Dynamic asset allocation gains currency in choppy equity, debt markets

Such funds alternate between debt and equity depending on market conditions

Investors are turning to dynamic asset allocation offered by mutual funds, seeking a safe shore after volatility in equity and debt markets.

The category---also known as balanced advantage funds—saw net inflows of Rs 2,006 crore in February and of about Rs 660 crore in February. Investors shunned such schemes before amid a strong rally in the equities market. Between September and December, the dynamic asset allocation fund category logged net outflows of Rs 2,000 crore.

The dynamic asset allocation strategy involves investing in equity, debt and derivatives. When equity markets are high, it increases allocation to debt and vice-e-versa. This allocation differs from one house to fund house. Dynamic asset allocation has seen net inflows, when equity-oriented schemes have continued to witness net outflows for eight months in a row.

 “Currently we are in an environment where both the asset classes—equity and debt are not cheap and hence investors can potentially benefit from returns out of the volatility. We are not in 2017-18 when there were expectations that interest rates will come down substantially. Even the current valuations on equity markets are expensive. So, for investors to make money in such scenarios, investing in the dynamic asset allocation seems to be the best approach,” said S Naren, CIO at ICICI Prudential MF.

For example, ICICI Prudential Balanced Advantage Fund uses an in-house asset allocation model to maintain an effective equity investment level between 30 per cent and 80 per cent. The scheme uses a model with a track record of 11 years, based predominantly on a long term historical mean price to book value (P/BV), which aims to increase equity exposure when valuations are attractive and aims to reduce equity exposure when valuations are expensive.

The equity exposure of ICICI Prudential Balanced Advantage Funds was at its lowest in 22 months at 37.91 per cent at the end of February. The remaining assets were invested in debt and arbitrage (derivatives). However, the returns of the category have been poor in the last one year. The data from Value Research shows that on an average dynamic asset allocation funds have given returns of 37 per cent in the last one year.

“Several funds might have reduced the exposure in equities due to the surge in the markets and that is the reason for underperformance. Such funds suit investors who want to gain from the volatility and protect the money when there is a fall in the market,” said a fund manager from the leading fund house.

The benchmark Sensex has come off nearly 5 per cent from its record high of 52,154 on February 15. The yield on the 10-year benchmark government security too has hardened. From about 5.86 per cent during the start of the year, the yield has spiked over 30 basis points to 6.2 per cent.

With US bond yields surging, equity markets are expected to see turbulence this year. Given this backdrop some investment advisors are making a case to invest in balanced advantage funds.

However, for investors who want to stay invested for the long-term and are not worried about the intermittent corrections, a pure-play equity scheme could be better suited, said experts.