- 2 years ago
Passive Investment Strategies: What is a smart beta fund?
Head of ETF Products Siddharth Srivastava, Sapient Finserv's Amit Biwalkar, and My Wealth Guide's Salonee Sanghvi discuss the Mirae Asset Nifty Smallcap 250 Momentum Quality 100 ETF, the latest offering in the smart beta space.
Head of ETF Products Siddharth Srivastava, Sapient Finserv's Amit Biwalkar, and My Wealth Guide's Salonee Sanghvi discuss the Mirae Asset Nifty Smallcap 250 Momentum Quality 100 ETF, the latest offering in the smart beta space.
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00:00 (upbeat music)
00:02 - Hi, thanks so much for joining in.
00:10 This is The Mutual Fund Show on NDTV Profit,
00:13 and I'm Alex Mathew.
00:14 This show gets you actionable insight
00:16 on everything mutual fund related.
00:18 Now, in the recent past, we've had a number of conversations
00:21 about passive investment strategies.
00:24 These are mutual fund schemes
00:25 where you don't have active intervention by a fund manager.
00:30 One of the subsets of these passive strategies
00:33 is something called Smart Beta.
00:35 The latest offering in that space
00:38 is the Mirai Asset Nifty Small Cap 250
00:41 Momentum Quality 100 ETF.
00:44 It's a passive strategy that places two filters,
00:46 momentum and quality, and it's also a bit of a mouthful.
00:50 Don't worry, we'll explain everything
00:52 so that it's simple for you to understand.
00:54 At the onset, we're joined by Siddharth Srivastava,
00:57 the head of ETF products at Mirai Asset.
01:00 Thanks so much, Siddharth, for taking the time.
01:02 Like I said, it's a bit of a mouthful.
01:05 Let's understand what this is entailing,
01:09 what does it mean,
01:10 and how an investor should understand how this works.
01:13 So let's start with the overarching theme,
01:16 which is it's a smart beta product.
01:18 Can you explain that first,
01:20 and then we'll delve into this product specifically?
01:24 - I think smart beta makes it sound complicated
01:28 than it actually is.
01:31 The idea is to target a very specific behavior or a profile.
01:36 So for example, there is a factor called low volatility,
01:42 where the idea is to have a portfolio
01:45 which exhibits less volatility by picking up companies
01:50 which have lower standard deviations
01:52 compared to the same similar companies
01:55 and in a given market cap segment.
01:57 Then there is factors like quality,
02:00 that there's factors like value, growth, momentum,
02:04 where idea is to capture companies which are doing well
02:07 from a stock returns point of view
02:10 compared to the other companies.
02:12 So in smart beta, also known as factor investing,
02:16 the companies are picked based on a certain factor,
02:22 like quality, value, momentum,
02:25 and they're even weighted in the portfolio
02:28 based on those factors.
02:30 So idea is that, let's say, instead of investing in Nifty 100,
02:34 some people might come and say that I want to invest
02:37 in a large cap portfolio, which is, let's say,
02:41 more stable or less risky than a Nifty 100 itself.
02:45 So there he or she can invest in, let's say, Nifty 100,
02:49 low vol 30, where 30 companies are picked
02:51 based on less volatility.
02:54 Similarly, a person may come and say that,
02:57 I want to invest in a portfolio of large cap companies
03:01 where potential of returns is high,
03:04 I'm okay with higher risk.
03:06 Then he or she can invest in, let's say,
03:08 a momentum 30 ETF or an index fund,
03:12 where 30 companies are chosen, which are performing well.
03:16 The idea is to capture that recent trend,
03:18 but in the long term, hopefully it will outperform,
03:23 but there is obviously phases of higher volatility.
03:26 So factor investing is all about targeting
03:28 a certain behavior, a certain profile,
03:30 which you want to, from an asset allocation point of view.
03:35 - So let's explain this even further, right, Siddharth?
