Tag: quant

The Best Mutual Funds – Quantitative

shyam May 28, 2015

Introduction

Mutual fund investors are faced with a zillion choices in the marketplace. At last count, there were more than 5300 different schemes that an investor could choose from. When confronted with such a large number of choices, investors either spiral into an “analysis paralysis” mode and end up doing nothing or blindly invest in whatever their broker recommends – both these paths lead to situations that are injurious to the investor’s long-term financial health.

In this post, we try to simplify the choices in front of the investor by ranking the top 10 funds based these risk metrics: sharpe ratio, bear-beta, information ratio, draw-down depth and draw-down length between Jan-2010 and May-2015.

Sharpe Ratio

Fund	SHARPE	IRR
ICICI Prudential Blended Plan A – Regular Plan – Growth	0.35	2.12
Birla Sun Life MNC Fund-Plan B (Growth)	0.10	24.25
UTI – MNC Fund (UGS 10000)-Growth Option	0.09	17.14
Edelweiss Absolute Return Fund – Growth Option	0.08	3.87
Birla Sun Life Asset Allocation Fund-Conservative Plan-Growth Plan	0.08	2.14
Franklin India Pension Plan-Growth	0.08	3.67
Escorts Leading Sectors Fund – Growth Option	0.07	5.79
Axis Long Term Equity Fund – Growth	0.07	17.29
ICICI Prudential Balanced Advantage Fund – Regular Plan – Growth	0.07	5.57
HDFC Balanced Fund – Growth Option	0.07	8.11

The Sharpe ratio is a measure of risk-adjusted performance of a fund.

Glad to see the two MNC funds that we have been recommending our clients make the top end of this list.

But also note the single digit IRR funds.

Bear-Beta

Fund	BETA BEAR	IRR
ICICI Prudential Blended Plan A – Regular Plan – Growth	-0.03	2.12
Birla Sun Life International Equity Fund Plan A- Growth	0.05	4.81
Bsl Comm Eq Fund – Global Agri Plan – Growth	0.08	1.56
Birla Sun Life Asset Allocation Fund-Conservative Plan-Growth Plan	0.20	2.14
Edelweiss Absolute Return Fund – Growth Option	0.25	3.87
Franklin Asian Equity Fund – Growth Plan	0.27	2.71
Franklin India Pension Plan-Growth	0.30	3.67
ICICI Prudential Moderate – Regular Plan – Growth	0.33	2.81
Franklin India Dynamic PE Ratio Fund of Funds-Growth	0.37	2.86
ICICI Prudential Very Aggressive – Regular Plan – Growth	0.41	2.37

Bear Beta is a measure of the sensitivity of a fund’s return to negative changes in its benchmark’s return.

Given the single digit IRRs that test will for this metric, investors can ignore the bear-beta.

Information Ratio

Fund	IR	IRR
HDFC MID-CAP OPPORTUNITIES FUND – Growth Option	2.05	15.96
JPMorgan India Mid and Small Cap Fund – Regular Plan – Growth Option	1.95	13.96
Religare Invesco MID N SMALL CAP Fund – Growth Option	1.84	16.84
Canara Robeco Emerging Equities – Regular Plan – GROWTH	1.83	17.31
ICICI Prudential Value Discovery Fund – Regular Plan – Growth	1.73	13.27
Franklin India Smaller Companies Fund-Growth	1.71	15.23
UTI Mid Cap Fund-Growth Option	1.69	12.55
Birla Sun Life MNC Fund-Plan B (Growth)	1.57	24.25
Religare Invesco Mid Cap Fund – Growth Option	1.55	13.35
Axis Long Term Equity Fund – Growth	1.53	17.29

The information ratio is a ratio of the portfolio’s returns above the returns of a benchmark (CNX MIDCAP, in this case) to the volatility of those returns.

This is probably a better metric than the Sharpe ratio to rank funds.

Nice to see that both the Value Discovery fund and an MNC fund make this list.

Draw-down Depth

Fund	DRAW DEPTH	IRR
ICICI Prudential Blended Plan A – Regular Plan – Growth	-0.35	2.12
Edelweiss Absolute Return Fund – Growth Option	-7.46	3.87
Birla Sun Life Asset Allocation Fund-Conservative Plan-Growth Plan	-9.69	2.14
Franklin India Pension Plan-Growth	-10.87	3.67
ICICI Prudential Moderate – Regular Plan – Growth	-11.57	2.81
Birla Sun Life Asset Allocation Fund-Moderate Plan-Growth Plan	-12.05	2.71
Franklin India Dynamic PE Ratio Fund of Funds-Growth	-12.06	2.86
ICICI Prudential Balanced Advantage Fund – Regular Plan – Growth	-13.00	5.57
ICICI Prudential Balanced Fund – Regular Plan – Growth	-13.26	7.30
ICICI Prudential Very Aggressive – Regular Plan – Growth	-13.81	2.37

Draw-down depth measures the max-loss from peak valuation.

