India’s fund managers ride AI bandwagon to capitalise on new investors

Fund houses are preparing for a future where passive investing, which has decimated fees for US managers, takes hold in the country

India’s mid-sized money managers are counting on rule-based mathematical models to tap a new breed of investors embracing equities.

Tata Asset Management is the latest to start a quant fund. The firm is seeking to expand in a market where industry assets have more than doubled to $378 billion in the past five years. The fund will be the first in India to use artificial intelligence and machine learning to pick stocks, according to Tata Asset.

“We want to really try and get bigger,” Prathit Bhobe, the firm’s CEO and MD, said earlier this month. “In order to do that, you need to look at how you can capitalise on every opportunity the market presents.”

For Tata Asset, that meant seeking new ways to benefit from the shift in local savings from gold and property to financial products, a trend that has sent India’s $2.2 trillion stock market to records earlier this month.

Fund houses are preparing for a future where passive investing, which has decimated fees for US managers, takes hold in the country. DSP Mutual Fund started a quant fund in June, with assets that have since grown to about Rs 1.5 billion ($21 million), according to the data from Abchlor Investment Advisors.

“In the next three years, when the rest of the industry starts to launch quant products, the funds that are in place will be the only ones with a track record,” said Arun Kumar, head of research at FundsIndia.com.

Quant strategies, which fall somewhere in between active and passive trading, seek to reduce the role of human bias. They follow a data-driven approach to pick stocks, using pre-defined parameters, such as momentum or valuation. Their global success is a mixed bag.

In India, too, their success has been limited. The Nippon India Quant Fund has often struggled to beat its benchmark over both short- and longer-term horizons. It is now adjusting the methodology of its stock selection to bolster returns. Corporate governance failures, which machines can’t factor in, have also been responsible for the poor performance. Conflicts within founders’ families have had a more significant impact than in developed markets, FundsIndia’s Kumar said.