In a very short span of time, balanced advantage funds have gained popularity among investors and advisors. What are the three key reasons for this?
Balanced advantage funds dynamically adjust allocation to equity and debt based on market conditions. This provides investors with consistent returns with low volatility and a smooth investment experience. Right asset allocation strategy diversifies risk, reduces volatility in returns and enhances investment experience. They allow investors to use the expertise of an investment professional for optimum asset allocation. Investors cost (exit loads on withdrawal, taxation etc) under this strategy are also lower in balanced advantage funds. Most other investment options are only focussed on single asset class (equity or debt) or hybrid funds with a rigid asset allocation pattern, say x% equity and y% debt. Balanced advantage funds, on the other hand offer dynamic asset allocation based on the expertise of an investment professional. Hence their popularity.
ITI MF will launch ITI Balanced Advantage Fund. Please share with us the fund management strategy for this fund?
ITI Balanced Advantage Fund aims to provide long term consistent returns in all market conditions to investors by dynamically allocating money between equity and debt. The fund actively manages allocation between equity and debt using our research based asset allocation framework. Net equity exposure of the fund can range from 0 to 100%, however from a tax efficiency angle the gross equity exposure (ignoring hedged derivative positions) will be minimum 65%. Debt allocation can range from 0 to 35%. The fund will only invest in debt securities with residual maturity of upto three years so as to generate smooth accrual based debt returns.
What would be the underlying formula to decide equity and debt allocation?
We follow an internally developed research based asset allocation framework. The framework is based on three factors – market valuations, trends in earnings and volatility in different asset classes. We use price to book as the primary valuation indicator as it has been a good predictor of market tops and bottoms across global markets as well as Indian markets. It is less impacted by short term or one off factors and is better at handling cyclicality. We have studied how these factors have operated in our markets over the last 25 years and tried to work a solution that provides optimal asset allocation and consistent returns.
When you back tested the fund, how has it performed across market cycles?
The table below gives the results of our asset allocation framework vs. Nifty. As can be seen, the framework has been successful in significantly reducing downside in bear market phases and outperforming in bull phases.
ITI Asset Allocation Framework: Back Testing – Monthly Rebalancing
How is this fund different from other balanced advantage funds?
We use an internally developed research based methodology for deciding asset allocation. Our methodology gives more emphasis on fundamental factors and less on technical/momentum based indicators, so as to provide consistent returns over longer term. The fund can vary its net equity allocation between 0% to 100%, as against most other funds which have a more limited range. Another key differentiator is that our fixed income investments will not have instruments with balance maturity of more than three years. The focus will be steady accrual income from a high credit quality portfolio. This will significantly reduce the volatility in fixed income returns as the portfolio duration will be lower. Thus, the fixed income portfolio will help provide consistency in returns.
Why should advisors recommend this scheme to their clients? Which category of investors should invest in balanced advantage funds?
ITI Balanced Advantage fund has three key differentiators –
- an asset allocation framework that is predominantly based on fundamental factors and research;
- full range (0% to 100%) of net equity allocation and
- no duration risk in fixed income portfolio
This we feel will enable our scheme to provide consistent long term returns and a superior investment experience.
We feel the balanced advantage scheme is not just meant for first time investors. The first time investors have a smooth investing experience and less volatility. The more experienced investors also benefit of a disciplined asset allocation strategy with far lower transaction costs and tax efficient structure. The optimal asset allocation generates very good long term capital appreciation by reducing losses in bear phases and enjoying the strong returns of bull phases.
Many distributors believe that asset allocation is the prerogative of advisors. Your comment.
Distributors as well as experienced investors can apply the asset allocation strategy themselves using a combination from the various equity and debt funds. ITI Balanced Advantage Fund provides them as well as lay investors, an option that can achieve the same objective of long term consistent returns with the added benefit of lower transaction and tax costs and much less effort in terms of monitoring market conditions on a continuous basis.
