![[Title to come]
[Sub-Title to come]
Strictly for Intended Recipients OnlyDate
* DSP India Fund is the Company incorporated in Mauritius, under which ILSF is the corresponding share class
November 2019
| People | Processes | Performance |
DSP Quant Fund
Investment Process](https://image.slidesharecdn.com/dspquantfund-investmentprocess-191111115310/85/DSP-Quant-Fund-Investment-Process-1-320.jpg)
DSP Quant Fund - Investment Process
- 1. [Title to come] [Sub-Title to come] Strictly for Intended Recipients OnlyDate * DSP India Fund is the Company incorporated in Mauritius, under which ILSF is the corresponding share class November 2019 | People | Processes | Performance | DSP Quant Fund Investment Process
- 2. 2 Investment Process ELIMINATE STOCKS from the S&P BSE 200 Index SELECT GOOD COMPANIES from the above shortlist ASSIGN WEIGHTS to create the final portfolio 200 stock universe ~ 100 stocks 30 – 50 stocks Exclude stocks which may destroy value × High debt × Excessive volatility in stock prices × Inefficient capital allocators × Poor quality of reported earnings Select final list by ranking stocks based on average scores for: ✅ Quality ✅ Growth ✅ Value Weights assigned to manage risks Single Stock exposure limits Single Sector exposure limits Exposure limits based on stock liquidity Model converts sound investing principles into a RULES BASED investment process BASED ON A QUANT MODEL REVIEW & REBALANCE every six months (Mar & Sep)
- 3. 3 Stage 1 : Elimination process Eliminating likely value destroyers is a principal consideration of the strategy Identify characteristics that often lead to value destruction Companies which display these characteristics are eliminated from the investable universe 200 STOCKS (Components of the S&P BSE 200 Index) ~ 100 STOCKS (Shortlist for next stage) WHY ELIMINATION IS A CRITICAL PART OF THE PROCESS 22.0% 20.3% 11.2% 18.6% 11.1% 10.2% 6.7% 5.5% 3.5% 10.9% 4.6% 7.9% 16.8% -1.4% 1.6% -5% 0% 5% 10% 15% 20% 25% 2005-2010 2010-2015 2015-Now Returns QUANT MODEL VS. BSE 200 TRI VS. ELIMINATED STOCK BASKETS Quant Model BSE 200 TRI High Beta High Leverage S&P BSE PSU index ENTIRE PERIOD QUANT MODEL S&P BSE 200 TRI S&P BSE PSU INDEX HIGH BETA BASKET HIGH LEVERAGE BASKET RETURNS 17.9% 13.1% 5.0% 5.2% 7.6% STD. DEVIATION 18.7% 22.5% 24.2% 33.6% 28.8% RETURN/RISK 0.96 0.58 0.21 0.16 0.26 *Note: The performance numbers are Total return series from 30-Sep-2005 to 31-Mar-2019. Eliminated stock portfolios created using BSE 200 constituents that meet the elimination criteria described in the previous slide at every rebalance. Weighting is proportional to their weights in BSE 200 index. The portfolios are rebalanced every March and September. Data Source: FactSet, MFIE. Past performance may or may not sustain in future and should not be used as a basis for comparison with other investments. These figures pertain to performance of the model and do not in any manner indicate the returns/performance of the Scheme. One cannot invest directly in an index. 2015 onwards*
- 4. 4 Stage 1 : Criteria used for elimination Difficulty to service interest payments Raises risk of defaults which further tightens liquidity In case of defaults, creditors get preference over equity holders × High DEBT TO EQUITY (applicable to all sectors ex financials) HIGHLY LEVERAGED COMPANIES × High BETA HIGHLY VOLATILE STOCKS NON-ALIGMENT OF MANAGEMENT INCENTIVES POOR QUALITY OF REPORTED EARNINGS × High PRICE VOLATILITY Typically highly cyclical businesses Disproportionately high stock price volatility on a relative & absolute basis Potential red flag Haven’t added value to equity holders over the long term × Ownership Criteria Shareholder wealth creation is not a primary goal Business decisions maybe driven by other considerations Minority shareholders get sub-optimal returns × LOW reliability of earnings × WEAK balance sheets × POOR cash conversion × Potential governance issues Accounting & Management issues can lead to severe value destruction Forensic analysis of financials disclosures can throw up potential red flags Extensive criteria to identify and eliminate potential value destroyers from the investible universe
- 5. 5 Details of Forensic Analysis PARAMETERS CONSIDERED IN THE FORENSIC OVERLAY REPORTED EARNINGS QUALITY BALANCE SHEET HEALTH WORKING CAPITAL CYCLE ANALYSIS FOR FINANCIALS : ALM, ASSET QUALITY ETC. MANAGEMENT ACTIONS Large divergence in accounting v/s cash flow entries suggest aggressive accounting policies Examples: Divergence in × EBITDA v/s Cash Flow from Operations × Interest entry in Cash Flow Statement v/s P&L Statement × Annual depreciation rates Badly managed balance sheets at higher risk of financial distress Examples: Weak metrics on × Interest coverage ratio × Debt/Equity market capitalization × Credit rating Cash flow conversion & liquidity issues are early signs of business problems Example: Variability and deterioration in × Debtor days, inventory days and creditor days Aggressive growth -> Asset quality issues-> Solvency risk High short term funding -> Liquidity risk Examples: × High NPA growth × High Short term debt to total debt × Provisioning cover Imprudent management actions can destroy minority shareholder value Examples: × High promoter pledge × High related party transactions × High loans and advances Forensic analysis is a critical part of the elimination process
