Quantletter Q30

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Quantletter January 2020 Volume 1 Issue 0

Why a Quant System

Any investment framework needs to encompass the following:


• Universe selection
• Stock selection
• Portfolio allocation
• Selling
The focus of the majority of books on investing is only on stock selection. However, for good
portfolio performance, all the 4 aspects are important. Think of times when one or more of the
aspects have gone wrong and how things unfolded. For example, allocating too little or selling too
early can make a huge difference to the portfolio returns.
This is true irrespective of whether you are investing or trading. It does not depend on your time
horizon or the methodology of stock selection. It is not important if you are selecting stocks
based on fundamental analysis, technical analysis, macro trend analysis etc. It is also not
important whether you are following the value, growth, GARP, momentum or any other style.
These 4 aspects are constant and are always true. The idea of quantitative investing is to put into
mathematical terms conditions for all these 4 parameters.
Let us look at Joel Greenblatt’s magic formula. For those who do not know about it, can read it
here - https://www.investopedia.com/terms/m/magic-formula-investing.asp
• Universe Selection - S&P 500.
• Stock Selection - Rank selected companies by highest earnings yields and highest return on
capital. Select top 20 or 30 stocks based on ranking.
• Portfolio Allocation - Equal weights for each stock
• Selling - Sell everything after 1 year and repeat the process.

Now, this example should quell the fears of those who are ready to jump at hearing the word
quant that it is hi-frequency trading or some such ignorant criticism.
For those who believe in passive investing in index ETFs like Sensex or Nifty also need to
understand that, in fact, any index is also primarily a quant system.
This is the index selection criteria for Sensex. See how it is setup and has a review frequency of 3
months.
https://www.bseindia.com/markets/Derivatives/DeriReports/FAQs.aspx#

The advantage of following a quant system is:


1. It takes away the emotional challenges and brings in a systematic approach.
2. You can theoretically backtest the result of your system to see how it would have performed
over time including times of extreme stress, volatility or exuberance.
3. It brings a lot more discipline to the process of investing. You should objectively follow this
practice of thinking through the 4 aspects highlighted here even if you are doing bottom-up
fundamental investing.

© www.quantamental.in twitter: @quantindia email: query@quantamental.in


Quantletter January 2020 Volume 1 Issue 0
Q30 Quant Stocks basket for February to April 2020
TTM Growth % ROE/PEG
Stock Name NSE Code EPS OP Sales ROE PEG Market Cap
Amber Enterprises AMBER 95% 56% 53% 9% 0.41 4,947.64
AU Small Finance Bank AUBANK 94% 128% 53% 12% 0.55 34,627.99
Berger Paints BERGEPAINT 34% 22% 10% 20% 2.46 56,344.17
Dixon Technologies DIXON 80% 63% 62% 17% 0.6 5,247.98
Granules GRANULES 64% 58% 20% 15% 0.26 4,453.15
Gujarat Gas GUJGASLTD 190% 53% 27% 19% 0.1 19,640.05
ICICI Securities ISEC -4% -7% -10% 47% -7.77 15,090.65
Manappuram Finance MANAPPURAM 57% 36% 26% 20% 0.19 14,225.58
MAS Financial Services MASFIN 31% 30% 26% 17% 0.93 5,361.52
Navin Fluorine NAVINFLUOR 10% 16% 9% 14% 3.56 5,948.77

The Q30 Strategy


▪ Stock selection uniiverse is NSE 500. (Covers >96% of listed market cap on NSE)
▪ System selects upto 10 strong stocks every month.
▪ System is designed to get less or no stocks at all in severe bear markets. Capital in such case moves to
liquidbees.
▪ You could possibly use these in following ways
• Invest equal amounts in each of the stocks in current basket and replace them with the new
basket the following month
• Invest only 1/3rd of your capital intended for Q30 in this month's basket and replace them with
the new basket to be published 3 months later
• Treat these stocks as a group of strong stocks and trade them based on your own entry & exit
rules. Usually risk reward is favourable in strong stocks.
Disclaimer
The quantletters are only a source of information. We are offering a shortlist of stocks, which may merit
further research and analysis and then possibly could be chosen for investments. It would not be possible
for subscribers to do their research through us. Remember, we are not recommending that you buy these
stocks. We are using our system to offer you a shortlist of stocks. If you wish to act on this shortlist, please
consult an investment advisor who would guide you about the appropriateness of these stocks, in
conjunction with your risk profile and suitability of stocks as an investment product. Although
information has been obtained from and is based upon sources we believe to be reliable, we do not
guarantee its accuracy and the information may be incomplete or condensed. Information presented is
general information that does not take into account your individual circumstances, financial situation, or
needs, nor does it present a personalised recommendation to you. Individual stocks presented may not be
suitable for you. Future returns may not resemble past performance and are likely to be lower.

© www.quantamental.in twitter: @quantindia email: query@quantamental.in


Quantletter January 2020 Volume 1 Issue 0

Addendum
Q30 Quant Stocks basket backtested returns for quarterly portfolios
Calendar 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Annual
Year (31st March) (30th June) (30th Sep) (31st Dec)
2007 9.15 13.91 11.33 72.15 138.29
2008 (-34.41) (-3.4) (-1.35) (-4.83) (-40.51)
2009 (-1.58) 32.03 45.11 28.16 141.66
2010 9.21 8.47 31.87 1.11 57.95
2011 1.89 0.03 (-1.08) (-7.63) (-6.87)
2012 7.03 (0.54) 24.84 6.68 41.77
2013 (-14.4) 16.13 10.98 19.92 32.30
2014 3.99 45.43 35.72 10.12 126.02
2015 8.35 3.77 16.9 7.01 40.65
2016 (-6.05) 8.73 15.49 (-6.48) 10.33
2017 20.43 35.09 43.11 49.87 248.93
2018 (-10.71) 1.66 4.24 (-6.51) (-11.54)
2019 0.65 0.87 (-3.99) 27.51 24.29

• If one bought 10 stocks and replaced it a new basket every quarter since 2007, the CAGR is
~46%
• However for the sake of simplicity, the retuns calculation doesn’t include brokerage costs,
doesn’t include dividends and doesn’t include any returns on liquidbees when part of the
portfolio is in cash. There are also slippages likely to be there in executing the trades. You may
discount the above returns by 1% to 2% on account of these factors.
• While only 13 out of 52 quarters have given negative returns, but there are occassions where
multiple quarters have resulted in negative returns one quarter after another in succession.
• 4 out of 13 complete calendar years have been in negative returns. No prizes for guessing which
could possibly have been the best and the worst year.
• Max Returns: 248.93 % in 2017
• Min Returns: (-40.51%) in 2008
• Past is indicative of the existence of an "edge" in the quant strategy. However the future
doesn’t exacty mimic the past. There is no guarantee that future returns will be similar. They
may likely be lower. Please refer to the complete disclaimer before you invest relying on any
of the information contained in this quantletter.

© www.quantamental.in twitter: @quantindia email: query@quantamental.in

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