What does the Balanced Advantage Funds Report Card look like?


The fall in the markets from its peak in October 2021 provides an opportunity to assess the performance of these funds, especially since the BAF/DAAF are based on asset allocation, oscillating between equities and debt, depending on what should be better for the investor. And the period since October has been marked by a combination of choppy stock markets and falling debt yields.

Although a fund’s short-term performance may not be an indicator of long-term outperformance or even underperformance, it’s definitely something to watch if the trend persists. In addition, the decision should be based on a combination of overall returns and the extent of return volatility.

BAFs invest in a mix of equity and debt instruments, managing this allocation dynamically as market conditions change. They increase their exposure to equities when the markets look attractive and vice versa. This results in reduced volatility of returns compared to a pure equity fund.

Today, nearly 25 BAFs/DAAFs offered by AMCs manage Rs. 1.2 trillion in assets. In this article, we take a look at the recent performance of some of the biggest and oldest funds.

The selected BAF/DAAF generated negative returns of around 2% to 9%, between October 18, 2021 and June 24.

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Strong on value

Launched in December 2006, ICICI Prudential BAF has used a valuation model based on the price-to-book (P/B) ratio to dynamically manage its equity-debt allocation since its inception.

Unlike several other BAFs that use the P/E (price/earnings) multiple or a combination of P/E and P/B, ICICI Prudential BAF relies solely on the P/B ratio. Elaborating on the choice of this valuation metric, Chintan Haria, Head of Product Development and Strategy, ICICI Prudential AMC, said, “P/B is a more stable indicator than P/E, which is subject to greater volatility with upgrades and earnings downgrades. estimates”.

The fund is down just under 2% from the October 2021 high. “We are disciplined in applying the valuation model. Also, staying away from very expensive stocks and being underweight high beta sectors helped us in this fall,” says Haria, explaining the fund’s moderate decline. Between October 2021 and May 2022, the fund only had a net equity exposure of 32-36%. Large caps represented 90% of the fund’s total equity allocation.

One of the market experts we spoke to pointed to the fact that value stocks have done very well over the past 7-8 months and this shows in the performance of funds such as ICICI Prudential BAF which have invested in these stocks. He added that it wouldn’t always work.

In summary, while ICICI Prudential BAF did not generate the highest returns in the category, it did manage to provide good downside protection.

Driven by momentum

Unlike a valuation-based BAF, at the other end is the cyclical trend or momentum-based model of Edelweiss BAF which has returned minus 9% since its peak in October 2021. This model combines quantitative measures such as daily moving averages (average of daily index values ​​over specific time periods) and downside spread (extent of decline in index value during periods of market decline ) for the Nifty 50 to gauge the market trend. Based on this, the fund begins to increase its equity allocation if the market is strongly bullish and vice versa. While such a model can provide good downside protection during market downturns, it can limit the upside to some extent, compared to a valuation-based model, once the market rally begins. .

More importantly, while the pattern is designed to work well when markets are trending up or down, it may not work in bound markets. Elaborating on the fund’s recent underperformance, a person familiar with the matter who did not wish to be named said the model was not suited to a volatile but constrained market such as that seen in the 6-8 last months. According to him, the model tends to work well when the markets are up or down, that is, they rise or fall by more than 8-10% in a year. A volatile market without moving significantly in either direction is not suitable for a trend-based BAF model.

High return, high volatility

With assets under management of 43,836 crores at the end of May, HDFC BAF is the largest program in this category which has achieved the highest returns in the category over different holding periods of 1, 3 and 5 years. The fund’s significantly higher unhedged equity exposure relative to its peers helped it outperform. But this came with much greater volatility (wider range of returns) relative to peers over different holding periods.

Unlike most other BAFs, HDFC MF’s BAF does not operate on a model basis, although it does take into account factors such as valuations, interest rates and the outlook for different asset classes. assets to change its equity and debt allocation. Additionally, historically it has kept its entire equity allocation unhedged (no derivatives exposure) and largely static, and at much higher levels relative to its peers. This made it more of an equity fund than a BAF. However, from January 2020, the fund began to dynamically manage its equity allocation and use derivatives to reduce its effective equity exposure. For example, from 82% in March 2020, the net equity exposure was reduced to 57% in November 2021. Subsequently, after some minor adjustments, it was increased to 65% in May 2022.

Thanks to this net equity (unhedged equity) significantly lower than before, the HDFC BAF has only fallen by 5% compared to the peak of October 2021, which is not the highest of the category. In the past, the fund has experienced larger declines than its peers.

The model holds the key

Although not one of the largest funds in the category, the DSP DAAF stands out for strictly adhering to its model since its creation in 2014. So much so that the plan’s information document sets out the model in all its details. , it largely takes into account P/E and P/B trends for the Nifty 50 to assess whether the market is attractive on valuations and, to some extent, on technicals as well. The model construction helped DSP handle declines well (less return volatility), but the fund’s overall returns lagged many peers, across different holding periods. While the negative 7% return from the October 2021 peak looks a little steep compared to its peers, it should be noted that in the past the fund has generally fallen less than its peers during market downturns. .

“We follow a numbers-driven analytical model without any human intervention,” says Sahil Kapoor, Head of Products and Market Strategist, DSP Mutual Fund. According to Kapoor, with valuations approaching historical averages, the model has indicated an increase in equity allocation recently.

Value mix, market trend

Kotak Mutual Fund’s BAF follows a two-factor model that relies primarily on the Nifty 50 P/E: the higher the valuation multiple, the lower the equity allocation. Apart from this, it also takes into account the market trend or sentiment using parameters like long-term rolling returns, volatility, market breath, etc. The fund has fallen 5.6% since the peak in October 2021. Between October 2021 and today, the fund has increased its net equity exposure from 31% to 51% as valuations have moderated and sentiment rose from extremely frothy levels.

Harish Krishnan, Fund Manager, Kotak Mutual Fund, explains that BAFs primarily derive their returns from asset allocation and (within stocks) investment style and stock selection. “Asset allocation is typically the biggest contributor to return, followed by investment style (such as value, growth, etc.) and then stock selection. Over the past few months, value style has seen greater outperformance, especially in sectors like energy,” he says.

At Kotak BAF, the equity investment style is multi-cap diversified, with an emphasis on growth companies at reasonable valuations, he adds.

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