If the stock market moves mimic waves in the ocean, a momentum investor sails up the crest of one, only to jump on to the next wave before the first wave crashes. When you believe that stocks that have gained in the recent past can continue to rise, you belong to the momentum investing club. Thanks to the long rally over the past years, markets have seen a flurry of momentum investing-based schemes both in the actively-managed and passively-managed mutual fund space. Joining the ranks is quant Mutual Fund with their latest offering: quant Momentum Fund. This is the second actively-managed momentum-based fund in the space, after Samco’s offering. Here is a review.

Gaining momentum

Following the prevailing trend is probably as old as the stock market. Momentum stocks are those that exhibit positive price momentum – based on the phenomenon that stocks which have performed well in the past relative to other stocks (winners) continue to perform well in the future, and stocks that have performed relatively poorly (losers) continue to perform poorly. Let winners run and cut losers fast --- this is the basic premise.

Momentum investing is based on the gap in time that exists before mean reversion occurs in a stock. Momentum is usually seen in the short- to intermediate-term. If the stock market moves mimic waves in the ocean, a momentum investor sails up the crest of one, only to jump on to the next wave before the first wave crashes.

How quant MF views momentum

At quant Mutual Fund, researchers continue to explore the momentum anomaly by channelising efforts to develop alternative asset pricing models that can better account for the complexities of market dynamics and investor behavior.

According to quant MF, these models aim to incorporate factors such as investor sentiment, market frictions, and behavioral biases to provide a more comprehensive understanding of asset pricing and market inefficiencies, addressing the challenges posed by the momentum anomaly within the realm of modern financial theory.

In terms of data analysis, quant MF considers economic outlook, cycles, seasonality, and human behavior to perceive the ‘investors’ reactions’ to the market. It then applies mathematical and statistical models to understand how these individual momentum trends can be combined as a single force multiplier for portfolios.

Fund strategy

Quant MF’s initial stock universe is BSE Allcap Index (has about 1100 stocks). Stocks are filtered based on the removal of outliers, and then quant’s VLRT filtering system is employed.

The scheme will invest at least 80 per cent in equity/equity-related instruments of companies with strong profit potential based on quant’s momentum thesis.

Driven by a thematic quantitative momentum strategy, the investment thesis aims to forecast the expected return of stocks using momentum attributes and auto-correlations to optimise the risk-return trade-off. A combination of quantitative methodologies, risk-based analysis, and systematic portfolio construction will be used to achieve investment returns.

According to quant MF, it will employ a ‘proprietary model’, which combines investor views and market equilibrium, to improve asset allocation decisions by optimising the expected risk-return tradeoff of the portfolio while ensuring skewness to the momentum strategy.

Quant Momentum Fund will have the flexibility to invest across market caps and sectors displaying strong price momentum, potentially outperforming the benchmark.

Its risk-mitigating VLRT (Valuation, Risk Appetite, Time and Liquidity) framework and predictive analytics tools will dynamically manage known risks and identify opportunities.

Existing Momentum Funds

In June this year, Samco MF had launched Samco Active Momentum Fund, which was India’s first actively-managed momentum mutual fund. The fund has outperformed BSE 500 TRI by about 600 basis points in the past 3 months (7.5 per cent fund return).

The passive mutual fund products based on momentum largely track either the Nifty 200 Momentum 30 Index or the Nifty Midcap 150 Momentum 50 Index. The latter schemes in the last 3 months have given between 8-11 per cent returns. As you can see, passive products have beaten the lone actively-managed offering in momentum space.

Barring 2-3 schemes, most of the index and ETFs based on momentum indices don’t have even a year 2-year NAV history.

Our take

Momentum investing is ideal for high-risk-taking investors only. So, only investors with a long-term horizon and high-risk appetite should consider momentum funds.

Although this is a new fund, quant MF has made its name with ‘trend following’ across different fund mandates. The fund will invest in companies based on current trends, including earnings or price movement. It has great potential for high profits over the short and long term. At the same time, any swift market downturns will cast a negative effect on momentum-based funds much more than other factor-based funds. Risk mitigation tactics can shield some downside, but not all.

For investors willing to experiment with the new fund offering, bear in mind that thematic funds should form only 10-15 per cent of your overall portfolio depending on your risk appetite/profile.

According to AMFI website, quant Momentum NFO closes November 21, 2023.

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