For example, the Blended Plan at the top of the list only lost 0.35% from its peak valuation between 2010 and 2015.

Portfolios with a lot of short-term bonds test well for this metric. But note the pathetic IRRs – no pain = no gain!

Draw-down Length

Fund	DRAW LENGTH	IRR
Franklin India Dynamic PE Ratio Fund of Funds-Growth	110.00	2.86
HDFC Balanced Fund – Growth Option	126.00	8.11
ICICI Prudential Balanced Fund – Regular Plan – Growth	126.00	7.30
ICICI Prudential Balanced Advantage Fund – Regular Plan – Growth	128.00	5.57
UTI – MNC Fund (UGS 10000)-Growth Option	140.00	17.14
Birla Sun Life MNC Fund-Plan B (Growth)	141.00	24.25
Franklin India Pension Plan-Growth	158.00	3.67
Birla Sun Life International Equity Fund Plan A- Growth	190.00	4.81
Principal Global Opportunities Fund-Growth Option	194.00	1.71
Sundaram Global Advantage Fund Growth	207.00	1.44

The draw-down length is a measure of how many days it took the fund to get back the previous peak valuation after a draw-down.

Shorter bounce-backs typically indicate high-quality portfolios.

Nice to see both the MNC funds make this list.

Past Performance

Fund	BETA	IRR
Birla Sun Life MNC Fund-Plan B (Growth)	0.55	24.25
Canara Robeco Emerging Equities – Regular Plan – GROWTH	0.78	17.31
Axis Long Term Equity Fund – Growth	0.69	17.29
UTI – MNC Fund (UGS 10000)-Growth Option	0.54	17.14
Religare Invesco MID N SMALL CAP Fund – Growth Option	0.73	16.84
HDFC MID-CAP OPPORTUNITIES FUND – Growth Option	0.76	15.96
Franklin India Smaller Companies Fund-Growth	0.76	15.23
JPMorgan India Mid and Small Cap Fund – Regular Plan – Growth Option	0.80	13.96
Religare Invesco Mid Cap Fund – Growth Option	0.74	13.35
ICICI Prudential Value Discovery Fund – Regular Plan – Growth	0.78	13.27

We wanted to check if higher returns were achieved by taking higher risk. Given the low betas (against CNX MIDCAP), it looks like these funds have taken the “right” risk.

Conclusion

We looked at broad spectrum of funds – including those with bond allocations – to ferret out a good set of funds that investors can consider. Depending on what is more important to the investor, the appropriate set of metrics can be weighted to fit individual risk appetites.

Mutual fund investors whom we advise will immediately recognize some of these funds as they are already part of their portfolios. Get in touch with us if you are looking to invest! Call us or Whatsapp us at +918026650232

Categories Investing Insight, Your Money Tags mutual funds, quant

Practical Momentum – Conclusion

shyam May 21, 2015May 21, 2015

Recap

We began the exploration of a practical way to execute momentum using derivatives. We found that:

A lookback period of one year works best (Part I)
Because of survivorship bias, long-short underperforms long-only (Part II)
Hedging with single-name put options doesn’t work(Part III)
Larger long-only portfolios have smaller drawdowns and better performance than smaller long-only portfolios (Part III)

Conclusion

The way things stand, Momentum is best executed using a broad basket of stocks. There is no mechanical way to maintain a momentum driven derivative portfolio. You can explore long-only equity momentum here.

Categories Investing Insight, Your Money Tags momentum, quant

Practical Momentum Part III – Hedging

shyam May 20, 2015May 20, 2015

Introduction

In Part II of our Practical Momentum series, we saw how adding a volatility adjustment significantly improved portfolio returns. However, we were left with a nagging observation that long-only returns were much higher than long-short returns. The problem with a long-only futures portfolio is that draw-downs can wipe you out. But what if we hedged the portfolio?

