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Markets are at all-time high and market volatility is one thing that investors face as a hurdle on an everyday basis. They are the primary antagonist in the fight against wealth generation and investors have frowned upon it every time it shatters the healthy well being of Mr. Market. There are numerous investment strategies out there that tackle market Volatility but time and time again, one strategy has proven to hold its own against defending the Financial Markets against volatility and that is Asset Allocation.
To talk more about asset allocation and why it's necessary to tackle volatile markets, we brought in two of the best known smallcase managers Ashwini Shami, Portfolio Manager, Omniscience Capital and Sonam Srivastava, Founder, Wright Research to share their thoughts on Asset Allocation.
Q.1 Before we talk about Asset Allocation, what do investors get wrong while investing?
Sonam Srivastava: Markets go through distinct phases, and our behavioral biases make us take emotional decisions while trying to time the markets, which is the most significant cause of sub-optimal portfolio performances. So if you pull money out upon seeing a crash, or you let your style bias make you invest in high momentum stocks even in volatile markets - you are doing it wrong.
Q.2 How would you describe what Asset Allocation as a strategy is and how does it help the conservative investor?
Ashwini Shami: Asset allocation is a powerful portfolio management tool. For a conservative investor, it helps to lower the portfolio volatility of an equity portfolio through allocations to assets which have lower or negative correlation such as bonds and gold. If done tactically, it can also help the return-focused investors to enhance portfolio returns through higher allocations to undervalued asset classes. Especially, for the first-time equity investors or the investors who cannot tolerate high portfolio volatility, a multi-asset portfolio is a great way to have significant allocation to equities without getting completely dazed with the market gyrations.
Q3 What is the art and science of creating a Portfolio to tailor a risk profile and how does this help?
SS: The art and science of creating a portfolio comprising multiple asset classes, styles, & sectors that is robust to market risks and tailored for your risk profile are known as Asset Allocation.
Asset Allocation balances the risk and rewards of an investment portfolio by allocating to a broad set of assets while being aware of an investor’s risk profile, and it not only gives you a stable portfolio performance but also saves you from market volatility.
Q4 What are some of the segments that you’d like to talk about regarding Asset Allocation that investors might have to look into?AS: The global equity exposure provides a dollar hedge against the depreciating rupee and also a diversified equity exposure to the developed world economy. The global technology segment allocation helps take exposure to tech disruptors which have induced us into the third transformative era of human civilization, viz. the era of Artificial Intelligence. All these belong to the broader equity asset class but have unique characteristics of their own to command separate allocations.
A curated asset allocation portfolio should give exposure to multiple asset classes to reduce the portfolio volatility based on the expected or in-principle volatility of each asset class and allow investors to allocate to mispriced opportunities.
Q5 Can you show us an example of how Asset Allocation helps tackle Volatility and can give your Portfolio an edge?
SS: Let us look at a few simple examples of how asset allocation can add an edge to your portfolio.
Here’s the performance of an Asset Allocation with Bond & Gold exposure and Equity vs. the Nifty 50 portfolio in and around March 2020. Again, you see almost a 20% outperformance for asset allocation just by being a multi asset.
Similarly, post the crash, for the next year, if you compare a Nifty 50 portfolio with an Asset Allocation portfolio that includes Mid-caps & Small-caps along with Large-caps, you see the Asset Allocation portfolio outperforming by more than 20% just by being Multi-cap.
Asset allocation can be static, like a 60-40 equity-bond allocation or dynamic adjusting the postures over time relative to changes in the economic environment.
Q.6 What are your approaches to Asset Allocations?SS: There are two main parts of our approach - diversified asset selection and risk targeting.
- The portfolios are a combination of stocks and bonds & gold ETFs. And even among stocks, we are not biased towards an equity style but look at a broad range of factors.
- The allocation is highly dependent on how much risk the investor can take. When markets are favorable, a momentum-type strategy gives you high returns at low risk, which we take advantage of in our allocations. But as risk increases, to stick to our risk budget, we move to lower-risk assets. So, like recently, our portfolios made a shift to earning growth and low volatility from highly momentum-based allocations.
AS: Equities hold a predominant allocation which is well stabilized with significant allocations to low-to-negatively correlated assets thus reducing the portfolio volatility. The regular rebalancing feature helps in periodic profit booking across asset classes.
Another way to look at our approach to an Asset Allocated portfolio is that it can be considered as one single investment that one may choose and allocate to either on lump sum basis or regular investments over a long term. This one single investment may take care of one’s investment needs by giving exposure to all significant asset classes. However, readers should keep in mind that this smallcase carries equity investment risks and one should consult his/her financial planner before making an investment decision.
From the above stated reasons it can be clearly seen that asset allocation is one effective strategy against volatile markets that can protect your investments. Putting emotional biases away and diversifying your portfolio is key to a healthy wealth generating strategy. Asset Allocation helps in creating a roadmap for your investment portfolio and its goals. It also significantly increases the chance of getting better results and decreases market volatility keeping your investments safer.(This is a partnered post)
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.