Ajit Menon, EVP & Head – Sales, DSP BlackRock Investment Managers talks to Cafemutual about Global Allocation Fund and the rationale behind bringing it to India.
What is the rationale behind launching
DSP BlackRock Global Allocation Fund at this juncture?
The underlying fund of DSP BlackRock Global Allocation Fund is BlackRock Global Funds – Global Allocation Fund (BGF-GAF). BGF-GAF is part of world’s largest actively managed multi-asset strategy which has an AUM in excess of USD 100 billion and has a history of over 25 years. The objective of (BGF-GAF) is to provide a core holding, suitable for a broad range of clients and deliver a competitive rate of return with less risk than a traditional equity portfolio.
BGF-GAF can provide a one-stop international diversification solution as it invests across geographies and sectors. We feel there is no good or bad time for such a product as a diversified asset allocation strategy like this can be a part of an investor’s core portfolio.
In how many countries does BGF-GAF have exposure to?
BGF-GAF has exposure to over 700+ securities across 40+ countries.
How is DSP BlackRock Global Allocation Fund different from the existing international fund of funds available in the industry? What is unique about this fund?
Most other international fund of funds in India are feeders investing in international funds with a geographic/theme focus or invest only in equity or debt (but not both). On the other hand, BGF-GAF is not constrained in search of opportunity. BGF-GAF has the flexibility to look at any geography and sector and invest across capital structure (equity or debt) of the companies they like.
How will the changes in debt fund tax structure in India would affect the inflows in international fund of fund category?
Though there may be some short term impact on inflows, we believe that over a longer term the market will stabilize. The option to avail of indexation benefit at the end of three years holding period still continues and hence the tax liability for a longer-term investor continues to be on the lower side. Hence, the industry in the long-term may be benefitted as this category may find more a greater appeal to long-term investors who would are investing in these schemes with a clear objective like diversification or getting exposure to a specific theme or geography.
Can you take us through the portfolio of BGF-GAF? In which countries is it overweight currently? In how many sectors does it have exposure to?
As mentioned earlier, BGF-GAF has exposure to over 700+ securities across 40+ countries. This exposure is across 30+ currencies and multiple sectors and geographies.
Currently, BGF-GAF is overweight on Japan as the fund managers believe that the actions taken by Japanese Prime Minister, Shinzo Abe (popularly known as “three arrows of Abenomics”, namely fiscal stimulus, monetary easing and structural reforms) have the potential to bring household savings into equities. Japanese households have almost $3.5 trillion in cash holdings. Even a small shift from these holdings will result in a massive inflow for equity markets. Further, a weakening yen would be beneficial for Japanese exporters – a further impetus to equity markets.
BGF-GAF is also slightly overweight on Europe as the economic conditions are improving. However some concerns remain as the inflation (currently at 0.5%) remains well below ECB’s target (2%). Also, current account surpluses have led to a stronger Euro which hurts their export-driven economies.
As
far as U.S. is concerned, the broader equity market now appears fairly valued particularly
as earnings growth has been slower than what was experienced in the earlier stages
of the bull market. However the fund managers believe that certain pockets of
opportunity can be still capitalized on. For example, the much talked about shale
oil & gas revolution could help US become energy self-sufficient by next
decade, leading to lower energy prices and benefitting US utilities which use
natural gas as an input.
Also, many companies who used their funds to buy back shares and pay dividend
may now focus on corporate reinvestment. As a result, capital good stocks will
stand to gain as corporate spending increases.
Tell us something about the investment strategy of the BGF-GAF...
BGF-GAF aims to bring together the specialist skills of its analysts within an active, risk-controlled asset allocation process combined with research intensive, fundamental, bottom-up security selection. The types of securities and markets the fund invests in will vary in response to changing market and economic trends. For example, the fund may be substantially invested in US equities when they appear undervalued relative to other world equity markets, while greater emphasis may be placed on fixed income securities when the risk of owning equities is above average. The approach strives to achieve attractive total returns, while seeking to diversify the risks associated with investing in only one asset class or market. The philosophy of BGF-GAF has been in place with no material changes since the inception of the strategy.
