’t added value
to equity holders over
the long term
× Ownership
Criteria
Shareholder wealth
creation is not a
primary goal
Business decisions
maybe driven by
other considerations
Minority shareholders
get sub-optimal
returns
× LOW reliability of earnings
× WEAK balance sheets
× POOR cash conversion
× Potential governance issues
Accounting &
Management issues
can lead to severe
value destruction
Forensic analysis of
financials disclosures
can throw up
potential red flags
Extensive criteria to identify and eliminate potential value destroyers from the investible universe
5. 5
Details of Forensic Analysis
PARAMETERS CONSIDERED IN THE FORENSIC OVERLAY
REPORTED
EARNINGS
QUALITY
BALANCE
SHEET HEALTH
WORKING
CAPITAL CYCLE
ANALYSIS FOR
FINANCIALS :
ALM, ASSET
QUALITY ETC.
MANAGEMENT
ACTIONS
Large divergence in accounting v/s cash flow
entries suggest aggressive accounting policies
Examples: Divergence in
× EBITDA v/s Cash Flow from Operations
× Interest entry in Cash Flow Statement v/s P&L Statement
× Annual depreciation rates
Badly managed balance sheets at
higher risk of financial distress
Examples: Weak metrics on
× Interest coverage ratio
× Debt/Equity market capitalization
× Credit rating
Cash flow conversion & liquidity issues
are early signs of business problems
Example: Variability and deterioration in
× Debtor days, inventory days and creditor
days
Aggressive growth -> Asset quality issues->
Solvency risk
High short term funding -> Liquidity risk
Examples:
× High NPA growth
× High Short term debt to total debt
× Provisioning cover
Imprudent management actions can
destroy minority shareholder value
Examples:
× High promoter pledge
× High related party transactions
× High loans and advances
Forensic analysis is a critical part of the elimination process
6. 6
Stage 2 : Selection process
EVALUATING FACTORS
Determine core
investment
principles also
known as Factors*
Select metrics for
each factor, rank
each company on
every factor and
arrive at an average
factor score
Select companies
with the highest
average factor
scores
SELECTION PROCESS FLOW
~ 100 STOCKS
(remaining after the
elimination stage)
30 – 50 STOCKS
(final portfolio
selection)
Showing a
history of
generating
alpha
Used to arrive at
factors which
are quantifiable
And ideally have
low correlation
with each other
Help to
construct a
diversified
portfolio
Which is constantly
reviewed for adherence to
the core principles
Core
investment
principles
Factors convert core investment
principles into easily measurable metrics
Factors have historically been principal
drivers of alpha
*Based on research, established in back-tests
7. 7
Stage 2 : Selection of good companies
(with)
GOOD
PROSPECTS
(at a)
GOOD PRICE
(a) GOOD
COMPANY
QUALITY FACTOR
✔ High RETURN ON EQUITY
✔ CONSISTENT Earnings growth
Profitable and well
run companies
Steady earnings
streams
Receive a premium in
the market
GROWTH FACTOR
✔ High EARNINGS GROWTH
(consensus estimates)
Strong growth
prospects
Attract investor
interest
VALUE FACTOR
✔ Attractive DIVIDEND YIELD
✔ High FREE CASH FLOW YIELD
Relatively inexpensive
stocks compared to
the market
Can generate excess
returns during phases
of value discovery
Receive a premium
in the market
EVALUATING COMPANIES ACROSS MULTIPLE FACTORS
Using a multi-factor approach to assess companies in a holistic manner
8. 8
Stage 3 : Optimization process
Optimized
weights for each
selected stock
Maximize
portfolio
factor
exposure
Stock level
constraints
Sector level
constraints
Semi-
Annual
rebalancing
LOWER OF 10% OR 10X OF
WEIGHT IN S&P BSE 200 INDEX
(avoid concentration, ensure
liquidity/capacity)
MAX SECTOR ACTIVE WEIGHT = 10%
(avoids risk of sector rotation)
MAXIMIZE PORTFOLIO FACTOR SCORE
(weighted average factor score)
SEMI ANNUAL REBALANCING
(to minimize turnover)
ASSIGN WEIGHTS TO 30 – 50 SELECTED STOCKS AND CREATE FINAL PORTFOLIO
Optimization done with the objective of creating a diversified portfolio
9. 9
Why do we use multiple factors?