- 6. 6 Stage 2 : Selection process EVALUATING FACTORS Determine core investment principles also known as Factors* Select metrics for each factor, rank each company on every factor and arrive at an average factor score Select companies with the highest average factor scores SELECTION PROCESS FLOW ~ 100 STOCKS (remaining after the elimination stage) 30 – 50 STOCKS (final portfolio selection) Showing a history of generating alpha Used to arrive at factors which are quantifiable And ideally have low correlation with each other Help to construct a diversified portfolio Which is constantly reviewed for adherence to the core principles Core investment principles Factors convert core investment principles into easily measurable metrics Factors have historically been principal drivers of alpha *Based on research, established in back-tests
- 7. 7 Stage 2 : Selection of good companies (with) GOOD PROSPECTS (at a) GOOD PRICE (a) GOOD COMPANY QUALITY FACTOR ✔ High RETURN ON EQUITY ✔ CONSISTENT Earnings growth Profitable and well run companies Steady earnings streams Receive a premium in the market GROWTH FACTOR ✔ High EARNINGS GROWTH (consensus estimates) Strong growth prospects Attract investor interest VALUE FACTOR ✔ Attractive DIVIDEND YIELD ✔ High FREE CASH FLOW YIELD Relatively inexpensive stocks compared to the market Can generate excess returns during phases of value discovery Receive a premium in the market EVALUATING COMPANIES ACROSS MULTIPLE FACTORS Using a multi-factor approach to assess companies in a holistic manner
- 8. 8 Stage 3 : Optimization process Optimized weights for each selected stock Maximize portfolio factor exposure Stock level constraints Sector level constraints Semi- Annual rebalancing LOWER OF 10% OR 10X OF WEIGHT IN S&P BSE 200 INDEX (avoid concentration, ensure liquidity/capacity) MAX SECTOR ACTIVE WEIGHT = 10% (avoids risk of sector rotation) MAXIMIZE PORTFOLIO FACTOR SCORE (weighted average factor score) SEMI ANNUAL REBALANCING (to minimize turnover) ASSIGN WEIGHTS TO 30 – 50 SELECTED STOCKS AND CREATE FINAL PORTFOLIO Optimization done with the objective of creating a diversified portfolio
- 9. 9 Why do we use multiple factors? COMBINING MULTIPLE FACTORS With LOW CORRELATION between themselves Reduces the risk of CYCLICALITY of INDIVIDUAL factors Offers portfolio DIVERSIFICATION BENEFITS Based on the core investment principle of portfolio diversification Aims to create an ALL WEATHER PORTFOLIO
- 10. 10 Factor cyclicality STAGFLATION OVERHEATING GOLDILOCKSRECESSION MACRO↑ Economy picking steam INFLATION↓ Still subdued due to spare capacity MACRO↓ Economy slowing INFLATION↓ Demand collapse MACRO↓ Weaker economy INFLATION↑ Stubbornly high prices MACRO↑ Economy peaking INFLATION↑ Capacity shortages Growth tends to Outperform Quality & Value Value tends to Outperform Growth & Quality Quality tends to Outperform Growth & Value Quality tends to Outperform Growth & Value Factors generally show cyclicality in performance across the economic cycle MAPPING MACRO CONDITIONS TO FACTORS
- 11. 11 Diversification benefits Data is net of estimated fees and impact costs for back-tested returns of the Quant Model . The Model was tested for both in-sample and out-sample periods (roughly 2/3rd and 1/3rd of the entire back-test over 13+ years to avoid over fitting and avoiding hindsight bias) Combining factors aids in portfolio diversification which may improve returns per unit risk NEGATIVE OR LOW POSITIVE CORRELATIONS between Quality, Growth and Value factors allows suitable portfolio diversification CORRELATION GROWTH FACTOR VALUE FACTOR QUALITY FACTOR GROWTH 1.00 VALUE -0.23 1.00 QUALITY 0.02 0.15 1.00 The performance numbers are total return series from 30-Sep-2005 to 31-Jan-2019. Factor portfolios are created using factor tilting approach representing portfolios having stocks displaying high values on the respective factor. The portfolios are rebalanced every March and September. Data Source: FactSet, MFIE. Past performance may or may not sustain in future and should not be used as a basis for comparison with other investments. These figures pertain to performance of the model and do not in any manner indicate the returns/performance of the Scheme. It is not possible to invest directly in an index. STD. DEV of RETURNS (%) RETURNS(%) GROWTH FACTOR VALUE FACTOR QUALITY FACTOR QUANT MODEL S&P BSE 200 INDEX RETURNS 15.0% 19.2% 15.8% 17.8% 12.7% STD DEV 24.1% 22.9% 20.1% 19.3% 22.5% RETURNS / RISK 0.62 0.84 0.79 0.92 0.56 BETTER RETURNS PER UNIT RISK are achieved by combining factors with low to negative correlation PERFORMANCE STATS – INDIVIDUAL FACTORS V/S MULTI-FACTOR 10% 12% 14% 16% 18% 20% 22% 18% 19% 20% 21% 22% 23% 24% 25% S&P BSE 200 TRI VALUE FACTOR GROWTH FACTOR QUALITY FACTOR QUANT MODEL