While the portfolio does not have style constraints, the BGF-GAF’s style position tends to be towards a value-driven approach for the equity portion and a risk adjusted yield-driven approach for the fixed income portion. The BGF-GAF team has the ability to move into any style, credit quality and market cap range they see fit according to the current market environment.
What percentage of assets of the underlying fund (BGF-GAF) is in equity and in
fixed income? What would be investment strategy for fixed income portfolio?
For BGF-GAF, equity comprises of around 58% of the portfolio while fixed income constitutes around 21% of the portfolio (as of June 30, 2014). The portfolio has around 21% in cash. Though cash allocation may seem to be on the higher side, to put things in perspective – historically cash has ranged between 0-30% of the overall exposure, with the average being around 15%. Cash performs various functions within the portfolio like dampening the overall volatility of the portfolio, offering additional liquidity, lessening the interest rate sensitivity to the fixed income portfolio, to name a few. Also, this cash is actively managed and may be denominated in USD or any other currency.
On the fixed income part, investment decisions are based on an assessment of the team’s confidence levels in various regions, federal bank policy activities, inflation forecasts and relative yields based on varying levels of credit. The confidence level of a particular view would reflect the collective views of the team. Sell decisions are based on continuous monitoring of all the credit holdings. Generally, the team continues to hold individual positions provided that there are no material changes in pricing or in the credit outlook for the sector or for the company, and also provided that the overall credit exposure remains in line with the investment strategy. In the cases where the spread widens significantly or there is a specific credit issue or change of outlook, the team reviews the credit in order to determine whether the spread widening is justified. In the cases where the spread narrows significantly, the team will also review the credit, and switch to another issue with better relative value if appropriate. The team is comfortable in taking on varying levels of risk as long as they are being compensated for that risk and it falls properly in the overall context of the portfolio.
What is the AUM of the underlying fund (BGF-GAF) and how has the fund performed?
BGF-GAF has an AUM of around USD 22 billion; however Global Allocation Fund as a strategy has a total AUM of over USD 100 billion (across all sleeves). The original BlackRock Global Allocation Fund has a track record of over 25 years.
As mentioned earlier, BGF-GAF’s objective has been to successfully deliver on its objective of giving a competitive rate of return with less risk than a traditional equity portfolio. Additionally, we have seen that within varied market conditions, the fund has been able to provide consistent returns. For e.g. in the technology bubble of early 2000s, the fund began with a heavy underweight to US stocks (most importantly in technology and telecom), ending in a significant overweight towards the later period. In the more recent global credit crisis of 2008-09, the fund increased its exposure in US equities and decreased its exposure in developed European equities and developed Asia (ex Japan) equities. Timely asset allocation calls like these have helped the fund tide over turbulence and deliver impressive long-term performance.
You have filed offer documents for feeder funds based on Healthscience, Europe and Japan Nikkei 225 Fund with SEBI. When are you planning to launch these funds?
We are evaluating the market conditions for the launch of these funds and hope to launch these soon.
Is there an investment case for domestic investors in this fund at this juncture?
As I mentioned earlier, BGF-GAF is a one-stop international diversification solution. It is truly global with regards to its investments and is suitable for an investor who would not like to expose himself to a specific geography or theme. It has the potential to cushion a domestic investor’s portfolio in periods when domestic markets perform poorly. Hence any investor, who is looking to add an international flavour to his portfolio while not taking any specific geography risk/theme risk, should consider investing in DSP BlackRock Global Allocation Fund.
Date provided in the interview is as on June 30, 2014. AUM of Global Allocation strategy (across all sub-portfolios) is in excess of USD 100 billion as of June 30, 2014.
To know more about DSP BlackRock Global Allocation Fund Click Here.