Radhakrishnan Chonat: Hello everyone, and welcome to another insightful episode of AlphaStreet’s Fund Manager Series. Today, I’m truly privileged and honoured to have Sandeep Tandon, the Founder and Chief Investment Officer at Quant Mutual Fund with us. With over three decades of experience in the capital markets, Sandeep’s journey is personally, truly inspiring.
He began his career in 1992, as a trainee at GIC Mutual Fund. Then played pivotal roles in launching IDBI Asset Management. He also has held significant positions at ICICI Securities, Kotak Securities, REFCO, and has contributed to — contributed his expertise to Economic Times Research Bureau as well.
Now Sandeep is renowned for his innovative approach to investment management, leveraging what we call predictive analytics and the dynamic VLRT Investment framework. His book, published in 2019, “Being Relevant”, delves into decades of research and offers insights into preparing for future market volatility.
Under his leadership, Quant Mutual Fund has grown from INR488 crores to INR84,000 crores-plus in less than four years. So today, you know, it’s a fanboy moment as well for me. Let’s explore his market strategies, insights, and the incredible growth story of Quant Mutual Fund.
Welcome, Mr. Sandeep.
Sandeep Tandon: Yeah. We can start. Hi.
Radhakrishnan Chonat: Sandeep, your career spans over three decades, starting, as I said in my intro, from GIC Mutual Fund, evolving to founding Quant Mutual Fund at the height of global financial crisis. Can you share some key milestones of your journey? And how the principles of being relevant and the predictive analytics that you guys found shape your investment philosophy in general?
Sandeep Tandon: So, thanks. First of all, thanks a lot for inviting us. The way we look at, I have always been associated with, in today’s world, called Start-up, okay. Way back in ’92, ’93, when I did a summer training with GIC Mutual Fund. And the mutual fund phenomenon was, itself was very new. You have only UTI, okay. And UTI was never known as a mutual fund, it was an institution.
So, Unit Trust of India. So it’s a financial institution. It was known not as a mutual fund. So very early stages of career started as a mutual fund and good, where we owned a smaller one that gives me a good amount of satisfaction. So, right from, whether I talk about earlier days of GIC Mutual Fund and I worked for IDBI Mutual Fund, and I joined IDBI Mutual Fund, again way back in ’95.
What was — well, I was the first employee who got selected in IDBI Mutual Fund and IDBI was a giant institution, you know, and the 10th largest in Asia, that’s the way IDBI used to be. So, it was a very privilege to get a job in IDBI. Yeah, I was the first employee who got selected, and what was my, really year experience of four months of my training experience. That has given me the leverage of being selected. So, as you can understand what sort of environment, how we like, we were infancy stages of the mutual fund.
Being very early, say, I was, started my career, or my investment in Harshad phase. Harshad was ’92 when this euphoria was there during Harshad phase in India. That’s the way I came to the market, and I like sold all my family investment. I forced my uncle and dad to invest, liquidate their holding. That was the peak of the cycle, and I felt that it was a euphoric moment, okay.
And, from those days, and since we spotted that and market collapsed after that. That was the way my journey started. So, I will always remember that as a euphoria movement. Now, we didn’t have any capability to define as a euphoria, okay. I can only feel it. And, again, doing a post-mortem analysis is very easy. Few years later you felt it was really the industry that was the most euphoric phase Indian market has ever seen, okay. Now, obviously, we have built analytics and we go back to 1990 and ’92 also. And mathematically, we can demonstrate, that’s the time, the Quant euphoria index was at lifetime high, okay.
Now, obviously, that is a post-mortem analysis. That time we have never built it, but it was very early stages of behavior finance to get into. Then I was part of early stages in India, part of Badla Market have traded and because of our previous organization used to invest in Badla Market. So very early stages of understanding behavior finance. Some of the terminology which lot of people are maybe new [chutka fatka].
India was a very evolved market, okay. Much before the derivative future or forward was evolved globally; we have our own innovative system in India. And, by the way, BSE is one of the oldest exchange in Asia, okay. So, that’s the way we were early, at least Indian — we were early in this game, so we got very early stages of behavioral finance, got an opportunity to meet best of the brains in the financial market. Today industry has become very big, but that time industry was very small.
Got an opportunity to — dealt with most of the market veterans in those days, because I was very early stages in a derivative market. Right from inception stages of Indian derivative market I’ve been involved, and I have been market leader in that segment for a reasonably long period of time, you know until 2018 we were playing that, and we were like Top 5 player also in the country. And initially, we were actually number one wherever I’ve worked. So that experience of a derivative market because — taught me that leverage market drives the real economy, not the other way. In our textbook we have been taught real economy drives everything, and actually — and when you talk about reality.
So I’m a student of Pragmatic Institute of money management. So, we have learned whatever we have built, whether we talk about predictive market as analysis or predictive market thesis, or our VLRT framework, which is a byproduct of this thesis itself, has been built from mistakes and blunders. It’s not something it just got evolved, and we are super genius, and we created something unique, that never happened. We have burned our own capital, and in last 33 years I have been in the market where we have learned from massive mistakes which happened, and the good part about us is that an SME, as an individual, what we have learned not to repeat the mistakes.
