Ajit Dayal, Founder, Quantum Advisors Ltd, Sponsor of Quantum Asset Management Co Ltd
How do you write the script of a mutual fund house that had began with a lot of promise 18 years ago but lost the plot somewhere along the way? That’s what Ajit Dayal, founder of Quantum Asset Management Company (AMC) Pvt Ltd, has been trying to do.
At the time of its launch, back in 2006, Quantum AMC was the 28th — and the smallest — of all fund houses, according to data by Value Research. Today, it is 37th out of the 43 fund houses in the market. In its fight for existence, the David is taking on a Goliath, ICICI Bank, over the delisting of ICICI Securities. Dayal says he’s doing this to protect the interests of his investors.
But increasing its investor base is a bigger task at hand for Dayal et al.
Is 15 percent returns good or bad?
Dayal says that while the fund house’s research, investment, compliance, and operations are all in fine nick, the biggest lack is in communication. “It’s not that we have changed what we do. The market’s view of the stocks that we own has changed. We have remained true to our discipline, but instead of being proud about that, we tend to be apologetic (about underperforming peers),” he says.
Dayal — often shuttling between his home in India and children in Switzerland — was active in the Indian mutual funds sphere until he took a backseat a few years ago. But he is now being seen in his Mumbai headquarters more often, holding meetings, conducting webinars, and spreading the word about the work they do.
However, does the fund house, specifically its flagship Quantum Long Term Equity Value Fund (QLTEVF), have much to tomtom? At Rs 1,230 crore, QLTEVF is among the smallest value-styled funds in the Rs 65-trillion Indian mutual fund industry. The largest scheme in this category is worth a little over Rs 50,000 crore. Between 2011 and now, QLTEVF’s three-year performance (a series of three-year returns were taken) averaged 14 percent, the lowest among its 18 peers in the category. In the last three-year period, the fund returned 17 percent.
Dayal says that’s not a bad performance because a 15 percent return is what the fund has always aimed for. “We are the only fund house that I know of, which targets a known rate of return, 15 percent, and is not swinging for a six (as in a cricket shot) in every ball, but is methodical.”
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An overheated market
QLTEVF also sets itself apart by holding higher-than-normal cash, whenever fund managers George Thomas and Christy Mathai feel the equity markets are overheated.
As of September 2024, it held 16 percent in cash, among the highest in its history. In fact, QLTEVF has held more than 10 percent cash since April 2024, and increased the same on the back of rising valuations. “The equity market is overvalued at present. If 5 percent cash is the norm for us, today we are three times that,” Dayal says.
“Following our value-styled philosophy, if a stock hits its ‘sell’ price, we begin to trim our positions. If we don’t find new stocks to add, we just sit on the cash.”
Asset managers or gatherers?
Despite experts like Dayal calling the markets overheated, investors have been pouring money into equities and equity-oriented mutual funds.
Dayal says that apart from investor greed, part of the blame lies with the Indian MF industry. He is not happy with the way smallcap schemes have collected money, especially in the last one year. Between August 2023 and July 2024, smallcap funds got net inflows (more inflows than outflows) to the tune of Rs 34,386 crore, dwarfing Rs 7,287 crore of net inflows into largecap funds. Smallcap funds got Rs 30,331 crore net between August 2022 and July 2023. Only passive funds got more money in this period.
“Our rough estimates suggest that investors who’ve entered the market during 2020-2021 have probably allocated 50-60 percent of their portfolios to small and midcap stocks. A 1990s investor would probably have invested just 10-20 percent in such stocks. The current trend is dangerous. When the markets crumble, the backlash from these investors will be quite shocking,” says Dayal.
Stress test not enough
Earlier this year, the Association of Mutual Funds of India (AMFI), the Indian MF industry trade body, had come out with a stress test that all MFs had to put their small and midcap funds through the instructions laid out by the capital markets regulator Securities and Exchange Board of India (Sebi). At the time, Sebi had felt that froth was building up in the smallcap segment and investors should be warned. Smallcap funds have to now check, every month, how liquid their portfolios are.
Dayal feels the stress test is “idiotic” since it removes the bottom 20 percent of the stocks in terms of liquidity, before calculating how many days it will take to sell 25 and 50 percent of the portfolio. “When the market crashes, fund managers sell their most liquid stocks, leaving the bottom 20 percent intact, which then comprises a big chunk of the portfolio. Investors who stay on are saddled with these illiquid stocks,” he reasons.
