Nikhil Kamath’s True Beacon starts quant-driven PMS

Zerodha co-founder Nikhil Kamath, who also runs alternative asset management company True Beacon, has launched a Quant PMS driven by factor investing principles. Factor investing is the generation of returns by identifying specific factors such as momentum, value, and quality, among others. For instance, a momentum strategy will seek to buy stocks on a strong upward trend and ride the trend till it reverses.

True Beacon recently hired Rohit Beri, formerly a hedge fund manager in the US/Singapore, as Chief Investment Officer (CIO). He will be managing the strategy. This product will have a minimum ticket size of 1 crore. Back tests on the strategy since 2011 show a return of 18.08% compared to 12.2% on the Nifty.

Kamath launched his first investment product, True Beacon 1, a long-short fund (hedge fund) in September 2019. It has delivered a CAGR of around 22.3%, marginally outperforming the 19.22% delivered by the Nifty till 31 March 2022, before accounting for fees and taxes. The fund outperformed strongly in the first year of operations but a relatively cautious stance caused it to miss out on some of the market rally in 2021. However, these returns were made on a portfolio with lower market risk.

The True Beacon Equity Factor Quant Strategy will trade in a basket of 40-50 stocks. Its universe will be restricted to the Nifty 200 stocks. No stock will exceed 5% of the portfolio. The model portfolio for the strategy currently shows technology to be the top sector at 23% of the portfolio, followed by consumer non-cyclicals at 18%.

The strategy’s portfolio will be rebalanced monthly. The team expects a monthly portfolio churn of 20%-50% which can translate to the portfolio changing up to six times a year. There will be a management fee of 1% and a performance fee of 5% over a hurdle of 10%. For example, if the portfolio generates a return of 18%, the total expense ratio will come to 1.4%. There is also an exit load of 1% for withdrawing before a year .

Richard Pattle, co-founder and CEO of True Beacon, said, “Nikhil and I are excited to launch the equity factor quant strategy and, although recently launched, its performance has surpassed our expectations”.

Experts are however cautious on this strategy. The high level of churn might lead to gains in the funds being taxed as business income rather than capital gains, they pointed out. Business income is taxed at slab rate and hence the tax can go up to 42.7%. “Factors like value and quality take time to play out and don’t normally take effect in 1-2 months. Also I’m not sure that such a high churn is required for 18% return,” said Anish Teli, founder of QED Capital Advisors Pvt Ltd, a PMS manager focused on quantitative strategies.

However, True Beacon is confident about using factor investing in the short term. “We are not a value momentum or quality based investors, we use these factors in our analysis but these are one of the 10 major category of factors. We churn through factors based on the macroeconomic environment and factor performance. The chance that we are using value as a factor is only one out of nine. Markets have various cycles ranging from a few minutes to a few years. We take advantage of cycles which last 20-25 trading days and look to generate alpha in that duration,” said Beri.

Munish Randev, founder, Cervin Family Office, was also sceptical. “As a house strategy, we strongly believe in multi-factor strategies but with an adequate level of performance, both in terms of alpha and risk reduction. We look for the alpha attribution to understand the cause of the alpha, and also for the demonstrated ability of the manager to perform in all types of markets. This requires our platform to have live portfolio data over a minimum 3-year period,” he said.

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