If you can build processes around that and ensure that if you don’t make the same mistake again, you will be more successful, okay. See, as a human being, I always believe we will make new mistakes. It’s bound to happen. Environment is new. Something is happening for the first time, maybe in a decade an opportunity sometime comes and we don’t realize at that moment.
But over a period of time you learn. And that’s the reason I say that at least, whatever mistakes you have done, don’t try to repeat it. That’s the way the processes come into picture. That’s the way Quant, as a mutual fund house or Quant Global Research, our research wing of Quant Group, is all about how we have built analytics over a period of time. How well we are able to quantify the qualitative, quantitative and the behavior aspect.
So we are predominantly a behavior house. But we combine all three thought process. That’s the reason we bring a very unique way of looking at our market into, what I call multi-dimensional research. The challenge with industry I see, everything revolves around valuation analytics, which industry very proudly say fundamental works. But, we say, is a valuation analytics. The biggest challenge of valuation analytics, when you look at valuation data in isolation, it doesn’t work, okay.
And that’s the reason I have been saying last one year everybody in India has been talking about India is very expensive, because and — but market never corrects. It corrects hardly and comes back with a vengeance. So, what is not right? Okay, are we saying that the valuation analytic thesis which we have been working for donkey’s years have not been working? So I think that’s the way we look at, when you look at in one dimensional aspect, pure valuation, you don’t get answer.
Let’s – then we bring the second dimension. Let’s talk about liquidity analytics, okay, and let’s compare what was liquidity in 2000, was an important year and market has peaked out. And today’s global equity is maybe a few hundred times what was in 2000, what was in ‘2007, ’08, the great Lehman Moment which happened, where the — most of the central bank came together and pumped massive liquidity and the huge earning started. Everybody still remember that was the biggest liquidity provider, central banks were working in tandem, and that was the biggest liquidity. It’s not true. Today also, global liquidity is few times of that, okay.
Now — so very clearly, if you look at second dimension, and then you break this liquidity into good and bad liquidity, and the good liquidity in India is, it’s actually rising. So, on the second dimension, we are perfectly alright. Now you bring the third dimension. That is risk appetite or the sentiments data, okay. Look at what was the perception about India in 2007, ’08, in a verge of collapse, okay. We barely managed that crisis, the Lehman phase.
And versus 2024 India perception, amazingly well, okay. Indian macro is one of the best in the world. So, if you look at today’s India perception on an absolute basis is good; but on related basis, extraordinary. When you combine all these three analytics, then you get a very different answer. That’s the reason, we always say VLRT framework; one-third weightage on the valuation analytics, one-third weightage on the risk appetite analytics, one-third weightage on the liquidity analytics. And “T”, timing as an analytic, it’s a risk mitigation tool for us. So, when we talk about timing aspect, lot of people look from trading perspective, you know timing is a risk mitigation. Timing is an analytical tool. So timing as an analytic is a function of risk appetite, is a function of liquidity analytics, is a function of valuation analytics, okay.
So when you combine, you get much more answers, okay. Since we were talking about the valuation challenges, okay, we all have grown with the same thesis. I have also gained from this. But it took some 10 years for me to undo what I have learned, okay. And it’s very important to understand. Let’s look at the challenges. See, criticizing something which has not worked or failed is a very easy thing. But how to improve? That was the challenge.
So, if you really look at what we understood, why valuation analytics doesn’t work properly, because valuation analytics — all the valuation analytics parameters are dependent on one dependent variable called price, okay. And if you read the cash flow based analytics, most of the — whether it’s price to sales, price to EBITDA, everywhere the price aspect comes into picture. And hence, we are all slave of prices. When prices moves up and down, your conviction also changes. Analysts’ recommendation also changes, and I have seen most of the time, again, from the industry not criticizing about it, majority of the people, including us in the past, used to do post-mortem analysis.
Earnings, as announced, call has happened, and then analysts will do upgrade or downgrade. By the time that event is over, it has already played out. Either you do — other way of looking at that, I take a pre-emptive approach, okay, that I pre-empt something. Some people take contra approach that I’m contrarian, okay.
But as a Quant Mutual Fund, we take a data-driven approach, okay. And that makes lot of referring to us. What I actually am trying to do? We are trying to do — in our Quant Global Research, we are trying to reduce the dependency of this dependent variable called price by significant levels, okay. So, when we bring in the VLRT framework, two-third is macro data. So now valuation analytics is only one-third. And within one-third also, the way we have defined the view, our valuation analytics is that ultimately I’m able to achieve the — or I may need to reduce the weightage of this dependent variable called price by below 9%, okay.
And when you do that, your biases goes away, okay. And this is something which I have learned is all about biases. So when you talk about all — theoretically, we can talk about different types of biases coming to picture, but those are all theoretical exercise. In real life, it is very difficult to quantify that.
So Quant Mutual Fund as a house is very unique about that. Everything we try to quantify, that’s the name comes on the background, we quantify anything which affects markets, whether you talk about geopolitical volatility, you’re talking about earth analytics, you’re talking about perception analytics or liquidity analytics or sentiment analytics. Any sort of analytics which really plays a role in either defining the markets or quantifying something really help.