Other than a faulty methodology to measure a scheme’s stress levels, Dayal says, the AMFI, or for that matter, much of the Indian MF industry, isn’t doing much to curtail risk (leaving aside the few Sebi warnings about the harmful effects of derivatives on a retail investor’s portfolio).
“AMFI ought to be using its investor education budget to build awareness among investors, to caution them against investing more than, say, 10-25 percent in smallcap funds,” says Dayal.
Is ESG dead?
The onset of Covid saw MF schemes focusing on Environment, Social, and Governance (ESG) factors. Launched in July 2019, the Quantum ESG Best in Class Strategy fund was among the first such funds to be launched in India.
Around 2018, the SBI Magnum Equity Fund, a diversified fund that was originally launched in 1991, was rechristened as an ESG fund. Today there are 10 ESG MF schemes that collectively manage just Rs 12,000 crore. ESG funds have underperformed both flexicap and multicap funds in 2021, 2022, 2023 and thus far in 2024, as per ACE MF data.
Clearly, ESG funds have not yet captured the fancy of the Indian investor.
Some fund houses like Quantum have, however, been increasingly using ESG-like parameters in their other diversified funds. Quantum MF uses what it calls an ‘integrity score’, since its inception in March 2006. Dayal says that his fund focusses more on the governance of a company than the social or environmental factors.
“Companies that demonstrate good behaviour are likely to have good outcomes,” he adds, clarifying that it is not a guarantee that high ethics will lead to high performance. “But that combination is very powerful.”
In his newsletter, which is part of the MF’s 2023-24 annual report, Dayal explains how the integrity score works. He says the fund house avoids investing in companies where it believes the protection of minority shareholders is suspect, or which intentionally harm clients (e.g. in the financial services sector), or harm society (e.g. by exploiting child labour).
Quantum vs ICICI
At present, Quantum MF is locked in a bit of a battle with the ICICI Banking group over the share swap ratio as ICICI Securities gets delisted. After the National Companies Law Tribunal (NCLT) threw out its case in August, Quantum AMC appealed to the National Company Law Appellate Tribunal (NCLAT).
Quantum AMC, the asset manager, says the ratio is unfavourable for the shareholders of ICICI Securities, the broking arm of ICICI group. The securities firm will continue to remain a wholly owned subsidiary of the bank. QLTEVF and Quantum ELSS Tax Saver Fund own shares of ICICI Bank and ICICI Securities. Quantum AMC has taken up the battle on behalf of the fund house’s unitholders.
Read: Quantum Mutual vs ICICI: Should the fund’s investors pay legal fees?
Dayal has made Sebi a party in the NCLAT, unlike at the NCLT. He explains that since the NCLT re-looked at the whole process of the voting exercise and didn’t find anything wrong with it, it had dismissed the case. However, he points out that newspapers had reported in March 2024 that ICICI Bank employees had been calling up shareholders of ICICI Securities and nudging them to vote in favour of delisting.
In May, the Press also reported that Sebi had started to look into the matter, about which ICICI Securities shareholders complained to the regulator. In June, the markets watchdog wrote a letter to ICICI Bank asking it to desist from interfering with the shareholders’ decision-making, and called its interference “inappropriate”.
Dayal says that he wants Sebi to clarify to the NCLAT whether, according to its June letter to ICICI Bank, the voting “process was vitiated” as the NCLT judge had observed. It will compel the NCLAT to order a second shareholder vote over delisting.
As of September-end, QLTEVF holds 5,80,810 shares, or 0.008 percent, of the bank’s shareholding. It also holds 2,47,482 shares, or 0.076 percent, in ICICI Securities Ltd.
“ICICI Securities represents about 2 percent of our portfolio. We are custodians of your savings. If you have given us capital to deploy on your behalf, it’s not a game. You’ve given me your capital, your savings, to maximise your returns. We are accountable to our investors. This will benefit our unitholders. We’re not doing this for glory. We’re doing this to fight for the unitholders’ right to get the right price for their shares – and we expect Sebi to do the same,” Dayal says.
Dhuraivel Gunasekaran contributed to this story