While domestic flows have protected the downside and new supply has restricted the upside. Arihant Jain: It depends on where a fund is positioned. The market was broadly flat in 2018-19, but that did not prevent every fund manager from generating alpha.

Over a fiveto seven-year period, there may be two or three flat years. We are positive on earnings growth. We expect the second quarter to be strong, with analysts projecting 20% to 30% growth in midand small-caps.

If earnings growth remains strong, market capitalisation will eventually move in the same direction. What is your market outlook? Arihant Jain: It depends on earnings growth and the multiples available for that growth.

Midand small-caps are already pricing in 20% to 30% earnings growth. In large-caps, investors are expecting nominal earnings growth of around 10% to 12%. That leaves room for earnings estimates to be revised upwards and for valuation multiples to expand.

Your multi-factor fund has around 80% exposure to large-caps. Arihant Jain: It is also a result of portfolio construction. The fund’s benchmark is the BSE 200, which is predominantly represented by largeand mid-cap stocks.

Arihant Jain: Single-factor strategies carry higher drawdown risk. If a factor goes out of favour, the underperformance can be significant. We use multi-factor investing as a core allocation.

We assess a company from a 360-degree perspective, looking at its quality, valuation and momentum. We assign strategic weights to the factors and maintain exposure to all of them. Our approach is “and”, not “or”.

We look for a company with good quality, reasonable valuation and momentum. Arihant Jain: Private banks could be an opportunity given their valuations and the credit environment. Arihant Jain: A quantitative model is algorithm-based.

The efficiency of the algorithm and the experience of the team are important. You can broadly compare it with AI because both involve machine learning. However, we control both the inputs and the underlying algorithm.

If we have a sector view, we generally let the model drive 80% to 90% of the portfolio and take an active call on the remaining 10% to 20%. For example, if a corporate governance issue may take time for the model to capture, our experience can help us react earlier. The model is continuously upgraded.

Stock selection is important, but position sizing can sometimes be even more important. Arihant Jain: Globally, the team has more than 100 people. We also have a dedicated 15-member technology team maintaining the Mosaic platform.

In the multi-factor fund, we use more than 35 sub-factors. Quality, for example, contains more than 12 sub-factors, which are combined into a single quality score. We use macroeconomic data to help determine long and short exposure.

Arihant Jain: It is typically around 70% to 90% for our quantitative funds. Since we use a core approach based on quality, value and sentiment, a stock tends to remain unless something materially changes. Arihant Jain: There is a structural gap between what regulations allow and the tools available to fund managers.

Mutual funds can take positive positions, but they have limited tools when they are neutral or negative. The ability to take active short positions is a key differentiator. Mutual funds cannot undertake naked shorting.

If we are negative about a theme or stock, we may hedge or avoid it, but we cannot take an active short position at scale. Taxation is another advantage because it is similar to mutual-fund taxation. Derivatives have traditionally been treated as business income, which can attract a much higher tax rate.

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