Typically, when equity markets rise, we tend to invest more in equity. When markets decline, investors typically hold on and refuse to sell.
To overcome this problematic approach, an asset allocation fund may be of help. Balanced Advantage or dynamic asset allocation funds decide on equity-debt allocation based on internal models that they follow. At present, there are 23 funds in this category. The re-categorisation of mutual funds was done in mid-2018. But seven funds, including ICICI Prudential Balanced Advantage, have been following this strategy for more than seven years. Here, we review the ICICI Prudential Balanced Advantage fund (IBAF).
What is the scheme about?
With assets of Rs 26,123 crore, IBAF is the second largest scheme in its category. It switches between equity and debt dynamically by using an in-house model that is based on the price-to-book value (P/BV) ratio. The fund also looks at other metrics and factors, including interest rate movements and global financial conditions.
The scheme has maintained allocation to equities (net equity and arbitrage positions) at 69-79 percent over the past three years, to give investors the equity taxation advantage. In rising equity markets, the fund manager has gone short (derivative position) on most of the equity exposures to make the portfolio defensive. In other words, it brings down its pure (net) equity allocation in rising markets.
S Naren, chief investment officer, ICICI Prudential Mutual Fund says, “Balanced advantage funds, by construct, are defensive in nature since they buy equity when it is cheap and sell it when markets are at a high. Hence, such products tend to underperform the aggressive hybrid funds when there is a bull market. But in periods of volatility such as in 2020 and 2018 after the IL&FS crisis, and across a full market cycle, these funds tend to generate relatively higher return as compared to the equity oriented funds.”
For instance, when the market traded new highs in January 2015, January 2018 and January 2020, the fund increased its hedged position to 30-36 percent and brought down its net equity exposure to around 34, 32 and 50 percent, respectively. That acted as a buffer to the fund in the overheated market. Currently (as of September 2020), the net equity exposure of the fund stands at 62 percent.
Category beating returns
The scheme has done well over a long period of time. Over the last three-year and five-year time periods, the scheme has given 7.04 percent and 9.39 percent returns, respectively. But rolling returns are a better way to assess a fund’s performance as they covers multiple entry and exit points. We took the scheme’s three-year rolling returns over a total time period of 10 years. Here, IBAF gave 11.8 percent returns, as opposed to a return of 9 percent from the category average. The Nifty 50 total returns index gave 11.7 percent returns in the same period.
Portfolio holding
IBAF invests in companies across market capitalisation. But it also manages its debt side actively. It takes calls on interest rates as well as a bit of credit strategy and identifies securities with slightly lower credit rating of well-managed companies that are expected to see a rating upgrade. At present, the scheme’s average maturity is 2.9 years.
On account of its large size, the portfolio is fairly diversified. As per Value Research, its top 10 holdings account for 35.41 percent of its portfolio. Its top three equity holdings are Reliance Industries (six percent), ICICI Bank (4.69 percent) and HDFC Bank (4.47 percent). Ihab Dalwai and Manish Banthia are the fund managers of this scheme.
Typically, balanced advantage funds invest across equity, debt and arbitrage. The equity plus arbitrage portion of the portfolio is typically maintained at over 65 per cent. Hence, they are treated as equity funds for tax purposes.
Each fund follows an in-house valuation model to determine its equity allocation. Valuation metrics such as price-to-earnings (P/E), price-to-book (P/B) and dividend yield are typically used.
In the risk-return pyramid, the balanced advantage category is placed below aggressive hybrid schemes but above multi-asset allocation and equity savings funds. You cannot compare balanced advantage funds with aggressive hybrid schemes as the latter follow a static allocation strategy in equities that ranges from 65-80 per cent (unhedged).
Should you invest in IBAF?
Investors who wish to participate in equity markets with a relatively conservative approach can consider this category. S Naren says, “This fund is suitable for most investors and particularly those who wish to book profits in a disciplined manner when the markets are up and also investors who intend to participate in the equity market when markets are trading at high valuations. It is the category you can invest a lump-sum in at any point of time, given that the asset allocation is structured accordingly and aimed at providing better investor experience.”
Ideally, have a minimum of five years’ duration in mind if you wish to invest in IBAF.
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