Let’s take one more example. Whole industry works on the concept of forecasting the earnings, okay. Three years, five years earning and majority of the people based on futures earning, take the calls, okay. And the biggest challenge of this thesis is that it is based on certain assumptions, okay. When assumption changes, you have positive surprise or negative surprise, okay.
Radhakrishnan Chonat: Correct.
Sandeep Tandon: So, it is assumption based. So as Quant Mutual Fund, we don’t like to do anything which is assumption based, okay. So we typically take these data points as a historical only and earnings, this forecast we took only as a catalyst. So it’s not a main driver in our thesis or our models which we look at. These are only act as a catalyst. The challenge is, nobody defines the multiple aspect, okay.
So, when you talk about P/E multiple or you need to say any number, any let’s say simple — let’s keep it simple, price-to-book or price-to-sales or let’s say P/E ratio itself, nobody forecasts — this is actually a balancing number. When analysts wants to upgrade the, like let’s say, earnings rallied by — growth is 5%. And you want to increase the target. So what you change, you drastically change the multiple. And that’s the way it’s a balancing number. Your targets can be changed. So I can, as analyst can upgrade and downgrade by just playing by the valuation multiple itself.
And that is a very subjective exercise, okay. At Quant, we always say, objectivity is our religion and data is God. There’s no scope for subjectivity. So we always believe that don’t get into subject, the moment you have subjectivity, the problem starts. Those biases comes into the picture. And hence, it is our focus area that how to resolve this problem. So we have built something called perception analytics. How? With the help of perception analytics, we can quantify whether perception is speaking out at both in absolute terms and relative terms, is very important for us to understand. When they see reach — when, let’s say, perception for a sector or a stock reach an inflection point. I’m a seller. When it hits, so when it peaks out, it means they hit the most admired territory. We move out from a behavior perspective and market is, let’s say, stock is corrected significantly, and hit the most neglected zone or what sometime I call most hated zone.
That’s the time we’ll be buyer, because that is the extreme inflection point. So at Quant Mutual Fund, we specialize inflection point. We are saying, we are an inflection point strategist, and we are not momentum house. Lot of people consider we are a momentum house, okay, because globally majority of the fund managers are momentum traders, okay. And so is the case with the traders, because everything is all about momentum. Somebody defined price as the momentum. Somebody says, earnings as a momentum which also has its own flaws, or somebody, look, could be a combination of this momentum. So what is important for us is that extreme inflection point something which really help us in taking a bigger, longer term call or medium term call.
Radhakrishnan Chonat: Excellent. Excellent. You mentioned about timing analytics. That’s the first time I’m hearing, and Quant as a fund house is highly regarded for your exit strategies for the timing and effectiveness of when you take an exit. You did mention about it, but can you elaborate your approach on exiting the investments, especially in volatile markets, like what we are seeing now? And what are the principles that guide your decision making in just the exit portion?
Sandeep Tandon: So, let me touch base on timing, and then we’ll come to, because it’s a linked question. What we have been taught, this is one of the important thing we have taught is all about that nobody should try to time the market. Timing is bad, okay. Time in the market is important. I agree, timing the market is important, because that’s how you’ll experience how much time you spent in the market.
But timing is important, okay. I believe that as a student of management, we have been taught, okay, right place, right time. Every businessman wants to time the market, and this is all about, if you’re not on right time, you will miss out opportunity, okay.
Radhakrishnan Chonat: True.
Sandeep Tandon: Whether you’re talking about product launch or even government wants to time it, okay. Timing is such a deep rooted — it is actually so deep rooted in our subconscious mind, we can’t even ignore it. Whatever people will say, I don’t time. Timing is bad. Trust me, the same guys actually wants to time the market because it is the human psyche, you tell me you don’t want to time the market? You don’t want to be successful?
I want to time the market, okay. But timing is a risk mitigation. When you start understanding from everything at Quant Mutual Fund, we say, from risk perspective, we very nicely say we are in the business of risk management, return is a by-product. We manage risk very well, okay. And that makes hell lot of difference when you start looking at the perception, instead of chasing the prices or momentum which people have been. So typically, you land up in a situation you know at the peak of the cycle you are sucked in and the bottom of the cycle, you are capitulated.
So when we talk about timing. So obviously, let’s understand for us at Quant Mutual Fund we always talk about entry is important, but exits are more important. We always say buying is a art and selling is a data science, okay. Lot of people can buy it by just observation, okay. Product launch is good. The queue is there. Let’s say, automobiles company, people think the experience has been good, it’s a very comfortable thing, you know. So, based on your observation, you can identify so and so particular stocks looks good because of these reasons.
But when it comes to exit, most of people have huge emotional attachment. This stock has given extraordinary return. This is something good. And at the peak of the cycle, best of the analysts have a strong buy recommendation. Massive upgrades will be coming, okay, and they will be all part of various indices; MSCI inclusion, NIFTY inclusion, all those things will happen. You know, I’m just not pinpointing one example, okay.
