Tuesday, March 24, 2015

Quantum Mutual Fund explaining their high cash levels

Quantum Mutual Fund on why a higher cash level is necessary sometimes:

The link to the original write up is here

It is said that, sitting on cash in not always the best strategy in equity markets. Such a move could easily backfire in surging market conditions. With high valuations it makes sense to wait rather than risk investors’ money at this time says Quantum. 

With markets regularly hitting new highs and then falling suddenly before rising yet again; the AMC feels that it makes sense to wait. We believe in the long term outlook either for a particular stock, or for the Indian economy as a whole."The AMC is clear that they are not worried about short-term under performance if it has potential to generate risk-adjusted returns in the long term. 

Currently the cash holding for Quantum Long Term Equity Fund is around 30 per cent and it’s the highest since the launch of the fund. Since elections results have been declared last May, markets have soared sharply with little fundamental changes like increased corporate spending etc. to back this jump. Hence, we have lightened our exposure to sectors like industrials, capital goods and financials, only because we are not comfortable with current valuations. 

Cash is residual after investing in stocks 




For us, cash is residual after investing in stocks. We follow the bottom up stock selection process, where we identify stocks and build a portfolio. Our research team and the Fund Management team set the buy and sell limit of the stocks. We generally buy a new stock at the pre-determined Buy price (or below) and generally sell an existing stock at the pre-determined Sell price or above.
The Past explains 


Even if you look back at the history of the fund, in the year 2007, when the markets were racing upwards - the cash levels at Quantum Long Term Equity Fund (QLTEF) was around 15-20%. Thus the fund was poised to take advantage of the dive in markets in late 2008 due to the Lehman crisis. Cash levels of QLTEF were at all-time lows at that point in 2008 as most stocks then came into the 'buy' limit of the fund. Since then, till now, the fund manager has continued to manage the scheme prudently. 

The stock market is cyclical and since the formation of the new government at the center, it has been hitting new highs almost every week regardless of the fact that the fundamentals are not backing it. Hence the cash levels of QLTEF are high, yet again. 

Our philosophy of thinking long term, being value investors, and our stance towards choosing the stocks that are the best for the portfolio while also not taking extreme risks will not change. So if markets continue their upward trajectory it is likely that we will continue to sit on high levels of cash.

So we take this opportunity to thank you yet again for your trust and continued faith in the Quantum philosophy and request you to be patient with us as we wait for the right opportunity to re-enter the market at the right time, and continue delivering the returns you have come to expect from us. 

2 comments:

  1. Good observation and thanks for explanation.
    Do you think it is a good strategy?

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    1. There may be many strategies. Holding cash when feeling that valuations are not hig is one. See the picture as to how cash came about. Some others may say that this will not help when markets are rising
      However, more than the strategy, what I like is the consistency of the Fund Manager
      and his sticking to principles. Earlier too The Fund Manager has held cash levels

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