Review of Lotus India Agile Fund (Quant Based Fund): Finance Trading Times

Review of Lotus India Agile Fund (Quant Based Fund)

Lotus India Asset Management company has recently launched a so called quant based mutual fund that is aimed at investing in such a fashion that it will eliminate human errors and select the stocks based on a computer generated algorithm.

I liked the punch-line “Eliminate Human Error” and depend upon computer algorithms for stock selection and portfolio churnings.

At last, there is one such fund house that agrees that fund management can contain human errors. Should it mean that other previous funds from Lotus AMC (and other fund houses), are not worth the investor’s trust, as they may be full of human errors?

The fund has the standard rate as per other funds – 2.25% at entry load, 1%, 0.6% and Nil exit load based upon the time you exit after remaining invested in the fund.

As per the details:
Lotus India Asset Management Company Monday launched Quant based scheme, Lotus India AGILE Fund (Alpha Generated from Industry Leaders Fund).

Quant funds operate on the basis of computer generated mathematical models. The investment objective is to generate capital appreciation by investing in a passive portfolio of stocks selected from the industry leaders on the basis of a mathematical model.

The new fund offer priced at Rs 10 per unit.

The fund will invest 90-100 per cent in equity and equity related instruments and 0-10 per cent in debt and money market instruments.

The fund offers two options--Growth and Dividend. The Dividend option offers Dividend Payout and Dividend Re-investment facilities.

Lotus India Agile Fund is an open ended equity scheme that will invest in 11 stocks (9 per cent each) determined by a mathematical model. The portfolio will be reviewed and reset every month.

The fund wants to limit itself to only 11 stocks. Can the algorithm be efficient enough to select the best performing 11 stocks always?

If the fund is so good and (human) error free, then why are there entry and exit loads as any other standard fund? Can the AMC give any guarantee of even 1% returns?

Can a computer really work better in predicting stock prices for the future? Elderly people are now going to cyber-cafes to match the horoscopes of their child with those of their prospective life-partners. All that happens is that crap software like “Kundli” uses stored information and matches the horoscope. Hardly anyone will understand anything, yet the elderly, without having any basic knowledge about a computer, will be happy to use it to match horoscopes.

Even if someone designs an algorithm to predict future stock prices, it all has to be based upon historical data and publicly available market information. Nothing better than a computer matching horoscopes.

No quantitative model can work efficiently ever after to pick up the stock market winners month after month consistently.

This fund is nothing but “Old Wine in a New Bottle”. Same old fund management charges, same old stock selection tricks disguised in the name of quantitative models.

Investors may try their luck by betting!
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9 Comments: Post your Comments

Majid said...(on 29 November 2007 at 01:05 )  

Point Noteworthy !!

Gimmicks - There will be more Mutual Funds in India than there are Companies in the stock market one day

Investment n Trading Advisor said...(on 29 November 2007 at 01:39 )  

Hi Majid,
It's actually possible and happening!

Holland, where I did my finance studies, is one of the few countries in the world where the number of mutual funds outnumber the total number of stocks listed on Amsterdam Stock exchange.

With the way things are proceeding, you may soon see a similar trend in India too!

Keep watching!

nickp2 said...(on 29 November 2007 at 02:54 )  

Hi Shobit,
This is in regards to your article which shared light on renting a home rather than buying it.Can we apply DCF on this example and see how much of a loss are we actually in by buying a house.Ofcourse we can make some basic assumption.I think it would be great if you assume some figures and apply DCF since this would be a real word example for all the readers of this blog.
Thanks a lot.

Anonymous said...(on 29 November 2007 at 03:18 )  

You're usually right on the mark, Shobhit, but sorry, I can't agree with your views here.

These fellows have launched a fund with an algorithm-driven investment policy. How can I, you or anyone under the sun have any objective opinion at all about the efficacy of the fund without knowing what the actual algorithm is, and how it has actually worked in past periods? (Not that past performance guarantees future performance, but it does serve as a negative check.)

Although your're perfectly right in pointing out that in charging the same fees as funds that employ and "active" management style with fund managers and research teams, the fund is trying to put one over the investors' heads.

I don't think ANY investor should put in their money here unless the fund discloses what precise algorithm they use, and how that measures over different periods in the past.

Although I disagree with your view, my thanks to you for pointing out the features of the fund. This is the first I heard of it.

Regards,
Siddhartha.

Anonymous said...(on 29 November 2007 at 04:15 )  

The analogy with computer horoscopes was really good!

Here's another blog post that expresses similar sentiments on quant funds:

http://www.vinayahs.com/archives/2007/11/06/lame-product-lotus-india-agile-fund-another-great-opportunity-to-play-diwali-with-your-cash

That post also has a link to a good article about potential losses that can occur with these type of funds:

http://www.dnaindia.com/report.asp?newsid=1129885


-KV

Investment n Trading Advisor said...(on 29 November 2007 at 20:41 )  

SIddhartha,

This is something which can be debatable.
However, my knowledge & experience of working with models and algorithms in the financial stream can be simply described by one word - FAILURE!
There has been no single MF manager who could beat the market consistently year after year even for a period of 3 years. All the models have failed miserably, all algorithms ultimately find their way to the "Recycle Bin".
Here is an example from the DNA article link left by KV:

In August, the Forbes magazine reported that Goldman Sachs’ Global Alpha Fund is in trouble and there were rumours it might be wound up. Global Alpha was a mega $9 billion hedge fund, and a quantitative fund at that.


Thanks KV for the links!

Param said...(on 29 November 2007 at 21:26 )  

Kudos for highlighting this new disease that is all set to spread in Indian MF industry...
One only needs to re-read "The Intelligent Investor" one last time before junking such schemes and also such fund houses who promote such stupidity.
Algorithmic trading WILL fail, one only needs to wait long enough.
More interestingly, if the entire process is computer driven, why do they need to charge 1.25% mgmt fee (standard of other schemes)? Must be a really expensive super-computer that needs more RAM as the asset size increases :)

JapMan said...(on 5 December 2007 at 23:51 )  

The charges of 1.25% is required for modification of algorithm if they can not make profit as planned.
Debugging is never ending process till it is scrap and with others money.

Thanks shobit for your valuable articles.

regards,

nmittal said...(on 16 January 2008 at 05:12 )  

It seems that you are a guy who is just pissed of because of some mutual funds not giving you a decent return in the recent bull rally. The fund will rather be doing a much better job than an average mutual fund on street. Their criterion of picking up just 9 stocks will help them reduce the huge transcation costs that other funds often incur. No one can guarantee returns - even your own Indian government. Everything is risky - even keeping cash with yourself.
These kind of funds will rather enhance the much needed efficiency in the indian markets.

Wish you all happy and fruitful trading and investing activities with safety! = = = Post a Comment

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