COMBINING
MULTIPLE FACTORS
With LOW
CORRELATION
between themselves
Reduces the risk of
CYCLICALITY
of INDIVIDUAL factors
Offers portfolio
DIVERSIFICATION
BENEFITS
Based on the core investment principle of portfolio diversification
Aims to create an ALL WEATHER PORTFOLIO
10. 10
Factor cyclicality
STAGFLATION OVERHEATING
GOLDILOCKSRECESSION
MACRO↑
Economy
picking steam
INFLATION↓
Still subdued due
to spare capacity
MACRO↓
Economy
slowing
INFLATION↓
Demand
collapse
MACRO↓
Weaker
economy
INFLATION↑
Stubbornly
high prices
MACRO↑
Economy
peaking
INFLATION↑
Capacity
shortages
Growth
tends to Outperform
Quality & Value
Value
tends to Outperform
Growth & Quality
Quality
tends to Outperform
Growth & Value
Quality
tends to Outperform
Growth & Value
Factors generally show cyclicality in performance across the economic cycle
MAPPING MACRO CONDITIONS TO FACTORS
11. 11
Diversification benefits
Data is net of estimated fees and impact costs for back-tested returns of the Quant Model . The Model was tested for both in-sample and out-sample periods (roughly 2/3rd and 1/3rd of the entire back-test
over 13+ years to avoid over fitting and avoiding hindsight bias)
Combining factors aids in portfolio diversification which may improve returns per unit risk
NEGATIVE OR LOW POSITIVE CORRELATIONS
between Quality, Growth and Value factors
allows suitable portfolio diversification
CORRELATION
GROWTH
FACTOR
VALUE
FACTOR
QUALITY
FACTOR
GROWTH 1.00
VALUE -0.23 1.00
QUALITY 0.02 0.15 1.00
The performance numbers are total return series from 30-Sep-2005 to 31-Jan-2019. Factor portfolios are created using factor tilting approach representing portfolios having stocks displaying high values on the respective factor.
The portfolios are rebalanced every March and September. Data Source: FactSet, MFIE. Past performance may or may not sustain in future and should not be used as a basis for comparison with other investments. These figures
pertain to performance of the model and do not in any manner indicate the returns/performance of the Scheme. It is not possible to invest directly in an index.
STD. DEV of RETURNS (%)
RETURNS(%)
GROWTH FACTOR VALUE FACTOR QUALITY FACTOR QUANT MODEL S&P BSE 200 INDEX
RETURNS 15.0% 19.2% 15.8% 17.8% 12.7%
STD DEV 24.1% 22.9% 20.1% 19.3% 22.5%
RETURNS / RISK 0.62 0.84 0.79 0.92 0.56
BETTER RETURNS PER UNIT RISK
are achieved by combining factors with low to negative
correlation
PERFORMANCE STATS – INDIVIDUAL FACTORS V/S MULTI-FACTOR
10%
12%
14%
16%
18%
20%
22%
18% 19% 20% 21% 22% 23% 24% 25%
S&P BSE 200 TRI
VALUE FACTOR
GROWTH FACTOR
QUALITY FACTOR
QUANT MODEL
12. 12
QUANTITATIVE RESEARCH and PORTFOLIO MANAGEMENT TEAM
Convert
model
output into a
live portfolio
Periodic review &
rebalancing.
Constantly seek
to upgrade model
Construct
the model
based on
tested rules
Determine an investment
hypothesis based on some
principles or data
Test the hypothesis for
robustness, consistency and
longevity to frame rules
Incorporate rules into the
model. Seek to evolve and
upgrade the model.
Model generates a live
portfolio by running the rules
on updated data
Securities are purchased
using best execution policies
to minimize costs and
tracking error (with model)
Final portfolio is constructed
and communicated to
relevant stakeholders
Periodic formal model review
and regular portfolio
rebalancing
Manage daily flows as per
the model
13. 13
Product labelling details
Fund Product Suitability Riskometer
DSP Quant Fund
(An open ended equity scheme investing based
on a quant model theme)
This open ended equity scheme is suitable for investors who are seeking*
Long term capital growth
Investment in active portfolio of stocks screened, selected, weighed and rebalanced on the
basis of a predefined fundamental factor model
*Investors should consult their financial/tax advisors if in doubt about whether the product is suitable for them.