Quantum Long-Term Equity Fund

The investment objective of the Scheme is to achieve long-term capital appreciation by investing primarily in shares of companies that will typically be included in the BSE 200 and are in a position to benefit from the growth and development of the Indian economy and its markets. However, there is no assurance that the investment objective of the Scheme will be achieved.*
*Source: Offer document

Quantum Long Term Equity Fund (QLTEF) is a value fund. Put simply 'value-investing' involves buying shares of companies that are 'under valued' and selling them when the mispricing is corrected. It involves scouting for companies with sound fundamentals (sales, profits, cash flows among other factors) that are trading at a discount to their fair value. The value investor then waits for the stock price of the company to reflect its true value; and when it does, he books a profit.

Given that the there are few 'true blue' value funds in the country to begin with, QLTEF does not have many peers in the industry. In our view, the fund is distinct from the existing value funds in at least four aspects. It has defined a liquidity criterion for investing in a stock. It will not invest in a stock unless the stock has significant daily volumes. So a lot of mid/small caps that find their way in the portfolios of other value funds will not make it to QLTEF's portfolio. This will help in 'de-risking' the portfolio considerably, since mid/small caps can add to the volatility during market turbulence.

Another aspect wherein investors will find QLTEF's style a departure from its peers is in its willingness to hold cash (upto a maximum of 35% of net assets) at times when investment opportunities are not there. Given the fund's disciplined value style of investing, it recognises that it may not always find stocks at a price that meet its investment criteria. For this purpose, it will be in cash till such a time that it can invest in stocks that fall within its parameters of value.

A high exit load is another aspect unique to QLTEF. While a lot of equity funds have an exit load to discourage investors from exiting prematurely, QLTEF's exit load structure is rather interesting. An exit within 6 months of investment is slapped with a 4% exit load; the exit load continues till 24 months (i.e. 1% exit load) of investment. This will ensure that the fund attracts only the serious investor willing to wait for the desired time frame for the fund's investments to deliver according to parameters of its value style.

While equity investments should always be made with a long term perspective (at least 3 years in our view), a value fund like QLTEF will really need that time frame for its investment calls to deliver. So unlike with growth funds, returns in QLTEF may not come in a hurry. Investors must consider this fact before committing monies to QLTEF.

On the flipside, QLTEF does not have any entry load, neither during the NFO period, nor on an ongoing basis. This ensures that the entire monies mobilised by the fund from the investors is put to work. For instance, if an equity has a 2% entry load, then only Rs 98 (out of every Rs 100) is invested, the balance Rs 2 is set aside to meet marketing and distribution expenses. In QLTEF's case, the entire Rs 100 will be invested, since there is no entry load and therefore no initial marketing and distribution expenses.

Although this is the first fund for the retail investor from Quantum Asset Management Company, the sponsors of the AMC - Quantum Advisors Pvt. Ltd., aren't alien to the Indian equity markets. Mr. Ajit Dayal (who is also Chairman of Quantum Information Services Ltd., of which Personalfn is a division) was responsible for bringing Jardine Fleming (now JP Morgan) to Indian shores and headed its equity research division. Quantum Advisors Pvt. Ltd. has advised the Indian investments of offshore funds from Prolific Asset Management Limited, U.K (US$ 11 m investments in Indian equities) and Hansberger Global Investors, USA (US$ 70 m investments in Indian equities) over a combined investment tenure of 8 years.

In our view, QLTEF's disciplined value style of investing will suit investors with moderate risk appetite and a 3-Yr time frame. Given that the fund will not shy from holding cash, investors may well find it trailing competition (who are fully invested in equities) during a market upturn. But over a cycle, the fund should compare favourably with its peers.

The fund will have a portfolio of about 25-40 stocks with an average holding of 2.5% to 4.0% in each stock. The fund will employ the bottom-up investment approach. In line with this strategy, it will make stock calls and not sectoral calls. However, it will attempt to diversify across stocks and sectors at all times so as to reduce risk.

In our view, a disciplined value fund will need a longish investment time frame of at least 3 years to meet the value investor's expectations. The fund's strategy to invest in cash in the event of scarce investment opportunities (from the value perspective) could mean that it will trail its peers during a stock market rally. On the flipside, during a market downturn, it is better geared than most of its aggressive peers to protect the value of its portfolio from erosion.