One more quantitative fund
SBI Mutual Fund, in which Societe Generale Asset Management has a 37% stake, has filed an offer document of its SBI WISE Fund with SEBI for approval. WISE Fund stands for Winning Investment Strategies in Equities Fund. This Fund is an open-ended diversified growth scheme. The scheme would invest in stocks which are the constituents of SGI (Societe Generale Index 1) WISE India Index, an index based on a quantitative model. As per the investment strategy it will use a screening and scoring model. The stock universe for the fund would be all the stocks listed in National Stock Exchange. Under the screening of the stock universe, the fund manager would follow two parameters. Firstly the stocks would be chosen on the basis of market capitalisation which are greater than Rs2,500 crore and in the second step the stocks would be selected if the 60-day average daily volume would be greater than Rs5 crore. This screening would result in a list of stocks which are primarily large cap.
 
After the screening is done, the Fund would score the stocks on two criteria— stock spot performance/earnings momentum and fundamental/valuation parameters. The first would include price-specific aspects like price momentum of the stock, short-term variation in the stock holdings by professional investors and future earnings momentum. The second criteria would include aspects based on a company’s balance sheet and profit and loss account with parameters such as cash flow growth (estimated), earning before interest tax, earning per share (EPS), price to earnings ratio (PE) and enterprise value. After every stock has been given a score, stocks which comprise the final index constituents are selected from the top 33% of the stocks with the highest averaged score. Finally the investment manager would make investments in constituents of SGI Wise India Index on an equal weighting basis. The scheme would be benchmarked against CNX 100.
 
Will it work? Any quantitative approach has the advantage of removing the fund manager’s bias. However, it also brings in rigidity to the stock selection process. What kills fund performance is fixed belief as a much as absence of rigorous method. There are two funds based on quantitative models. Of this, Reliance Quant Plus Fund has gained 9% against a 1% rise in its benchmark S&P Nifty since inception while Religare AGILE Fund (earlier under Lotus) has declined 24% while the S&P Nifty has declined 7%. The SBI model intends to chase momentum. If it can do that successfully the scheme will do well. But chasing momentum is the specialty of traders, not fund managers.
-Swapnil Suvarna [email protected]
 
 
 
 
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