Adjust Your Portfolio Like Gears In A Vehicle Based On Market Conditions For Success: Estee Advisors

Estee Advisors, a pioneer in quantitative investing and data-driven decision-making, leverages advanced technology to deliver impactful portfolio management solutions. “Data-driven decision-making has consistently grown over the years,” says Co-Founder Sandeep Tyagi in an interview with Bizz Buzz, emphasising that reliable data and access to numerous investable companies form the backbone of their approach. Tyagi notes that the integration of artificial intelligence and machine learning has transformed quantitative investing, allowing Estee Advisors to evaluate market sentiment through social media analysis and score companies on over 500 factors.

Estee Advisors also tailors its institutional-grade strategies for retail investors, providing access to model portfolios that lower entry barriers and maintain quality. While uncertain markets pose challenges, Estee Advisors advocates a diversified, multi-factor model, helping investors achieve long-term gains through balanced and resilient portfolio management

With your background in analytics and consulting, how has data-driven decision-making in portfolio management evolved over the years?

Data-driven decision-making has consistently grown over the years. It thrives when high-quality data is available regularly and when there are numerous investable companies. No single human investor can absorb detailed information on 500 companies, but a data-driven process can.

Additionally, advancements in technology—such as faster computers and artificial intelligence—have significantly enhanced our ability to process various types of data. Moreover, the importance of specific insider information has diminished, as regulatory frameworks now require companies to disclose all relevant information promptly, making that information accessible to more people. These factors have propelled data-driven investments to become a major force in portfolio management.

How are AI and machine learning influencing decision-making in quantitative investing? Are there any specific models or algorithms Estee Advisors has pioneered?

AI and machine learning influence quantitative investing in two major ways. First, they allow us to process and synthesize data that was previously inaccessible.

For example, we can now analyze vast amounts of social media posts to determine market sentiment toward a company. Second, machine learning enables us to combine pieces of information in novel ways, helping to identify specific relationships between different data elements.

At Estee Advisors, for instance, we combine data from hundreds of factors to score all 500 companies in the NSE 500. This level of analysis is not feasible through manual processes.

What challenges do you foresee for portfolio managers in effectively using quantitative models in an increasingly volatile market environment?

One of the key challenges for quantitative models is handling novel situations. For example, during the onset of Covid-19, quant models lacked historical data to predict which companies or sectors would thrive under such unique circumstances. By design, quantitative models rely heavily on historical data patterns, making it difficult to adapt to entirely new scenarios that fall outside those patterns. This limitation poses a significant challenge in volatile market environments where novel situations can emerge.

You draw an analogy between gears in a vehicle and investment strategies in your book. Can you explain how this analogy can guide retail and institutional investors differently?

I use the analogy of driving with gears to illustrate how investors should adjust their strategies based on market conditions and risk tolerance. If you're uncertain about the driving conditions—like navigating a mountain road in the rain—you would use a lower gear and proceed cautiously. Similarly, in good conditions—such as driving on the Delhi-Jaipur highway on a clear day—you can confidently use a higher gear.

In investments, this translates to adjusting your portfolio based on your risk appetite. Retail investors, who may have lower risk tolerance or shorter time horizons, might choose a balanced approach with a mix of equity and debt. On the other hand, institutional investors, who can often absorb more market risk and have longer investment horizons, may opt for a more aggressive, all-equity strategy.

You emphasize long-term commitment to an investment plan. How can one stay in today’s fast-moving and often unpredictable market environment?

While the market environment is fast-moving and unpredictable, the core principles of investing remain constant. The key is to focus on these timeless principles rather than getting swayed by short-term fluctuations. Here's how you can stay committed:

Set the right expectations and goals: Have clear, realistic objectives for your investments.

Perform proper asset allocation: Distribute your investments wisely across asset classes based on your risk tolerance and goals.

Select the right products: Choose products for each asset class by considering factors like returns, costs, and taxes.

Avoid noise and distractions: Stay focused on your strategy and avoid getting influenced by market hype or panic.

Regularly rebalance and monitor: Keep an eye on your portfolio and rebalance as necessary to stay aligned with your goals.

How can retail investors benefit from portfolio management techniques typically reserved for institutional investors?

We offer retail customers access to model portfolios that are based on the extensive research conducted for our larger institutional investors, including those in our Portfolio Management Services (PMS), where the minimum investment is Rs 50 lakhs. This approach allows retail investors to benefit from a well-researched, balanced portfolio that is tailored to their investment size, with entry points as low as Rs 24,000. By leveraging the same strategies and insights used for institutional clients, retail investors gain access to sophisticated portfolio management techniques typically reserved for high-net-worth individuals and large funds.

With your experience, what key factors should investors prioritize to achieve long-term gains, even in uncertain economic environments?

There is no single factor or theme that consistently works in all economic environments, especially during uncertain times. Many investment management firms offer a variety of product variants, and while some may perform well, it is impossible to predict which one will succeed in advance.

At our firm, we take a different approach by providing diversified, multi-cap, multi-factor models. This allows investors to spread their risk across multiple factors and market segments. For instance, factors like momentum may perform well in many years, particularly in rising markets, but they tend to underperform during uncertain times. A clear example of this was in 2020 and 2022, when momentum strategies didn’t fare as well.

Therefore, we recommend that investors prioritize a diversified, multi-factor approach. This strategy helps manage risk and increases the likelihood of achieving long-term gains, even in volatile economic environments.