03:39 So because this is a passive strategy,
03:41 we're talking about no intervention from a fund manager,
03:45 and it's a very clearly defined strategy.
03:48 So there are certain rules that come into play.
03:51 You call them factors,
03:52 and they are called factors broadly, right?
03:54 So, but we are defining the boundaries of this.
03:58 So we're saying 250, that is the small cap 250,
04:03 is the wider boundary,
04:04 and we're talking about the smaller boundary,
04:06 which is 100.
04:07 100 stocks out of this 250 are selected,
04:11 and there are two filters that are given,
04:13 which is momentum and quality.
04:15 So to explain this further,
04:17 explain why you have selected, first of all, the 250,
04:21 small cap 250,
04:22 because this is the broader end of the spectrum,
04:25 and you generally see quite a bit of volatility
04:28 in this space.
04:29 - Certainly, I think you've asked the right question,
04:32 and just to build on to what I was saying earlier,
04:35 let's say typically when people invest
04:39 in small cap segment,
04:41 they are sort of concerned about,
04:44 or they want to target stocks or portfolio,
04:47 which have good liquidity,
04:49 so that they don't face issue while investing
04:52 or while redeeming.
04:53 They obviously want to achieve higher returns,
04:57 so momentum is one of the factor,
04:59 and they want to do all this
05:01 with a quality portfolio, right?
05:04 Quality is more of a concern in small cap
05:06 and micro cap segment,
05:08 compared to, let's say, a large cap segment.
05:10 So what we have done is,
05:12 and obviously, NSC has come out with this index,
05:16 that instead of simply launching a small cap 250 ETF,
05:21 where you have exposure to all 250 stocks,
05:27 here filtration is taking place.
05:29 That first, all the illiquid companies will be excluded,
05:33 all the companies which have higher promoter pledging
05:35 will be excluded,
05:36 and then 100 companies which are performing better
05:41 on quality metrics,
05:43 as well as momentum metrics,
05:45 will be shortlisted.
05:47 So ultimately, the final portfolio
05:50 will be of 100 stocks,
05:51 where sorts of these filters are used,
05:54 or rather these factors are used
05:56 to create the final portfolio.
05:58 So idea is that, hopefully, through this portfolio,
06:01 we'll be able to capture the upside momentum,
06:03 because we are using momentum as a factor,
06:07 and provide some sturdiness
06:09 whenever there is, let's say, a market correction,
06:12 or let's say, a longer phase of--
06:16 - Sure, so Siddharth, I want to understand
06:18 these two factors and how you've defined them.
06:20 There are obviously certain very quantifiable rules
06:22 that you've set,
06:24 that'll help you understand which stocks qualify, right?
06:27 So first explain momentum.
06:29 What is the definition of momentum
06:31 when it comes to this particular scheme?
06:33 - So all these factors have been well-researched,
06:38 and they have been used on the active side.
06:40 And as you mentioned that,
06:42 they are now defined in a very rule-based manner
06:45 to shortlist stocks.
06:46 So momentum, for example,
06:47 is defined as risk-adjusted momentum.
06:50 So whatever the return stock is generating
06:53 in, let's say, last six-month or 12-month period,
06:56 divided by the risk or volatility
06:59 which that stock is generating.
07:01 So it's simply return generated per unit of risk.
07:06 - A little complicated.
07:07 So would it be possible for you
07:09 to break it down for us even further?
07:11 I'm understanding momentum as a stock
07:15 that has outperformed or that has gained
07:17 quite significantly over a period of time.
07:20 And you have also said that this is also determined
07:24 based on the risk involved, which is the volatility, right?
07:27 - So let's take a very simple example.
07:29 Let's say there are three stocks.
07:30 - Sure.
07:31 - A, B, C.
07:32 A and B have generated, let's say,
07:36 20% return each in last 12-month period,
07:39 whereas C has given just 10% return.
07:41 So for me, A and B has higher momentum.
07:44 But within A and B, let's say B has higher volatility.
07:49 It has sort of moved up and down more, right?