You can hedge a portfolio in two ways: (a) buy individual put options, and (b) calculate the beta of the portfolio and short an appropriate multiple of NIFTY futures. The problem with option (b) is that it will not protect you against idiosyncratic risk. For example, say you are long a pharma stock and the USFDA issues an import alert, the stock will tank irrespective of the NIFTY. So for the purposes of this simulation, we will try option (a)

Hedged Long-Only Momentum

With 5 long-futures hedged with long put-options below the purchase price:

black line shows long-only; red shows hedged long-only

hedged.momentum

A portfolio hedged with single-name put options performs poorly:

There is always a d between the option payout and the underlying
?-decay eats away more of the option value than the protection it offers

Another way to make draw-downs shallower is to diversify. When we increased the number of stocks in our long-only equity momentum portfolio from 10 to 20, it reduced portfolio volatility and boosted returns. Here’s how a 10-count long-only momentum portfolio compares with the 5 from above:

black line shows a 5-item long-only portfolio returns; red shows 10
five10.momentum

Conclusion

The problem with leveraged momentum is that losses can wipe you out. Hedging it with single-name options doesn’t work. Are we stuck with unlevered momentum? We will explore this in the next post. Stay tuned!

Categories Investing Insight, Your Money Tags momentum, options, quant

Practical Momentum, Part II – Volatility Adjustment

shyam May 16, 2015

Introduction

Previously, we ran back-tests on long-only and long-short momentum algorithm over a couple of look-back periods. We found that (a) momentum with a one-year look-back period out-performed one with a 100-day look-back, and (b) a long-only portfolio significantly out-performed a long-short portfolio. We hypothesize that this is probably because the universe of stocks that we are forced to consider was heavily plucked. But what if we added a volatility metric into the mix to smooth out draw-downs?

Long-only Momentum

First, lets take a look at the long-only portfolio; both with a one-year look-back:

The red line is the volatility adjusted momentum; black is naive momentum; and green is buy & hold Nifty
long-only-momentum.volatility.2005-2010

long-only-momentum.volatility.2011-2014.

By year:

Adding volatility into the mix did nothing to drawdowns but boosted returns considerably – with volatility adjusted momentum out-performing the naive version in 7 out of 10 years.

Long-short Momentum

Long-short ended up under-performing long-only once again:

The red line is long-short momentum; black is long-only momentum; and green is buy & hold Nifty
long-short-momentum.volatility.2005-2010

long-short-momentum.volatility.2011-2014

By year:

long-short-momentum2

Conclusion

Over the long run, long-only momentum with volatility adjustment outperformed the long-short version. However, while long-only tanked with the rest of the market in 2008, long-short was in the green. So if you are one of those guys who ask “how did this strategy perform in 2008?” Well, it performed pretty well. But would you have stuck by it when it got shellacked in 2013?

The problem with steep drawdowns is that it makes implementing the strategy with derivatives or leverage difficult. Margin calls might force you to abandon the strategy just before it turns. Next, we will explore a hedged long-only momentum strategy. Stay tuned!

Categories Investing Insight, Your Money Tags momentum, quant

Practical Momentum, Part I

shyam May 15, 2015

Introduction

Momentum effects are one of the premier anomalies in the market and we have been running an equity long-only momentum strategy since 2013 with returns of +64.44% vs. Nifty’s +27.25% so far. Given the success of long-only equity momentum, we were curious as to how a long-short version of it would perform in India given our unique constraints. And also investigate if its success could be replicated using derivatives.

Typically, academic research that discuss momentum tide over the difficulty involved in shorting stocks. In India, you can only short stocks through SLBS in quantities that are multiples of the lot-size. And only those stocks that are allowed in the F&O segment can be borrowed for selling short. In order to overcome these constraints, we restricted our universe of stocks to only those that have been in the F&O segment since Jan 2004. There are grand total of 97 stocks that fit this criteria.

The biggest problem with choosing such a restricted universe is survivorship bias. One can argue that the stocks that survived from 2004 through 2015 and had enough liquidity to be listed in F&O would have stronger long-term momentum than those that do not. If this is true, then it doesn’t make sense going short. We will see if this hypothesis is confirmed in our back-test.

Long-only Momentum

Typically, momentum strategies are run using a one-year look-back period. We wanted to check what kind of impact shorter look-back periods had on overall returns. The following results are for going long (equally weighted) the top 5 stocks in our universe at the beginning of every month and holding it for one month.

The red line is the one-year look-back momentum; black is 100-day look-back momentum; and green is buy & hold Nifty

By year:

Long-short Momentum

You would think that shorting “weak” stocks should give returns comparable to going long “strong” stocks. But that doesn’t seem to be the case. The short-portfolio was always a drag on performance and made returns more volatile.

Conclusion

A long-only momentum strategy with a one-year look-back beat the pants out of both the Nifty and the long-short strategy. This could be because the pool of stocks in F&O show strong survivorship bias. We will continue to investigate if the short portfolio can be made more efficient. Stay tuned!

Categories Investing Insight, Your Money Tags momentum, quant