The noise, okay, around this thing will be there. So, you will be in a situation where the narrative will be so perfect, okay. It’s a picture perfect narrative when you get. That’s the time our data tells us, this is the peaking characteristic, move out, okay. And that make lot of difference how you look at — so let’s say, to give you some live example. Day before yesterday market meltdown in India happened. Some of the PSUs are down 20%, 25% and indices were down 8%, small, mid, okay. Luckily we didn’t hit the lower circuit, okay. But we are approaching in that direction. So I was one of the — on couple of channels, I came and said that INDIA VIX is now at 31%. We think, it’s peaking out. Majority of the charters will tell you, it’s breaking out, okay.
So it’s new high, new breakout. Now it will go into the next level, okay. So it’s a characteristic. Now with a behavior perspective, our thesis is like it’s peaking out and it cannot sustain beyond 2%, 3%. And good news is that it’s finally corrected, it corrected 27% yesterday and today, 7%. So more than 30% or 32% is already corrected.
Radhakrishnan Chonat: Correct.
Sandeep Tandon: But at that moment, nobody was willing to stick their neck out and say what will happen. People are shit worried. So, our behavioral data point were showing the fear in the market was extraordinary. People were getting capitulated. When — and when you build these systems, it’s built. When you are in normal environment, when you — when you have rational thinking, and you build it. And these analytics really help us in difficult time, what happened day before yesterday. We could be the only house on the media saying that one should be aggressive buyer, okay, don’t sell anything. These are time — these are like God given opportunity. Sometime extraordinary events happen which gives you extraordinary buying opportunity, and we cause — we actually wait for those moments, okay. And it is God given opportunity if you have.
But what was the situation? People were so scared they didn’t have guts to buy. Then market rallied yesterday, even today it’s rallying right now, okay. The perception changes. So, some of the analytics which we look at not only the end of the day, we look at even the data also, okay, that makes hell lot of difference in our thinking process and you remain. This is — ultimately this business is very mind game, you know, how well you can play it. So we play on human psyche, okay.
As a behavioral investing, you save in extreme – people would say fear and greed, you know. But everybody talks about a fear and greed, but nobody quantify fear and greed, okay.
So, we move to the next level, and we quantify fear and greed. Yesterday the fear was extraordinary, okay, and day before yesterday the greed was extraordinary. And the exit result came, everybody was sucked in. People thought now they will miss out. Something has already changed. So that is a way we try to capitalize these inflection points and try to have early exits or early entry points. Sometime you’re early, you have to live with those pains, but the good part is that when you buy and sell, the inflection points, your upside and downside both are limited, okay.
It’s not like when you buy in the inflection point, they’re at lower levels. I know my downside is limited. When I’m selling at the peak of the cycle, we know upside could be there, and nobody can time the exact exit or exact bottoms. But once you reach — start hitting those, what to call it, the neglected zone, the admired zone, we get opportunity to flip, and this is what exactly we do.
Radhakrishnan Chonat: Excellent. Excellent. Shifting gears a little bit, you have mentioned about the global uncertainties, from ’27 — an inflection point has happened till 2047, we are going to see geopolitical changes. Indian elections, you know you just touched upon, done and dusted. Now, at least there is some visibility, shaky visibility at least. But then the U.S. elections are impending. The superpower is trying to get the second guy keep quiet and all that stuff. So the geopolitical tensions, you have small wars breaking out everywhere. Given the current global market conditions, if I were to ask you to sort of quantify the future outlook for next 6 to 12 months, how do you foresee the period with these heightened uncertainties impacting investment strategies per se, let me put it that way?
Sandeep Tandon: So, I have been very vocal about the last few months I’ve been in various media houses and I am talking about that. Easy phase of bull run is over in India. So, one should be very clear. Yes, in India we are in decise — I can talk globally also, but let’s focus on India for a few minutes. The easy phase of bull run in India is over, the bull run is over. We are in decisive bull run, but we are in difficult view also, which means that anything you buy, any sector you touch, in next six months you will be going to make tons of money, that phase is over. Maybe there’s a probability in the next six months, you actually lose some of your investment. That’s the scenario.
But if you can mitigate your risk by doing sector rotations, stock rotation based on the sectorial preferences or the data analytics which we do, you do get that sense, and you can still generate massive [FI] in the current level, because we are in decisive bull run.
So, that’s the way I define the market, and people like us can really optimize it. Let’s say, example, since you talked about geopolitical. I’ve been myself an option trader in the past. We have very — used to run very large prop base in the country. 10 years I run that prop and maybe in those 10 years not a single year was ever negative. Yes, many month was — monthly is negative. I don’t think we have any quarterly also any negative yield.
In Lehman, we made very tons money, that’s a new genesis. So in Lehman crisis, actually, we made very sizable money, okay. And with a limited capital we’d made — and that’s the way we are able to build multiple business after that. Now when you talk about, let’s say, volatility, people — generally money managers and analysts as a community or investor as a community, lot of people generally make this statement, let this dust settle down, let’s volatility settle down. I don’t mind buying 5%, 7% higher, but I don’t want to be part of this noise, which is there. They call it noise and disturbance, because they are not equipped to handle that volatilities, okay. We actually thrive volatility, okay. The volatility is our best friend. I always say, if you can make this invisible animal called volatility as your best friend, then you will be very successful. The moment you start hating, is something you don’t like, you don’t understand, the problem starts.
When you become friendly with this volatility. It means you understand volatility. You have arts of managing that volatility. So when we’re talking about art of managing known risk as well as unknown risk. And if you can manage known and unknown risk better, you will able to generate Alpha out of it.
