While the mutual fund market has a slew of offerings, there are a few fund houses which have managed to carve a niche in active investing.
The rule-based active investment process relies on the use of data to guide the investment process. In this, research is an integral part of the process where the fund house constantly explores numerous ways to enhance the models, says Bijon Pani, Chief Investment Officer of NJ AMC in an interview with MintGenie.
He started his investment career in London after having finished his master's degrees from University of Oxford and London Business School. He also holds a PhD in finance from EDHEC Business School. However, after getting exposed to factor investing in a mature market, he realised that replicating the same model is more complicated in India where access to good quality robust data is a challenge.
He asserts that one of the key distinctions of NJ mutual fund will always be active rule based in their investment strategy in all their offerings. While underscoring the significance of quant funds, he states that a large proportion of institutional money has gone into quant funds globally as they offer a worthy alternative to traditional funds
How is the investment philosophy of NJ Mutual Fund different from those of other fund houses?
NJ Mutual Fund has been one of the early adopters of the active rule-based quant investment process in India, which was initiated in the PMS division of the firm. This rule-based investment process is the underlying foundation on which our mutual fund business has been built. We will always be active rule-based in our investment strategies in all the products that we offer to our clients. This is one of the stark differences between us and other more ‘traditional’ fund houses where schemes are usually managed by portfolio managers who use their own discretion.
Can you tell us about rule-based active investing which the fund house follows?
Rule-based active investment process relies on use of data to guide the investment process. This is done by applying various analytical models to the data to build the best risk adjusted return strategy. Factors form the basis of these strategies. The most commonly used factors are value, quality, momentum, low volatility and size. There are more complex factors as well which are engineered from the data through data mining. We combine various factors to develop the models that run our various funds in the mutual fund and PMS offerings. Research is an integral part of the process where we are constantly exploring various ways to enhance the models with the intention of offering the best risk adjusted return to our investors.
What impact do you see on the financial markets of the recent repo rate hike by RBI?
The Indian financial markets have priced in much of the hikes so we doubt whether there will be much incremental impact. In addition, the root causes of inflation seem to be resolving themselves with oil prices moderating and international food shipments restarting. Commodity prices remain elevated, but haven't really risen on a year-on-year basis. So, we expect to see inflation moderating which will provide the RBI an opportunity to pause sooner than expected.
You hold master's degrees from University of Oxford and London Business School and have worked in London for a long time, why did you then return to India to join a fund house here? I am asking this because I want to know your viewpoint on India's growth story and its future potential as an investment destination?
India holds a lot of potential in the area of financial innovation. And one area which would see increasing focus is the use of quantitative methods in the investment process. It is no secret that most fund managers struggle to beat their benchmark index. This makes rule-based investment strategies a strong contender for providing higher risk adjusted returns. I have been working in factor investment methods for a long time now having started my investment career in London.
Exposure to a more matured market allowed me to understand the potential of factor investing especially for a place like India where access to good quality robust data is a challenge. This challenge also gives rise to opportunity as the construction of a factor parameter is more nuanced than just copying what works in the developed markets.
Some modification and understanding of the liquidity part of the market is paramount in constructing factors suitable for India. This asymmetry in market structure between say US and India, provides a huge opportunity to harvest higher alpha.
Globally, a large proportion of institutional money has gone into quant funds as they provide a worthy alternative to traditional funds. In fact, many of the top 10 hedge funds by AUM are quantitative in nature which have been managing billions of dollars for decades. As we see higher participation of retail and institutional investors in the listed markets, both traditional and quant-based funds will see higher inflows.
In the developed markets, quant funds using factors are a strong alternative to traditional funds and an integral part of asset allocation. I am hopeful that active quant funds will see not just an increase in fund inflows, but also an increase in market share in India.
A number of fund houses have recently rolled out NFOs, most of which are index funds or ETFs. Will NJ Mutual fund remain committed to active investing philosophy in the foreseeable future, or does it have any plans to launch a passive fund?
We think that a lot more data and research is needed for factor based passive funds to succeed. Most of the factor identification rules applied in developed markets need substantial localisation for them to work and the body of research needed to evolve static factor rules does not exist yet.
As such, active research is needed to refine factor identification and measurement methodologies which is where our focus lies. We have a team of dedicated database specialists, financial scientists and programmers who are devoted to this endeavour.
Can you tell us about any other plans in store for NJ MF?
Our goal is to launch products that are not only well differentiated from the rest of the industry, but also from our own existing products. Given prevailing market conditions last year, we launched NJ Balanced Advantage Fund which proved to be a fortuitous choice.
We have approval for a Flexi Cap Fund, and have applied for approval for an ELSS. These are the ones we have on the radar at the moment.