MUMBAI: Saurabh Mukherjea, founder of Marcellus Investment Managers, has launched a quant strategy. According to Mukherjea, the Indian economy is growing more interconnected as measured by growth in road network, broadband, bank account penetration, goods and services tax (GST) and low cost SaaS (software as a service). The interconnectedness is driving a concentration of profits in the hands of a few companies in India and this shift is being captured by quantitative models better than human analysts.
Existing mutual fund houses and PMS strategies wedded to traditional human-driven approaches have no incentive to disrupt their own business – leaving the field open to smaller players to launch quant models.
“The share of the top 20 companies in terms of profits after tax has gone from 40% of the overall profit after tax (PAT) pool in FY 2001 to 80% in FY 2022. We looked at the 10-year rolling returns of companies with above average growth in free cash flows and re-investment (which is measured by cash flows from investing divided by operating cash flows). Their free cash flows have grown at 22.9% compared to 17.6% returns in their stock prices. This means the market has not priced in their prospects adequately. Quant models such as ours have started picking up this disconnect,” Mukherjea said.
The new quant strategy, called MeritorQ, will be delivered through a registered investment adivsor (RIA) licence and will have a minimum ticket size of ₹10 lakh. It will invest in a portfolio of 35-45 stocks and it will be managed by Krishnan VR.
In MeritorQ, Mukherjea will follow a quality approach focusing on clean, well governed companies which do not have debt (leverage). This is similar to his existing portfolio management service (PMS).
However, he says, MeritorQ differs from Marcellus PMS in three ways. First, there will be more frequent churn in the portfolio. According to Mukherjea, the turnover ratio, the percentage of the portfolio that will be changed each year will be 40-50% in MeritorQ compared to 10-20% in the existing PMS.
Second, the strategy will give a high weightage to the price-to-free cash flow measure allowing it to invest in companies that are one notch below the ones that clear quality checks in the Marcellus PMS.
Third, the quant model will be based on more recent earnings of the past six years rather than the 10 year time-frame that the PMS focuses on.
Mukherjea’s MeritorQ will be launched on the Wealthdesk platform through stock brokers with whom he has tied up. “We will charge a total fee of around 2.2% – this includes the broker commission of around 1%,” he told Mint. There will be no performance fee, he added.