Let me give you very small example. I have important myth in the market. Everybody talks about long. I agree. Investors are long term. Asset classes are long. But stocks and sectors are definitely long — are not long-term. We have been taught few wrong thing. These are blue chip companies. It’s a long thing. You can buy and hold and forget in your portfolio. So I can tell you, whether it’s S&P or even Sensex India, what was the Sensex in 1990? The so-called blue chip company don’t — majority of those companies don’t exist today. And if they exist, they are not part of Index. Maybe few companies, maybe two, three companies, which were part of Sensex at that time still are part of Sensex. Majority of the company, are no more blue chip company, but sometime we have been taught these are blue chip companies.
So let me come again, address this question from a risk perspective. Why everybody talks about long term? Because managing long-term risk is very easy. Your mistakes are hidden. And you, if you have — make few mistake, let’s say even 10 odd mistake you made in 10 years, it is hidden. Doesn’t make difference to you. So why — that’s the way I call it long-term investment is a lazy style of money management, because your mistakes are hidden.
And this thesis is, now I’m talking about India is no more mature — it’s no more emerging market. It’s actually quite developed market. It is quite evolved market. This thesis works in the emerging market. Maybe it can work still in, let’s say, in African countries, which is still evolving. But if you talk about in India or Singapore, or even China, or you talk about Indonesia, they’re fairly evolved economies, okay, or evolved market. I don’t think this thesis will work.
So what is very important to understand that if you manage your medium-term and short or near-term risk, or even short-term risks better, not only you protect your downside, actually generate Alpha out of it. And this is what exactly we do. It generates small, small alpha in a shorter and medium duration time also, because I don’t buy everything for 10 years. Every stock I don’t buy for 10 years perspective, okay, because every individual has needs, long term needs, medium term, short term.
You can’t say I want to enjoy my holiday, but let me save for 20 years, then I will be eligible for holidays, okay. Now you can’t pamper even yourself. He says, I want to enjoy; the rest of you, no, no I have to save first. After three years, I will go. Let me have a saving first. That’s not the way you do it, correct. If you have products which can offer you medium-term returns, short-term returns and long-term return, they are apt product for you. And this is the way we manage our treasury style money management with a philosophy we talked about.
So we manage more like a treasury. Idea is not to lose the capital. Because what happen typically, I have been investor for a long period of time. And you raise money, you take money, and by showcasing your previous track record, certain [IRU] promise, just what we can deliver. Obviously nobody gives guarantee. But this is what happens.
So when you collect money, you are absolute guy, absolute return product. But let’s say, three years later, when markets are down and you say market is down 15%, I’m only correct. I am down only 12%. So I have outperformed 3%. So when you take money, you are absolute-return product. When you deliver, you are relative product, I outperform. And this is what investor don’t like it. After three years, if I take your money and say, yeah, I have generated negative Alpha or whatever reasons, irrespective of the market condition, you may not like it.
And hence, it is very important for us to understand how you manage money in difficult example, and that becomes like a treasury style. So in a treasury, the treasurer does not have a mindset to generate few quarters negative return, maybe if unknown risk hit him, a quarter is maximum; worst case scenario two quarters will be example like COVID happened in March 2020, or Lehman moment happened, or some, let’s say in February 2020, is this Russia-Ukraine battle happened.
So those unknown thing people will still manage. But when you manage money like a treasury. So we have a view, we manage our long-term, medium-term, hedge-call, cash-call, near term, special situation. All sort of risk we manage parallelly, okay. And that gives us comfort, because parallelly we are managing all sort of thing. So some portion of my portfolio is also short term. Some portion of my portfolio is also medium term, and 70% is my long term. But in that 30% we generate Alpha, okay.
So let me give an example. So let’s say, talking about last two years. So calendar years and COVID onwards, 2020 was positive year for whole industry, ’21 very new. Calendar year 2022, industry has given negative return, and majority of the mutual fund schemes also have given negative returns. Quant was the one fund house, all scheme has given positive return, including small cap. So we deliver in negative returns period 10% to 30% returns. So that give you that Alpha can be generated negative.
Let me give you one more example. How the dynamic style of money management works. June 2023, okay, we launched our BFSI’s fund in India. And the first six months, I remember, strictly remember, I think, index, the BFSI benchmark has generated closer to 2% return, okay. And other — some other benchmark had about flat or even negative. So let’s say even 2% return for discussion sake.
In the same period, our BFSI fund delivered 64% return, okay, and which was higher than at that time, than smaller cap and the NIFTY itself. So when the benchmark index has not delivered a flat or negative returns, you have given outperformance of 62%, okay. And that makes big difference when you talk about dynamic style of management. See, because I always say we live in a very dynamic world. Our money management style cannot be static, buy, hold and then you forget it. That’s not the model we practice, because we believe that we have to continuously rebalance our portfolio, reconstruct our portfolio based on the risk-on, risk-off environment.
And the challenge is that people do post-mortem analysis, and you say, after risk-on period, you realize, oh that was the risk-on period, oh, that was the risk-off period, okay. So we not only quantify the risk-on risk-off environment, but we also quantify the impossible intensity of risk-on, risk-off environment through our predictive analytic. This is what we do. Instead of doing a post-mortem analysis, we do some amount of predictive analytics, and we have been reasonably successful in generating superior risk-adjusted return for our investors.
