Quant Mutual Fund front-running crisis: PrimeInvestor says ‘exit call’ on funds subscriber-centric

PrimeInvestor, a prominent Chennai-based investment recommendation platform, has garnered significant attention across social and print media due to its recent stance on Quant Mutual Fund. Following reports of regulatory actions by SEBI at Quant Mutual Fund's premises, PrimeInvestor issued an 'exit call' for all equity and hybrid funds managed by Quant AMC, regardless of their previous recommendations.

Building on its most recent guidance, PrimeInvestor emphasised that its latest advisory regarding Quant Mutual Fund was driven solely by the interests of its subscribers and their portfolios.

It clarified that seeking publicity was not their intention, as most media attention in such cases is unwelcome and its approach to mutual fund recommendations aims to not only highlight good investment opportunities but also to ensure effective portfolio management, which includes issuing Sell or Hold calls when necessary.

PrimeInvestor further stressed that these actions are not about short-term portfolio turnover but rather about prudent management in response to sustained underperformance or unknown risks associated with a fund or its asset management company (AMC). It advocated for moving to alternative options when the current fund no longer aligns with long-term investment goals, underscoring commitment to staying invested in the long run rather than being tied to a specific scheme or AMC.

It also advised that alongside the recent Sell call, the subscribers have the opportunity to reinvest in alternative options.

"We curate the Prime Funds list and endorse several funds across various categories with a BUY call. Our assessments are grounded in objective analysis, recognizing that sometimes the available information may be limited," stated the platform.

"So, in situations like the recent one, our opinion may come across as a sharp reaction. We’re not saying that risk is bad – we have plenty of calls where risks are high and it’s perfectly fine to take risks to earn returns. But where the impact of an event is currently unclear but consequences grave if it does transpire, we believe it’s far better to protect wealth than run a risk in the name of returns. And tax outflow is a consequence of such risk containment. We do not do the ‘what if’ scenarios to see whether the risk mitigation makes up for the tax outflow. Such an approach cannot work especially when the consequence is a black hole that cannot be measured. As the lyrics from the Wild West song goes: ‘..the secret to survivin’ is knowin what to throw away and knowin’ what to keep’."

PrimeInvestor also highlighted that its approach is likened to playing a game of chess, where both offense and defense strategies are crucial for winning.

What happened with Quant MF?

According to SEBI's surveillance system, there are indications of front-running involving entities that had prior knowledge of Quant Mutual Fund's upcoming transactions. It is suspected that Quant executives, aware of the size and timing of these transactions, may have leaked confidential information to potential beneficiaries.

SEBI's probe into suspected front-running involving Quant Mutual Fund's ₹93,000 crore has left numerous investors anxious about the security of their investments. During its raid on Quant's Mumbai and Hyderabad offices, SEBI confiscated mobile phones, computers, and other digital devices in an effort to uncover the sources of leaking confidential information for illegal financial gains.

What is front-running?

Front-running occurs when an individual, often an insider or broker, executes trades based on advanced knowledge of pending large transactions. For instance, if a broker purchases shares in their personal account ahead of a known client's order to buy a significant amount of stock, it constitutes front-running. This practice is controversial as it exploits privileged information, potentially impacting market fairness and investor confidence.

Reasons behind PrimeInvestor's Sell call on Quant MF schemes

PrimeInvestor expressed concern over the risks associated with front-running news, highlighting a dual-risk scenario. Firstly, they anticipate redemption pressures on AMC funds, particularly concerning for Quant, which holds a significant portion of mid-and small-cap stocks susceptible to NAV fluctuations. Secondly, they emphasised that stocks allegedly involved in front-running could face selling pressures, impacting overall sentiment and triggering further redemptions.

Given the momentum-driven nature of many stocks in Quant's portfolio, PrimeInvestor stressed the necessity of exiting these funds promptly to mitigate potential disruptions caused by sudden outflows and ensure investor protection.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.