07:52 Hence, has exhibited more risk.
07:54 So for risk-adjusted momentum,
07:57 you will end up selecting A
08:00 because not only it has generated higher return,
08:02 but has sort of exhibited lower volatility also.
08:06 - Now, how do you define quality?
08:08 Because quality and the way that I've looked at quality,
08:12 it's always usually on the larger end of the spectrum, right?
08:16 - Yes.
08:17 So quality, again, there can be several ways to define it.
08:21 But broadly, whenever you want to assess a company
08:24 on quality metrics, you look at profitability,
08:27 you look at financial health,
08:29 and you look at earning stability.
08:31 So in this index,
08:34 the profitability is defined by return on equity.
08:37 The financial health is defined by leverage,
08:41 which is debt-to-equity ratio.
08:43 And earnings stability is sort of defined
08:46 by how stable the EPS has been in last six years.
08:51 So again, a bit technical,
08:52 but if you just focus on three factors
08:54 that you're using, profitability, financial health,
08:57 and earning stability as a metric
09:00 to gauge how sturdy a company is,
09:03 then that is used to define a quality for a company.
09:07 - Okay.
09:08 So, and in fact, that was actually quite easy to understand.
09:11 But the last aspect is,
09:13 I'm sure when you're launching a product like this,
09:15 you've back-tested it.
09:17 And the benchmark in this case,
09:19 I would think would be the small cap index.
09:21 So against that, how is this strategy,
09:24 or how would this strategy have worked?
09:27 - So basically, as I mentioned earlier,
09:30 that momentum typically performs better in a bull run,
09:34 whereas quality typically shows sturdiness,
09:37 stability in bad market times, right?
09:41 Especially when there's a reasonable correction.
09:44 So by mixing momentum and quality,
09:46 the idea is to capture a bit of upside momentum
09:50 and ensuring portfolio sturdiness in bad market phases.
09:53 And that is what we have seen in the back-testing.
09:57 It outperforms the broader segment
10:00 in almost 16 out of 18 calendar years.
10:03 It gives that consistent seven to 8% alpha
10:08 for our investment horizon of three year,
10:10 five year consistently.
10:13 But as I mentioned, that more stark observation,
10:16 and which is why we are coming out with this fund,
10:18 is that it not only captures the upside momentum,
10:21 but provides sturdiness during bad times,
10:24 and sorts of fits in all with the portfolio.
10:27 It also outperforms, surprisingly,
10:29 80% of active small-cap funds
10:32 in last one year, seven year, and 10 year horizon.
10:35 So while it's a passive scheme,
10:36 it is doing fairly well when it is being compared
10:39 to active schemes as well.
10:41 - Absolutely, all right.
10:42 Thanks so much for joining in, Siddharth,
10:44 and breaking that down for us.
10:46 Viewers, let's delve a little deeper into this
10:49 and see where this fits into your portfolio.
10:51 As Siddharth pointed out,
10:53 there are quite a few timeframes
10:55 in which this has beaten,
10:56 even the actively managed funds.
10:58 Now we've been speaking about the Mirai Asset
11:02 Nifty Small-Cap 250 Momentum Quality 100 ETF.
11:07 And while that sounds like a mouthful,
11:09 we have actually broken it down for you
11:11 so that you understand what this is all about.
11:13 The question is, where does it fit in your portfolio?
11:16 And we've got Amit Bivalkar, as well as Saloni Sangui
11:22 joining in to give you some perspective on all of that.
11:26 Now, we were speaking with the fund manager
11:31 of this particular ETF,
11:32 and he was explaining how this works,
11:34 but I'm curious what you make of this as well.
11:37 So Saloni, first I'll come to you.
11:39 The combination of momentum as well as quality
11:43 in the broader market space,
11:44 not something that we've seen very often,
11:46 what do you make of it?
11:47 - So I think momentum essentially means
11:50 buying stocks that have performed well recently,
11:54 assuming that the outperformers of the recent past
11:57 are also going to be outperformers in the future.
