Balanced advantage funds' equity exposure reaches multi-year high

Fund managers lap up bluechip stocks amid a sharp decline in valuations

Balanced advantage funds (BAFs) have raised their equity exposure to multi-year highs as declining valuations have made stocks increasingly attractive. 

HDFC BAF, the largest scheme in the category with over ₹1 trillion in assets under management (AUM), had a net equity exposure of 72.6 per cent at the end of July, its highest level in at least two years. For ICICI Prudential BAF, the second-largest and among the most dynamically managed schemes in the category, the net equity exposure was 68 per cent as of last month, its highest level in six years. 

Some other large BAFs have also pushed equity exposure to multi-year highs or close to recent peaks. 

BAFs are hybrid schemes that dynamically shift between equity and debt based on equity valuations and other indicators.  

The flexibility allows fund managers to raise equity exposure when stocks appear relatively attractive and cut it when valuations look stretched, generating potential risk-adjusted returns. 

"In recent years, largecap stocks have gone through time correction even as corporate earnings have continued to grow. This combination has resulted in favourable valuations, which is reflected in the higher equity allocation of the fund," said Chintan Haria, principal — investment strategy, ICICI Prudential AMC. 

Gopal Agrawal, senior fund manager — equity at HDFC AMC, said the surge in equity holdings was also driven by factors other than valuations. “This reflects a combination of reasonable valuations, improving earnings expectations, and resilient domestic macros. In addition, ongoing market volatility has created decent investment opportunities in certain stocks from a medium- to long-term perspective, leading us to add to equity exposure. This positions the portfolio to participate in the potential upside in equities,” he said. 

Largecap valuations have eased significantly over the last two years as the stocks have gone through a mix of time and price correction. The 12-month blended forward price-to-earnings ratio of the Nifty50 is currently at 18.1, compared to its 10-year average of 21.4. The midcap and smallcap indices, on the other hand, remain significantly higher than their long-term averages. 

However, valuations have eased across the market capitalisation segments from the peak of September 2024.  

The equity exposure of most BAFs had then declined to multi-year lows. 

“Over the past two years, equity market sentiment has been subdued, with diversified equity indices such as the Nifty 500 still trading below their September 2024 highs. However, we have seen reasonable earnings growth in recent quarters, especially if we exclude oil-marketing companies, which are facing significant input cost pressure. Consequently, equity valuations are now in a more reasonable range, leading to increased equity exposure in BAFs,” said Nilesh D Naik, head of PhonePe Mutual Funds.