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Dishonest Truths

Ajit Dayal’s latest article in “The Honest Truth” talks about how Quantum, the mutual fund house he owns, invests in “value”. I don’t know what value is, to be honest, and Ajit rightfully admits that value is different for different people.

But let me be a critic and analyze Quantum’s “Long Term Equity Fund” holdings: (Source: Value Research Online)

Note carefully:

  • The Fund’s PE Ratio is 23. Nifty’s P/E at Feb End was around 21. If “value” were to be looked at as a P/E level, the Quantum fund is definitely not “value”.
  • The holdings show extremely large cap companies, very similar to a large cap diversified fund. Very little value there nowadays – in fact value is all in the midcaps!

Also I notice that this fund has performed miserably against the Nifty BeES, both in the short and long terms. Over the two year period that this fund has been active, the Nifty BEES, an exchange traded fund that tracks the Nifty, has been up much higher. Here’s the analysis:

The difference between a fund that tracks the Nifty and Quantum’s Long Term Equity is nearly 15%, with the Nifty BEES being the better performer. This period has seen two bull momentum, two massive corrections and has had enough “value” and “growth” periods. Yet, Quantum has underperformed by a whopping 15% despite having no entry loads and after two years now, no exit loads.

Why? I think it’s partly because of expenses. While Nifty BeES entry loads are small (typically brokerage costs, about 0.65%) the expense ratio is about 0.8% a year. Quantum charges 2.5% – the maximum chargeable expense – to the fund. Technically that means that even if they do just as well as the Nifty they will be about 3% behind in two years compared to Nifty BeES.

Second, they have not done well in stock picking. I don’t know what their portfolio used to be but they seem to have gotten hit much more than the Nifty. They have been in cash a large part of the time (which is fine) but in spite of that performance has suffered.

I think I would dismiss the “value” argument. And also the myth that lower loads can increase your performance. To give you an example – if the fund underperforms the Nifty by 4% every year, and the Nifty grows at 12% over the next twenty years, a Rs. 100,000 investment in each fund will become Rs. 9.65 lakhs with Nifty BeES and Rs. 4.66 lakhs with Quantum’s fund. The difference is nearly 5 lakhs – You pay Rs. 5 lakhs to stick with Quantum, which gives you 50% lower returns than Nifty BeES..

I think there is value in sticking with the Nifty BeES, for those who don’t want to monitor their investments.

Also read: How Entry and Exit Loads Affect You.

Disclosure: I have no ties with either company and do not benefit if you buy either. I have not received any consideration from anyone including the two parties above to write this article. Any advertisements you may see are provided by Google, over which I have no discretion.

  • Venkat Muthukrishnan says:

    >Hi Deepak,
    I think Ajit Dayal has been acting/speaking/writing differently from the moment he started this Quantum fund. He was against investment in Gold but has come out and recommended gold investment when the prices are ruling at all time high. As you rightly pointed out, Quantum fund has underperformed since the time of its launch. Value investing or not, the investors expect returns which Quantum has failed to deliver in the last couple of years.

  • Anonymous says:

    Why you should own it:

    An investment for the future and an opportunity to profit from the long term economic growth in India =================================

    Enough reason not to own this. This is a silly marketing prank..this “value” stuff. they dont know a damn thing about value.

    Some of the worst picks are there in their top portfolio holdings.

  • madhavan says:

    >Don’t know much about Quantum but your quoting Value Research Online’s PE multiple of funds made me curious.

    So, I took a look at the PE of an ELSS fund I bought recently – Reliance Tax Saver. Value Research says the PE is 34. It astonished me, because the reason I took the fund was precisely because the stocks owned by it didnt have crazy PEs and looked like long term stories.

    On checking here’s what I found. In the top 10 holdings most have PEs of 10-20. Areva TD has 36 PE. And there’s Triveni Engineering (10th largest holding) which has a PE of 158. Didnt bother to do the entire list but clearly, there’s no way the fund can have a PE of 34.

  • Deepak Shenoy says:

    >Madhavan: I checked their factsheet as of Feb 29, 08, and they have: Reliance Energy which had a P/E of over 40, Moser whose P/E is above 60, and tata Motors, Deccan Aviation etc. whose P/E is very high. Areva is hte second highest holding, so it’s impact will be pretty high.

    Remember that this will be as of Feb 29, rather than now, and some of these stocks have dropped since then. With Quantum, I see that it’s P/E is likely to be close to the Index because of hte past, and the Index is at 20+ today.

    I think there will be a full portfolio disclosure this month end so we can do a complete analysis again.

  • Anonymous says:

    >Sorry for this cynical comment.

    Firstly India is a minor part of Emerging Market which itself is a Very small portion of Global Equity Markets.

    Picking value in this trash makes no sense. If a Global Tsunami hits Indian Equity will be washed away like the Technology Sector (which was far bigger than Indian Market).

  • Anonymous says:

    >Hi deepak, have been doing some reading up on index funds and ETFs since i may want to have a small portion of my portfolio in them.

    Was wondering if you’ve ever done a post on these two – index and ETFs? Which ones come with the lowest tracking error, and fees/loads etc. If so where can i find it?