12:00 It works mainly because of investor behavior
12:04 where once a stock starts doing well,
12:06 a lot more people then want to invest in that.
12:09 But a momentum strategy by itself
12:11 can have higher drawdown,
12:13 especially in a turbulent market.
12:16 On the other hand, you have quality,
12:18 which essentially involves investing
12:19 in profitable stable companies with strong balance sheet.
12:23 And high quality companies are actually stable,
12:27 especially during bear market.
12:29 So momentum helps you capture the short-term gain,
12:33 whereas quality gives you long-term stability.
12:37 I think concentrating only on one factor can backfire,
12:42 especially if the factor goes out of favor.
12:44 So a multi-factor strategy that combines
12:47 both of these factors could actually provide alpha
12:51 while still maintaining the downside.
12:53 And it's better than concentrating only on one factor.
12:57 - Got it.
12:57 Amit, according to Mirai,
13:01 and I've seen the presentation,
13:03 seemingly this is the case,
13:05 in certain timeframes,
13:06 and we're talking about one year, seven year, 10 year,
13:08 it has outperformed quite a large chunk
13:10 of the actively managed funds.
13:12 It seemingly beat the benchmark as well.
13:15 But is it that simple an answer that,
13:18 it's back-tested, it works,
13:20 buy it in your portfolio?
13:22 What should an investor bear in mind?
13:24 - Basically, all these data is what every presentation has
13:30 on the factor investing are all backdated.
13:34 They are not tested live for data.
13:36 So you have to actually see as to how the fund
13:39 is going to perform in a live market with live money.
13:42 To understand this, Alex,
13:45 I think we have to understand what is beta.
13:47 And beta means the Sensex or the Nifty Return,
13:50 basically the index return.
13:52 And when you say a smart beta,
13:54 it means that out of the design,
13:57 which is of fixed weightages of stocks,
14:00 you will select something and assign it weights
14:02 which are different from the market.
14:04 So when you combine these three, four factors,
14:07 like currently we have momentum and quality.
14:10 Momentum is based on past performance
14:12 and quality is based on the ROC, ROE of those companies
14:15 what you're going to select.
14:17 So if you have multiple factors
14:20 which are going to go in a fund,
14:21 like say low volatility or growth or quality or momentum,
14:26 then it creates a lot of confusion.
14:30 People who come into mutual funds,
14:32 they generally come for,
14:34 I mean, one who comes into a mutual fund
14:37 is somebody who says that,
14:38 "I don't know, let the fund manager take a call."
14:41 Now, if you want to enter a passive fund,
14:44 but with the active fund management approach
14:46 through factor investing,
14:48 then those kinds of investors,
14:50 Alex should go into such kind of smart beta funds.
14:52 - Okay, fair point.
14:54 The question then arises as to how much of an allocation
14:58 can go into this,
14:59 because Saloni, you pointed out
15:01 that the design of this particular strategy
15:05 is supposed to give you the best of both worlds.
15:07 While the markets are going up in a bull market,
15:10 it's supposed to give you outsized returns
15:12 and it's also supposed to protect your downside
15:14 because it invests in quality companies.
15:17 The question is, it's still a broader market fund
15:20 and so therefore the risk involved is significant
15:22 and I'm pretty sure that this will be a high risk fund
15:26 like most equity funds are.
15:27 So how much of an allocation is appropriate?
15:31 - I think first one needs to look at that asset allocation
15:35 based on their risk taking ability
15:37 and the duration of holding
15:39 and decide a small cap as a category
15:41 even fits within their portfolio
15:43 because small cap is not a category
15:45 that every investor may want to invest in.
15:49 But if you look at within the small cap allocation,
15:52 I think one can look at about a 25 to 30% allocation
15:56 towards such a strategy,
15:58 within the overall small cap allocation.
16:01 Just one thing is that before investing,
16:04 it's important to understand that different factors
16:07 work differently in different market conditions.
