‘Balanced advantage funds are made to benefit from volatility’

Sankaran Naren, Manish Banthia, Rajat Chandak, Kayzad Englim and Ihab Dalwai are the fund managers of the almost ₹37,000 crore ICICI Prudential Balanced Advantage Fund, the primary BAF within the Indian MF trade. The ICICI Prudential Balanced Advantage Fund is run in a countercyclical method, paring down fairness when markets rise and rising it when markets fall, resembling through the 2020 covid correction. The fund administration group additionally takes lively calls on investing in mid and small caps when valuations flip enticing or high-risk, high-yield debt (credit score) when one of these paper offers enticing yields. The fund additionally makes use of derivatives to cut back fairness publicity beneath 65% whereas sustaining gross fairness publicity at that stage and thus enjoys beneficial fairness taxation.The fund administration group speaks to Mint on its long-term fund technique. Edited excerpts:

Could you stroll one via the ICICI Balanced Advantage Fund technique, and a few associated specifics?

Naren: The technique of ICICI Prudential Balanced Advantage Fund was a results of the investor expertise confronted between 2007 and 2009, whereby traders selected to spend money on 2007, avoided the market in 2008, and subsequently resulted in lacking out on the following market rally in 2009. So, once we regarded again at what transpired from an investor standpoint, we realized the necessity for a method which might be cautious in 2007, make investments aggressively in 2008, in order that the web funding expertise might be optimistic for an investor.

So, the necessity was to have a countercyclical strategy to investing which now we have achieved via our in-house mannequin which is predominantly based mostly on price-to-book with different choose elements. This mannequin has been in use for greater than a decade now.

The most up-to-date instance as to why such an funding framework is critical was seen throughout March 2020. Looking again, March 2020 was an fascinating part when the nation confronted lockdown and since places of work have been closed, traders who wished to deploy money throughout market correction too confronted some limitations, in the event that they weren’t fingers on with making investments the digital approach.

Also, it was a part when traders have been rattled with the market correction each in world and home markets and confronted a physiological barrier by way of making recent investments. This is the place balanced benefit technique is available in by serving to traders deploy cash out there thereby serving to them purchase low, promote excessive. As a fund home, in that part, we unwound our debt or arbitrage allocation and the identical was deployed into fairness.

To what extent was the portfolio in money or debt in March 2020?

Dalwai: At the top of January 2020, we have been round 49.7% in fairness, after which we reached 73.7% in March 2020. As of September 2021, we’re as soon as once more at 34% fairness allocation because the market valuation is not low cost.

To what extent is your mannequin ahead trying and never specializing in various multiples?

Naren: The benefit of following a countercyclical funding strategy is that funding outcomes over long run tends to be good since you are shifting in opposition to the market. So, even when the fund measurement is ₹50,000 crore or greater, managing an enormous corpus just isn’t a problem. It is our perception that taking part in momentum technique wouldn’t essentially ship rewarding expertise for traders over the long run.

Now, think about if the fund adopted such a method, then in March 2020, when the market corrected, you’ll begin promoting and finally destabilize the market because of the size of belongings being offered. The actuality in India is that liquidity in derivatives market is way greater than liquidity in fairness market. So, as the scale of the fund will increase, we make the most of derivatives.

On the fairness aspect, to cut back the mismatch between the derivatives and the long-only portfolio, you need to largely confine your self to index, or large-cap shares?

Naren: Our allocation mannequin could be very easy, purchase the place there may be relative attractiveness. If you’ll have regarded on the portfolio final yr, you’ll have discovered that we have been shopping for mid and small caps.

However, publish the rally in mid and small caps, we turned underweight this house. Other than this, we have been patrons in credit, gilts and a few perpetual bonds with extraordinarily enticing yields, which was a contrarian resolution at the moment. Now, a yr later, we’re completely satisfied to share that every of those choices delivered outsized returns.

At current, you might be at a fairly conservative place, which is 40% money, 25% debt. If the bull market continues to energy forward, how do you’re feeling with underperformance proper now?

Chandak: We usually are not nervous about market ranges, so long as there may be volatility. We acknowledge that there might be durations like 2017 second half or in all probability now, until final week, when the market repeatedly went up.

But over an entire market cycle, there’ll at all times be volatility out there, which can throw up some fascinating funding alternatives throughout asset lessons, which a fund just like the ICICI Prudential Balanced Advantage Fund appears to be like to capitalize on.

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