Insights

An Interesting Fund That Actually Thrives On Volatility

October 13, 2020 . Shrinath M L

With the world getting adapted to the new reality of ‘living with COVID’ and US elections around the corner, uncertainty is omnipresent. Global markets, specifically, Indian markets are no exception to this norm. 

Uncertainty everywhere…

The Google search comparison for bull and bear markets in India for the past 30 days lay out the dissonance that is prevailing in all our minds. 

At the time of writing, the BSE Sensex is close to the Jan’20 levels, but the question remains –

Will the markets go up or down from here?

Volatile markets equate to volatile minds

During these uncertain times, it is perfectly normal for any investor to be nervous about their existing equity exposure or to be unsure about where to invest available money.

The dilemma boils down to…

  • What if I take out/don’t invest and the market rallies?
  • What if I invest and the market tanks?

What do we do?

While there are no straightforward answers, in the current scenario, Dynamic Asset Allocation Funds can be a good option to address the dilemma and to take advantage of the expected volatility. Dynamic Asset Allocation Funds instead of maintaining a static equity allocation, automatically adjust (reduce or increase) their equity exposure based on market conditions. When equity valuations are high, equity exposure is reduced and when equity valuations are low, equity exposure is increased.

Here is an interesting fund from this space…

ICICI Prudential Balanced Advantage Fund

What’s the big deal about ICICI Prudential Balanced Advantage Fund?

ICICI Prudential Balanced Advantage Fund follows a ‘Buy Low, Sell High’ strategy of adjusting equity exposure based on equity valuations. The fund moves its equity allocation between 30% and 80% based on its proprietary price to book based valuation model as seen below. 

The equity exposure is held predominantly in large and mid-cap stocks and the debt exposure is held largely in higher rated debt instruments (only 3% of the overall portfolio currently is invested in instruments rated below AA). 

The dynamically managed equity allocation based on market valuations makes this fund a great option for investors who are looking to get the best of both worlds – adequately participating in equity market upside with much lower downside.

 

Category Veteran

The fund has been successfully running the dynamic asset allocation strategy from Mar-10 making it one amongst the oldest funds in the dynamic asset allocation category. The fund has successfully navigated several market falls and rallies and has delivered consistent performance across different market conditions. 

 

Experienced Fund Management Team

The equity portfolio of ICICI Prudential Balanced Advantage Fund is managed by S Naren, Rajat Chandak and Ihab Dalwai.

S Naren is the CIO of ICICI Prudential Mutual Fund with an overall fund management experience of 29 years. Rajat Chandak and Ihab Dalwai are in the fund management space for over 11 years and 8 years respectively.

The debt portfolio of ICICI Prudential Balanced Advantage Fund is managed by Manish Banthia. He has over 16 years of experience in the industry.

Consistent performer with far lower declines

 

Consistent Performer across various market conditions

Despite maintaining a much lower exposure to equities on average, ICICI Prudential Balanced Advantage Fund has outperformed the Nifty 50 TRI (100% equity index) over the long run.

ICICI Prudential Balanced Advantage Fund has also outperformed the Nifty 50 TRI, 89% of the times on a 3-year and 5-year rolling returns basis. We can see the outperformance of the fund from the probability of the delivered returns comparison in the below table.

On longer time frames such as 5 year plus, ICICI Prudential Balanced Advantage Fund has been able to consistently deliver outperformance over the Nifty 50 TRI with far lower intermittent declines. 

 

Far lower declines indicating the efficacy of the dynamic asset allocation strategy

In addition to being able to capture gains in bull markets, ICICI Prudential Balanced Advantage Fund has also managed well to reduce the declines in bear markets as indicated by the fund’s Downside Capture Ratio of 43%. This denotes that the fund’s returns have declined less than half of Nifty 50 TRI’s decline during falling markets. This is a result of ICICI Prudential Balanced Advantage Fund’s strategy to reduce equities when markets are expensive.

The Maximum Drawdown Chart clearly shows that the fund has always fallen much lower than Nifty 50 TRI during declines. This is more evident during phases of major market declines as highlighted below.

The Intra-year Drawdown Chart plotted to compare the intra-year falls of ICICI Prudential Balanced Advantage Fund versus Nifty 50 TRI also indicates the superior ability of the former to limit the fall in its returns.

It is evident from the above analyses that ICICI Prudential Balanced Advantage Fund is one that thrives on volatility.

How to use this fund?

  • If you have money to deploy into equities, but are grappling with the dilemma of what if market rallies vs what if market tanks, a dynamic asset allocation fund like ICICI Prudential Balanced Advantage Fund can be a good mid path solution.
  • In case, you are losing sleep over your current equity exposure and want to reduce it but are worried about what if there is a further rally, a dynamic asset allocation fund like ICICI Prudential Balanced Advantage Fund can be used to shift say 10-20% of your equity allocation. This ensures adequate participation if there is further upside and also reduced downside if there is a decline.
  • If you are looking to increase your debt portfolio returns by taking additional equity exposure (read as slightly higher risk) and have a 5 year+ time horizon, ICICI Prudential Balanced Advantage Fund can be considered for around 10% to 30% of your debt portfolio.

Summing it up…

  • Investors should look to take advantage of the volatility expected in Indian equities by investing in Dynamic Asset Allocation Funds.
  • ICICI Prudential Balanced Advantage Fund has a solid long term and consistent performance track record over the last 10+ years. 
  • The fund is aided by a time tested valuation model which automatically adjusts equity exposure based on market conditions.
  • The fund can be used:

– for deploying fresh money

– by investors uncomfortable with their current equity exposure and looking to reduce exposure 

– to allocate 10-30% of debt exposure for investors with 5+ year time horizon who are looking for improving debt portion returns and willing to take slightly higher risk

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