- 12. 12 QUANTITATIVE RESEARCH and PORTFOLIO MANAGEMENT TEAM Convert model output into a live portfolio Periodic review & rebalancing. Constantly seek to upgrade model Construct the model based on tested rules Determine an investment hypothesis based on some principles or data Test the hypothesis for robustness, consistency and longevity to frame rules Incorporate rules into the model. Seek to evolve and upgrade the model. Model generates a live portfolio by running the rules on updated data Securities are purchased using best execution policies to minimize costs and tracking error (with model) Final portfolio is constructed and communicated to relevant stakeholders Periodic formal model review and regular portfolio rebalancing Manage daily flows as per the model
- 13. 13 Product labelling details Fund Product Suitability Riskometer DSP Quant Fund (An open ended equity scheme investing based on a quant model theme) This open ended equity scheme is suitable for investors who are seeking* Long term capital growth Investment in active portfolio of stocks screened, selected, weighed and rebalanced on the basis of a predefined fundamental factor model *Investors should consult their financial/tax advisors if in doubt about whether the product is suitable for them.
- 14. 14 Disclaimer In this material DSP Investment Managers Pvt. Ltd. (the AMC) has used information that is publicly available, including information developed in-house. Information gathered and used in this material is believed to be from reliable sources. The AMC however does not warrant the accuracy, reasonableness and / or completeness of any information. The data/statistics are given to explain general market trends in the securities market, it should not be construed as any research report/research recommendation. We have included statements / opinions / recommendations in this document, which contain words, or phrases such as “will”, “expect”, “should”, “believe” and similar expressions or variations of such expressions that are “forward looking statements”. Actual results may differ materially from those suggested by the forward looking statements due to risk or uncertainties associated with our expectations with respect to, but not limited to, exposure to market risks, general economic and political conditions in India and other countries globally, which have an impact on our services and / or investments, the monetary and interest policies of India, inflation, deflation, unanticipated turbulence in interest rates, foreign exchange rates, equity prices or other rates or prices etc. The sector(s)/stock(s)/issuer(s) mentioned in this presentation do not constitute any research report/recommendation of the same and the Fund may or may not have any future position in these sector(s)/stock(s)/issuer(s). The portfolio of the scheme is subject to changes within the provisions of the Scheme Information document of the scheme. Please refer to the SID for investment pattern, strategy and risk factors which is available at www.dspim.com. Past performance may or may not sustain in future and should not be used as a basis for comparison with other investments. DSP Mutual Fund and its schemes are not registered in any jurisdiction, except the Schemes viz. DSP Equity Opportunities Fund and DSP Dynamic Asset Allocation Fund, which are registered with the Securities and Commodities Authority (“the SCA”) in the United Arab Emirates (UAE). The distribution of the Schemes in UAE would be undertaken by Barjeel Geojit Securities LLC, which is a licensed local distributor registered with SCA. .The distribution of this material in certain jurisdictions may be restricted or subject to registration requirements and, accordingly, persons who come into possession of this material in such jurisdictions are required to in form themselves about, and to observe, any such restrictions. The strategy mentioned has been currently followed by the Scheme and the same may change in future depending on market conditions and other factors. There is no guarantee of returns/income generation in the Scheme. Further, there is no assurance of any capital protection/capital guarantee to the investors in the Scheme. The S&P BSE 100, S&P BSE 200, S&P BSE Small Cap Index, S&P BSE Teck, S&P BSE Metals, S&P BSE Oil, Gas & S&P BSE SENSEX and S&P Healthcare are product of Asia Index Private Limited, which is a joint venture of S&P Dow Jones Indices LLC or its affiliates (“SPDJI”) and BSE, and has been licensed for use by DSP Investment Managers Pvt. Ltd. Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”); BSE® is a registered trademark of BSE Limited (“BSE”); and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”). © Asia Index Private Limited 2014. All rights reserved. All figures and other data given in this document for the fund and the Quant model are as on Sep 30th 2019 (unless otherwise specified) and the same may or may not be relevant in future and the same should not be considered as solicitation/ recommendation/guarantee of future investments by DSP Investment Managers Pvt. Ltd. or its affiliates. Investors are advised to consult their own legal, tax and financial advisors to determine possible tax, legal and other financial implication or consequence of subscribing to the units of DSP Mutual Fund. For complete details on risk factors, event of suspension of subscriptions and more details, investors are requested to read the Scheme Information Document (SID) of the Scheme. Mutual Fund investments are subject to market risks, read all scheme related documents carefully.