If I were to launch a quant fund today say in financial services – say a Banking Quant fund, would it be a good time?

Actually I do not know,  but let us say I do launch a fund, and I make the following rules…

1. exclude companies which are owned by rogue promoters
2. exclude companies which pay too much dividend that they do not have enough money for their own growth
3. exclude companies where there is no congruence between the owner and the managing team
4. exclude companies where the CEO does not get at least a 5 year tenure
5. exclude companies where the sole aim is not shareholder wealth creation
6. exclude companies which are run by professionals who run the company for their own benefit, shareholder be damned

Do you realize that you will not find…ANY COMPANY? Well, the problem is not that. The problem is the person MAKING THE RULES gets impacted by recency bias (so you may not see any Nbfc in my portfolio), and there is no cure against that.

Most fund managers feel that ‘ignoring’ psu is one of the best ways to generate alpha. However in the past 6 months the best performing shares in the portfolio have perhaps been SBI and ICICI. If I were making my quant fund rules I would have ignored both. I do not like both these shares – one is baboo(n) run, one is employee run. Seriously not seeing vision is something I would have held against BOTH these companies. However, i did trade in them – just clarifying – still holding – but will sell soon.

Now remember that if I had made these rules about 5 years ago I may have benefitted. The challenge is to make the rules for the next 5 years, and for that I should remove the recency bias – AND THAT is tough. If I had one of the rules as “good accounting standards and low debt”, I am sure I would have missed Reliance from 2010 (say launch date) ..and I would still not have touched it. My fund would have looked like a genius till 2017 and like an idiot from 2017 till date. No clue how we will be able to capture such mega trends.

If by some magic Namo were to energise the PSU – my Banking quant fund would look foolish because I would have missed the greatest story. Re-rating of psu banks. What if that were a reality? Would I go and change my rules..or will I brave looking like a fool till the ‘psu bank euphoria’ dies say in 3 years time? Will I have the guts? I am not sure.

If God gave me the following choices –

make everybody financially literate

make all financial services people fiduciary

make everybody understand their own financial behavior and its impact on their wealth

I seriously wonder what I would choose. I am still wondering which is the most important thing to do. From CEOs who are into empire building, from products with ridiculous charges, to sheer laziness of leaving crores of rupees in the savings account,…I do not even know which is the worst crime. Imagine if the new FM were to introduce a 50% tax on savings account interest – we would all be up in arms. However, leaving money in a savings account for 10 years is something which we will do happily.

So get these basics right – financial education, understanding your own biases, being able to look like a fool for an extended period of time (like not owning Reliance in 2016, ..and not buying it from the journey from Rs. 800 to Rs. 2600 – remember the bonus?), being contrarian (owning Psu stocks hoping for magic from Namo), holding on to Bharti Airtel – hoping tha it is Mukesh who will blink first – I HAVE NO CLUE WHAT WILL MAKE MONEY FOR ME. So I will find it difficult to lauch a rules based fund. However, if I were a big fund house, I would get the rules made ABROAD. He/ she would at least avoid the “what happened in India in the recent past” bias.

As an investor I would do something smarter. Put money in an index fund, an aggressive growth oriented flexi/multi cap fund, and some money in an Quant fund. Hopefully this combination along with a half decent fund manager I would capture the uptick in the equity market. However at 29 pe, you would have to be a magician to make money.

Oh hell, again my past bias!!!!!