Radhakrishnan Chonat: Excellent. While reading up, I was pleasantly surprised. In your predictive framework, you had mentioned something called Earth analytics. Now we have unknown risk. But climate change is, I think, right now, a known risk. So, explain to us what is Earth analytics and what are we talking about here?
Sandeep Tandon: So, to be candid with you, in 2012 when we were working for future risk perspective, we spotted that next biggest bull run will come in the agri side. Whenever we’re talking about agri as a or commodity as a space, we spotted from — based on our cycle analysis, some data we will get 2020 till 2030. This — that particular decade will be generating massive returns for the — we have talked about 100% to 1,000% return in that.
And we were trying to get multiple answer through market implied analytics or through cycle analytics. What could be the reason why this sort of returns or this sort of up-move can happen? Then we spotted that if agri prices globally will move up, it can only happen — either it can happen because of the supply constraint and supply constraint can only happen with the weather condition.
You have horrible weather condition or a negative Earth environment for you, and so we — so we started working. So nine years, I myself have worked on the Earth analytic. Try to understand what type of environment would be by 2020, because it has been now fashion to talk about climate change and every political party, every business house, every global leaders will talk, but nobody quantifies. They give you all fear of or changing climate condition, the impact which will happen, all sort of possible theoretical thing, okay, but nobody quantify.
So we have put in some effort through our Earth analytics, and we are able to quantify it. If I had to take few decades view, we are able to do through the help of analytics, and that’s something which we have invested a lot of money. We dealt with lot of geologists also, and we have spent considerable amount of time and money in understanding this seizure, and we are able to evolve a lot. In our book we are referring, we have actually covered a whole chapter about Earth analytics, how magnetic fields affect the economy, how various data points affect. Our focus is market. Our focus is financial market. That is our small domain.
So we don’t get into a theoretical exercise. We don’t have to write a white paper on these things, okay. We will understand what is relevant from our financial market or macro or global economy perspective. Our focus is very clearly defined. We don’t deviate beyond that. Otherwise, this is a big — you can do as much research as you can, and then we will — can be completely lost, okay. So we do a little bit of it, which help us in taking account, because we ultimately were a student of market cycles. We subscribe lot of data. We have 1,000 — 100 years of data on various kind of commodities or yields, okay. And sometimes 1,000 years of [weaved] data. So we have lot of data.
So, that’s where we have spent good amount of money. So it’s an analytic firm, okay. So, we say, the objective is the religion, data is God and everything revolves around data. That’s the way this firm has been built up.
Radhakrishnan Chonat: Excellent. In the last four years, especially you mentioned the index has not given the returns, whereas even some indexes that were in negative, you actually outperformed. I believe, what from INR500 crores — close to INR500 crores, you are now at INR50,000 crores plus AUM in the last four years alone.
Sandeep Tandon: Yeah, we are nearly INR87,000 crores.
Radhakrishnan Chonat: Okay. Excellent. INR30,000 more than what my data says. So some say, okay, as the AUM grew, now the performance will come down. But some say no, they have outperformed, even when their AUM is at an all-time high. Now, from your vantage point, how do you ensure consistent top performance across your fund schemes, even at much higher AUMs going forward?
Sandeep Tandon: See, we have grown with lot many myths. As I’ve said, we have to undo lot of our own teaching which we have learned. This is one teaching we have been taught, okay, with size, returns comes down. So, again, a classic example of lazy style of money management. When you can’t deliver, you start blaming size. If size is a problem, please return the money. And this is what happened in U.S. market. Nobody returns money. So, this gives a lecture. Okay, there’s a theoretical exercise. Nothing beyond that.
As a student of economics, we have talked about economics of scale, okay. As size goes up, your benefits also should rise. That’s the way we are taking advantage of it. Let’s take example, if we are growing our size, let’s say small cap, which was some INR40 lakh-odd, okay. And now it is INR22,000 crores or INR21,000 crores in that thing. But if you look at our performance of, in a small cap, with size, actually our performance has risen significantly, okay.
Now, what is the magic behind that? If somebody has to understand? Very simple, as we are growing, capital market depth and breadth is also growing, okay. So, it’s not like we are growing in isolation, and hence we don’t have desired liquidity in the market. So, liquidity is also increasing. Depth is also increasing. What is important to understand, let’s say IPO comes, okay. Last four years Indian IPO market has been extraordinary. If you really exclude the IPO benefit in most of the schemes which people bought it, then performance is below average, okay, because of allocation, because of sheer size of your fund allocation, you won the Tier 1 allocation. You got highest allocation, and you made extraordinary money there, okay.
And if you are as a small mutual fund, nobody is bothered about it. You don’t even consider for allocation. As now we are getting size, this one important benefit which we are getting, okay. Though, this benefit could have been more when you are the easy face of bull run, which was the case for the — our other mutual fund houses, because they have — they have been in this business for a while, and they have a benefit of size. Okay, that’s point number two.
