The fund uses an in house quantitative model to build its portfolio from the universe of BSE 200. It operates as a low cost, passive fund with just 2 rebalances (changed to 4 rebalances from July 2022) during the year.
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. (July 2022 Update: Quarterly rebalances)
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:
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
Semi-annual (quarterly from July 2022)
Don't get carried away by the name Quant, which refers to its focus on the quantitative aspect. The fund is going to have a portfolio of large and mid caps.
If you are keen to take exposure to large/mid caps using a non index way, DSP Quant Fund is a worth a serious consideration. The current expense ratio of the scheme as of June 13, 2022 is 0.56%.
If you do, 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.