Market has reached all time high post budget. Will the markets sustain this rally?
Post budget, our call on cyclical recovery in the economy and a broader recovery in the market is further reinforced. Pro-growth budget, positive news on the vaccine, faster-than-expected economic recovery, continuing fiscal and monetary policy support, and high liquidity should provide a supportive backdrop for stocks. We should be in for an extended period of a bull market in Equities.
Although markets are volatile and valuations seem rich after the sharp run-up in equities, two factors should continue to drive markets over med-to-long term. First, the continuing upgrades to economic growth and earnings estimates can provide upside. Second, in an environment of low interest rates and high liquidity, valuation multiples can be higher than their long-term averages, thereby justifying higher equity valuations.
The markets have been on fire since Budget 2021. What would be the impact of Budget 2021 on the equity markets in the medium term?
Budget 2021 had looser than anticipated fiscal deficit estimates with conservative nominal GDP growth and tax revenue estimates, along with a gradual fiscal consolidation glide path. This will provide an impetus for growth over the next few years. The quality of spending has improved with higher focus on investment. A big infrastructure push was announced with a budget outlay of 11.4 lakh crore capex for infrastructure which is a 9.5% CAGR over FY20. Allocation has been increased in Road/Railway/Water & Metro segments. PLI for domestic manufacturing should help Industrials. Setting up of ARC should help in NPA resolution for banks.
Overall, Budget 2021 is a pro-growth, conservative, and transparent Budget which should bolster the economy leading to better corporate earnings growth which drives equity markets. The outlook for most sectors has turned positive post budget. Domestic cyclicals, Industrials, and Financials can play out in 2021 along with the strong economic recovery.
Why should distributors consider recommending FoFs if they can curate investment portfolio for their clients?
Curation of portfolios is important, but it is crucial to stay ahead of the curve and rebalance the portfolio appropriately if one is to outperform or even generate reasonable returns. This is best understood with an example. Since the March 2020 low, we have seen quick rotation in sector leadership as concerns on covid and the economy have given way to increased confidence that covid will be contained and an economic recovery is underway. Till June-July, defensive sectors like pharma and FMCG were leaders, followed by IT. From Aug-Sep, we saw cyclicals like auto and banking & financials picking up. Post budget, infrastructure, industrials and PSUs have rallied.
Our investment strategy in the FOFs has been to stay ahead of the curve on this front. In addition to a few diversified funds, we had also included pharma and consumption focused thematic funds as well as a gold ETF in our FOF portfolio, which helped during the covid crisis. With positive news on the vaccine and initial signs of an economic recovery, we replaced these with banking & financials and IT/digital focused thematic funds and added an International Index ETF, which played out well. Post-budget, we have added an infrastructure focused fund to the portfolio.
These portfolio changes were possible only because we constantly monitor key parameters which drive the markets and are able to take proactive action. The continuous monitoring and active management ensures action taken is timely.
Aditya Birla Sun Life Asset Allocator FoF has consistently outperformed its benchmark. What are the key reasons for this performance?
ABSL Asset Allocator FOF aims to generate higher returns than traditional savings instruments while mitigating the risk by investing across four different asset classes viz. domestic equity, international equity, fixed income, and gold. While individual asset classes can be volatile, the well-diversified portfolio offsets volatility due to the negative correlation among various asset classes thereby generating reasonable risk-adjusted returns. This is one of the key reasons for the Aditya Birla Sun Life Asset Allocator FoF to consistently outperform its benchmark.
Secondly, in line with our positive view on equity markets, we have consistently maintained a higher than median allocation to equities in the portfolio. As the equity markets have rallied, this positioning has aided performance.
Lastly, as explained in the response to the previous question, we have been able to stay ahead of the curve and rotate amongst suitable thematic funds as well as to gold ETF and international ETF at the appropriate time, which has led to the outperformance.
What is the underlying formula to decide allocation between schemes and asset classes?
ABSL Asset Allocator FOF has a well-defined framework for top-down asset allocation and periodic rebalancing, as well as for bottom-up fund selection. We use an in-house quant model to aid in decision making with an objective of achieving the optimal asset allocation between different asset classes, based on market conditions. The model looks at various valuation metrics such as P/E, P/B, ROE, and yield gap ratio to provide a recommended asset allocation. The model tends to overweight equity when markets are at their bottom and overweight debt & gold when markets are at their top. ABSL Asset Allocator FOF is actively managed who also looks at other key macro parameters such as FII and DII flows, global and domestic growth, inflation, and interest rates, projected earnings growth, and expected returns from various asset classes to decide the final asset allocation.
For the bottom-up fund selection, the portfolio manager follows a comprehensive process which covers both quantitative factors like relative fund performance, fund positioning etc and qualitative factors like fund manager track record, investment philosophy, etc. to select appropriate funds in each asset class.
How frequently do you review this formula?
Rebalancing is done at least on a monthly basis to avoid unnecessary churn in the portfolio. However, in the current conditions, when markets are volatile, we are reviewing the model output and asset allocation on a weekly basis.
How is the fund different from other FoFs in the market?
There are three key differentiators for ABSL Asset Allocator FOF. Firstly, it provides exposure to four different asset classes viz. domestic equity, international equity, fixed income, and gold, which increases the chances of obtaining reasonable risk-adjusted returns.
Secondly, we follow a comprehensive process covering both qualitative and quantitative factors for both top-down asset allocation as well as bottom-up stock selection. We have an in-house model to assist in decision making but we also overlay the judgement of the portfolio manager to decide on the final asset allocation and fund selection.
Thirdly, we run this process in a disciplined manner. Once a month at least, the portfolio manager reviews the output from the model and also takes inputs from the investment team as well as our equity and debt CIOs to ensure that there is no bias in the portfolio composition process.
Why should distributors recommend this scheme to their clients?
The ultimate goal for all of us in the industry is to provide a good customer experience. In the current environment, wherein markets are seeing high volatility, there is a need to focus more time and effort in hand-holding. Tracking the markets is a time intensive and continuous activity. When it comes to rebalancing a portfolio, staying ahead of the curve by selecting suitable mutual funds and ETFs at the appropriate time is imperative. Any delay or miss can lead to less-than-desired portfolio performance and poor customer experience.
ABSL Asset Allocator FOF product enables a good partnership between the distributors and ABSLAMC. Here, the distributors can focus on investor management to provide a good customer experience while the portfolio manager for the FOF can focus on investment management to generate better risk-adjusted returns.