Point number two, what is very important to understand liquidity is always highest at the peak of the cycle, and liquidity is always high at the bottom of the cycle. So, if you can exit at the peak and rebuild your exposure at the bottom of the cycle, you always will be winner.
Third point, it’s about the derivative as such, okay. Now, we have been a very large player in the past. Derivative markets are 10, 20 times more liquid than the cash market. And hence we use that product also to bring down our impact cost, and that really help us in our entry and exit point scores.
A point number four, and very important is all about as you have grown, your corporate access becomes easy. At INR5,000 crore, let’s say if you’re managing, let’s say $10 million, $12 million, okay, nobody was — corporate was not willing to entertain your call also, forget the meeting request, okay.
At $10 billion of assets, majority of the managements are willing to meet us, and they are willing to come to our office also. So I’m seeing the whole perception change, it saves your time, it gives you better perspective, you’re able to talk to them. It gives you an edge. So corporate access also becomes a very meaningful edge. So there — and I can talk about many more examples, how size gives you edge, okay. So, if something, economies of scale has been taught in economics, this is right. What money manager are telling you, this is a lazy style of money management. If size gives me difficulty, then please return the capital.
Radhakrishnan Chonat: You’re very outspoken. Excellent. I noticed recently you picked up a sizable stake in a QIP in one of the energy companies. I’m not taking the names. So, sort of help us understand the investment thesis behind that decision. And is this like a global upcycle in commodities, do you expect, though there are negative impacts on stock prices. What are your sort of views on sunrise sectors? Something for my listeners, as key takeaway.
Sandeep Tandon: So, obviously from compliance perspective, we generally don’t talk about stocks, okay. But, in general I want to only share that, we as a house, from our research perspective, we believe leverage economy as a concept will lose its relevance. It is already losing its relevance, and maybe by 2047, it will have lost its relevance completely, okay. And what it means, the relevance of real economies, real asset class that we talk about, any asset class that we talk about, commodities also grow. So now, we believe commodities are in a super cycle or a secular up-move. I don’t want to call it a bull run, because bull run has its own connotations, so I say it’s up-move. So I’d say they are in secular up-move, okay.
And that is way we believe that America as a country will lose its relevance, banking as a sector will lose its relevant. They are all byproduct of leverage economy as a concept, okay. And in last many, maybe, I can say in last many decades, leverage economy as a concept has gathered momentum. And today, leverage economy drives the real economy and not vice versa. And I think that cycle has started reversing and that will make lot of meaningful shift in terms of the way sector allocation will happen, how the relevance of developed economy will evolve. How many will shift from east to west and from west to east and within that I have to call it Asia centric thing. And even, let’s say, 10% of liquidity shift from U.S. to Asia centric economy, particularly India, there will be Tsunami over here, okay. So that’s the way I define. So don’t look at just valuation analytic in isolation, doesn’t give you any answers, okay. You will be a lost person, because you’re looking at one dimension. And in today’s, if you go by our Vedas, we have 64 dimensions, okay.
So if you get into a theory, you relativity talk about multiple universe, okay. So all those things are part of a life, how well you can drill down and down, and you can able to quantify how and why it is affecting you. And that’s the way we try to filter it. So we are student of both absolute numbers and relative numbers. That’s because everything in life, as a student, they’re relative. Everything is relative. Returns are also relative.
So, absolutes are good, but relatives are important, and what is very important because absolute is like, you say the fair value. Absolute is very bizarre concept, you know, okay, it can be as abstract as it can be. You know it’s very difficult to quantify that part. When you combine qualitative, quantitative and behavior aspect, that’s the reason you get better answer. If you’re just looking at the qualitative, you won’t get all answers.
Radhakrishnan Chonat: Excellent. Shifting gears a little bit. Quant Mutual Fund House, right, you are strong proponents of active investing. Now there is this school of thought propagated in the U.S., like so Vanguard and all indexing. But your outperformance irrespective of the market cycle proves that active investing is good. So now for those listeners, who are young earners in India, what should be their asset allocation? You also mentioned, don’t have too much delayed gratification also. So what should be an ideal mix of investments and should he pick active funds over index funds? Or should it be a mix of both? What are your views on, how somebody who’s listening to this, we have 50,000 plus subscriber, so most of them are trying to understand how they should invest.
Sandeep Tandon: So first of all, very simple thumb rule, if you can see in the easy face of bull run, passive products will do very well, because they are very cost effective product in the bull run. And in the difficult phase, active fund will outperform passive fund and passive fund will underperform the benchmark decisively. By default it will be, okay.
Now let’s understand for a minute the success of passive. What lead to the growth of passive fund globally, okay. I have seen this momentum actually came from 2012 onwards in the passive cycle that we believe. Post Lehman, one important event happened, the liquidity crisis which we saw in 2008 — September 2008, that sort of liquidity crisis we have never seen in our life at least, okay. I don’t remember any events which was defined as a liquidity issues. The global liquidity has completely said and done, some of the banks became bankrupt. So, after that, the fear among active money management was so high, there were actually lost people. They really don’t know what to do now, because something new has hit them. And that’s the reason people were playing safe.