    And if not, would you be in a position to do a post on the same? Would be a huge help.

    I hear index funds in india charge much higher fees than their global counterparts. Which, knowing how mutual funds operate here, doesn’t surprise me one bit 🙂

  • Anonymous says:

    >With due respect Ajit Dayal is a mediocre fund manager. Anybody who followed his advice he expressed often thro his would have been regretting. For example;

    When the sensex crossed 6500, he started cautioning everyone about unchartered territory. If someone had taken him seriously, he would have missed the huge upside.

    He used to dish out the nonsense that US dollar will be the king and Rupee will always be the underdog. But events proved that was wrong.

    He misread data on Indian Corporate performance in 2004-2006 and mislead serious investors thro his articles. (about slowing gross profit margins etc.)

  • Shankar says:


    A nice bunch of acrid comments, arent these? I dont know Ajit Dayal so I’ll not defend him, neither will I add any insult.

    On the question of funds having P/E’s higher than the sensex .. I have my doubts.

    Anyone who has been operating in the stock markets for sometime knows that there are numerous stocks whose P/Es are 30 and above and yet have given the highest shareholder weath. Else, why would people invest in shares of GMR Infra and RNR? Or, which started with a P/E of 70 and in the last 2 years has given it’s shareholder capital appreciation of 400%.

    Pls note, P/E ratios donot directly capture value or growth rates in an efficient manner. If markets and scrips were that efficient, then we punters would not have been writing blogs.

    Fund management is all about discipline. As long as Ajit Dayal sticks to his bets and there are enough people who trust their money with him, he is doing well. (I can see that this Quantum fund has a portfolio of 17,000 crores .. quite a huge number!)

    And to conclude, notice the name of the fund – “Quantum Long Term Equity – Growth”. The name captures the essence of the fund, I believe.

    Warm Regards

  • Deepak Shenoy says:

    >shankar: I think you mistake Quantum for George Soros’ fund (which has the same name and probably controls the 17000 cr.). Quantum as in Ajit Dayal’s fund has 44 cr. or so.

    And yes, low p/e is not a big indicator of growth (but it is of value).That’s really what I was getting at, that “value” must necessarily mean undervalued, which I don’t quite see in Quantum’s allocation.

    Buying High P/E has always been good (n fact it’s interesting to se an PEG of > 1 to see what has the highest expectation in the market) Still, an inordinately high P/E has never been maintained long enough (in google’s case too it will be proved…)

  • Anonymous says:

    >Deepak, thanks for the post. It basically underlines the fact that Nifty Bees ETF is the best kept secret in India for index investors.

  • Akshay J says:

    >I personally do not hold much of mutual funds, primarily because of risk of the fund managers to be too close to the market to get the big picture.

    However, I do hold some of the stocks which the fund manager has (specifically, the two tech stocks accumulated at recent lows). Most of the people dislike tech stocks, because they expect rupee to appreciate all the way to 36 v/s dollar. However, to ignore the growth rates of the top technology companies is to be missing out on very fundamentals. A high P/E is harmful, only if it exceeds the growth rate. The sensex has stocks at low P/Es, because not all companies grow this fast.

    I am a value investor (really!!). Most of my holdings average a period of 5-6 years. I am still putting my bets on tech companies to give me excellent returns through to 2012.

  • Anonymous says:


    I am one of the client of PersonalFN & Equity Master research as well, both owned by Ajit Dayal. I would like to convey that I have been guided with due care and honesty whenever I apporached them. I have worked on my investments with other brokers as well who I found to be greedy, misguiding and never bother about investor care.

    About QLTEF, have invesed in this fund my self and track it on almost daily basis against index, theynever invested in RIL, L&T and other fancy stocks of the index yet managed to perform better. I am quite confident of the fund team and in the Long Term they will deliver the best, which is quite clearly visible in the last 3months. Don't evaluate an fund based on short term that too against a index fund etf that too in a period when index shot up so sharply and unexpectedly. Consider other parameters such as Sharpe ratio, you will find the fund investment worthy.

  • Anonymous says:

    >I am a subscriber of Equity Master premium services for the last 15-16 months. Ajit dayal has advises on about 20-30 scrips
    in this period. I have spent about Rs 15,000
    for the subscription fees. BUT I have earned ( Notionaly ) about Rs 4 to 5 lakhs
    by investing in scrips as advised by him.
    80 percent of his recomendations give positive returns in the range of 10 to 100 % in an years time. I have absolutely no Connection/ relation with Mr Dayal

  • amit says:

    I checked it today and Quantum Long term fund is at 3rd rank for last 5 year results — and I am sure everyone will agree about one thing — During bull markets almost every tom dick and harry can make money but when for last 5 years indexes have gone no where Quantum has outperformed it handsomely .
    I think you should revise the heading maybe or update it with a saying that for a 2-3 year perspective when idiots made money Quantum lagged and when it mattered the most it beat the hell out of everyone .
    And take a hard look at the portfolio snapshot you have given . Except 3i infotech I would say last 5 years have proven that its an amazing mix of stocks to have in top holdings. What do you say ?