16:11 And the effectiveness of such strategy,
16:13 again, as Amit mentioned, since it's back-tested,
16:16 depends on the effectiveness of those factors in live market
16:19 and the ever-changing correlation with the market.
16:23 So again, I would only look at this for a small cap allocation
16:27 and I would only look at this
16:28 for a since it's an aggressive strategy,
16:30 I would only look at this for somebody
16:33 who has knowledge and who understands
16:35 how the different factors work
16:37 and not for someone who's looking for income
16:39 or capital preservation.
16:41 - Fair point, all right.
16:42 I've got a few questions and by the way,
16:46 that number on your screen is meant for you
16:49 to send messages to us on WhatsApp
16:52 and we can take all of those questions.
16:54 We've got a couple of questions
16:55 that we're going to look at today.
16:57 The first one is from Narayan.
16:59 He says that he is aged 47 years
17:03 and he's got an SIP of 1.5 lakhs
17:08 in HDFC Balanced Advantage Fund
17:10 to balance the volatility, he says, in his portfolio.
17:15 He's got as much as 2.24 crore in a PMS
17:20 and he's looking to achieve a corpus,
17:23 a four crore before he retires in four years.
17:27 So I'll come to you on this one, Amit.
17:30 It's a little bit challenging, I'm sure,
17:32 because you don't have his entire details,
17:34 but the question is, has he invested
17:37 in a good Balanced Advantage Fund?
17:40 - So I think Balanced Advantage Funds
17:44 give you asset allocation mix
17:47 according to the structure of the portfolio.
17:50 So in case of any of the Balanced Advantage Funds,
17:52 you need to look at what is the objective of that fund,
17:56 whether they can move between debt and equity
17:59 as per your requirement,
18:01 and whether they are actually protecting your downside
18:05 when markets actually turn negative.
18:08 In a interest rate scenario going forward, Alex,
18:12 where you will see that interest rates
18:15 might come down over the next two, three years,
18:17 having a 30, 40% allocation to debt in a portfolio
18:21 will not hurt,
18:23 and you are accruing at a good 7% today.
18:26 So if you have a fund
18:27 which has a combination of debt and equity,
18:30 where your debt also might give you
18:32 at that 7, 8% kind of return over the next three, four years
18:36 and plus you will be protected from volatility
18:39 if the markets turn bearish,
18:41 and you have inbuilt insurance by having debt
18:43 as well as equity in a single portfolio
18:46 where your taxation also is taken care of,
18:49 I think Balanced Advantage Fund fits the bill.
18:52 So that was to that question,
18:55 whether A fund is better or B fund is better,
18:59 I think over a long period of time,
19:01 all the funds actually typically return
19:03 over the same period, absolutely similar returns.
19:07 So it's more to do with the objective of the fund
19:09 and how it has managed volatility in the recent past.
19:13 If you look at March 22, March 23,
19:16 index was at the same level.
19:18 So you should actually gauge the fund,
19:20 how is it doing in a flat market,
19:22 in a bear market and in a bull market,
19:24 and then take a call on that.
19:26 - Fair point.
19:27 And your point on the potential for returns
19:29 in the fixed income component
19:31 of the Balanced Advantage Fund,
19:33 given the potential for the change
19:35 in the interest rate scenario, Amit, is well taken.
19:38 Thanks so much for joining in,
19:40 both Amit as well as Saloni,
19:42 and for giving us a breakdown in fact,
19:45 on the momentum quality strategy
19:47 that has been launched by Mirai Asset.
19:50 Now, we were only able to take one question today,
19:53 but we should be able to take more tomorrow.
19:55 So don't hesitate to send your queries to us
19:57 on that number on your screen.
19:59 In the meanwhile, that brings us to the end
20:01 of this particular edition of the Mutual Fund Show.
20:03 It's been an absolute pleasure bringing it to you.
20:05 Do stay tuned, lots more coming up over the course of the day
20:08 and this is NDTV Profit.
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