And globally, I’m not talking about India, people globally moved — started hugging the indices. So if you are a long haul thing, this tendency of having 70%, 80% hugging towards index gives them comfort that I will not be at least outlier, okay. I will fall in line if I’m following 80% in the index and 15%, 20% I put in mid and small, that gives me upside also. So, I will always outperform my respective benchmark and I’m protecting my downside. So that thesis gathered momentum, and that’s a very passive product. This is the way active started doing.
Our investors are even more smarter. They understood this mess that you’re offering me a quasi-passive product and charging me active money management fees, okay. And that’s the way the active money management lost their relevance, and they — and passive product came into picture, okay. Now, India also, I’m seeing people are setting us a new segment here, passives is new product. No, it’s a failure of active money manager, and that’s the way passive has grown. I’ve a very strong opinion about active. This decade belongs to active money manager, because the global volatility will remain very high.
In this period, passive product will not differ, okay. It’s not like, we don’t have any product, and hence we are offering a very biased view. This is my analytical view. The active money manager, not only people like us globally will outperform in this phase.
Radhakrishnan Chonat: Excellent. Before I wrap up, I’m going to ask you sort of, to crystal ball gaze into 2047. Right now we are in 2024. For posterity sake, let’s assume this video is still on and somebody watching in 2047, what will be the position of Asia and India in general in the global mix? You mentioned about the leverage economies getting hammered and stuff. So where do you see India in 2047? And who do you think will be replacing U.S., if at all?
Sandeep Tandon: Okay. So, some of these things we have covered in our new book, which is largely ready, can be released in some time, okay. And see in 2047, why we chose 2047, because we call it 2017, till 2047 as a great transition phase. We have written about it in this book itself, where we said, 2017 onwards, the global reset happens, okay.
And now we are extending this thesis, saying that instead of using the word global, we said, we are seeing how the great transition, because that’s actually a transition phase, okay, where a country like India will re-emerge. We believe, by 2047 India demographic cycles will reset and that’s the reason that 2047 year is viewed not as that 100 years of — celebration of 100 year. So, that’s not going to be — that’s a political dimension. For us, this is the way we define, because demographic cycle we thought and lot of things are dealing with demographic cycle, will be a very important area for us.
What I believe that by 2047, when you say the relevance of leverage economy will go, which means, by 2047 America — dollar will not be a reserve currency. It’s a — it’s like U.S. is a very large economy, I don’t think it’s going to collapse the way a lot of people talk about. I think it’s a big shift, okay. But I’m not worried about the collapsing aspect. I think I look at everything from relevance perspective. America as a country, leverage economy as a concept, it will lose its relevance. So America will lose its relevance. It will remain as an important economy in the world, the answer is yes. The relevance will be lost.
A country like India will re-emerge, and the relevance of India or Asia-centric economies will get up into the cycle. And so called, some of the developed market. Our views of Japan, which has been a so-called second largest economy in the world today or third largest now, or maybe fourth largest, depending on how you look at, is going to lose its relevance significantly.
We believe — we have written in our book in 2019, it said that Yen was around 101. We think the yen will collapse. Lot of people were celebrated that devaluation of the yen leads to a better economic prospect. Yes, we talked about by 2020, end of 2023 Japan market will hit all time high, okay, which happened in January 2024.
Our view was that, beyond 175 JPY or yen as a currency will collapse. So far deprecation of it has been celebrated has helped. At some point of time, it will just collapse, and the relevance of — Japan is something which is, we are very worried. And India will be a biggest beneficiary of that event. When we say Japan, so far we have seen China Plus One. I think Germany Plus One is knocking the woods. And Japan Plus One will be one the biggest event for us, okay, from a longer term perspective, lot of things we have built in India because of sheer size or manufacturing thesis of the [Indecipherable] where the country is getting evolved. So, we have been very constructive about India. We think maybe by 2047, some of the other economy, Europe will not exist in this form. Maybe bigger economy like France, may not be — maybe not in the Top 5 economies. They will lose their relevance. So lot many radical changes we see. We believe that global volatility cycle should peak-out, okay, maybe by 2033, ’36 sort of thing, and maybe after that world will be very different.
We believe, in our book, we have talked about how a spirituality cycle will come back, and how India became a spiritual leader, new thought leader. If I have to say the word, right word, India will emerge as a thought leader, global perspective. And India, I don’t know about whether India will be the largest economy or not, but what is very, from the wealth perspective, India will be the wealthiest country, because we are very optimistic from the bullion perspective, or the precious metal perspective. That cycle is yet to be played out. And you know, as an Indian, everywhere right from our maids also, our driver also have huge amount — right from the lower status of the society [Indecipherable].
I think India will be in a very unique situation from a wealth perspective and maybe too premature to visualize everything. But these are the data points we’re showcasing. So in all, I’ll say, India will be forced to recon by 2047, and India will emerge as a unique asset class itself. So that’s the way bullishness about India, we say this decade, it belongs to India, maybe the century belongs to India.
Radhakrishnan Chonat: Excellent. Excellent. On that very bullish note. Let’s thank Sandeep ji, for taking his time out and giving us his insights into the markets and the investment philosophies. Sandeep ji, it’s been an absolute pleasure catching up with you. And I look forward to more such interactions in the future.
Sandeep Tandon: Thanks, Radhakrishnan. Thanks a lot for inviting us.
Radhakrishnan Chonat: Thank you..