Rather than plain vanilla largecap funds, go for balanced advantage fund: Bhavesh Jain

“I am fund manager for both our largecap fund as well as our Balanced Advantage Fund but we are getting convinced that today generating alpha in largecap category is becoming more and more difficult task. That is why one needs to either move into fund like index or into funds wherein some thematic plays will be there like say a momentum based fund or a volatility-based fund or different factor based funds which are getting launched. A plain vanilla largecap fund will find it really difficult to outperform even the Nifty Index on a TRI basis,” says Bhavesh Jain, Associate Director – Investment (Equities) Edelweiss AMC.
The Balanced Advantage Fund or Dynamic Asset Allocation Fund category is gaining momentum. It allows you to manoeuvre across asset classes like debt and equity. What has been your recent strategy for this fund if I talk about a one-year timeframe?
The Balanced Advantage Fund as a category is one of the fastest growing in the last six to seven years, especially after taxation of debt changed in 2014. This is the period after which all hybrid schemes including Balanced Advantage Fund, Arbitrage Fund, Equity Saving Fund picked up. We were fortunate enough to be there in this category at that point of time. In 2016-2017, our AUM was around Rs 250-300 crore and today it is a Rs 9,000-crore fund.
In almost 13 years of track record, the strategy which we follow has been consistent. We are going with a trend-based asset allocation model. Most of the funds in this category are on the basis of valuation, whereas from day one we believe that the Indian market is a highly volatile, high beta market in the global scenario. That is why the market rarely trades at fair value and is always overbought or oversold. That is why we want to go with the trend and the model which we follow is known as Edelweiss Equity Health Indicator. It is purely a trend-based asset allocation model.
So what is the indicator indicating now?
Within the Balanced Advantage Fund category, there are different funds running different net equity allocations and we will be a fund with the most aggressive equity allocation because spends are extremely positive. We are running close to 69% net equity today. If I compare this with the category average, that will be around 45% to 50%.
Now if we leave year one performance because it has been below the average category, but for two -three years, has the fund outperformed what happened in this one year’s time?
As I said, the strategy which we follow is trend-based asset allocation model and practically they were at 18,200 last year and in November, we are again at 18,200. For almost one year, Nifty has given hardly 1% or 2% return and that means there is no trend in the market and as the name itself suggests, our model is a trend-based asset allocation model. So in a non-trending market, we tend to underperform.

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Historically, 75% of the time, that is three out of every four years, markets are trending which is suitable to our style and 25% of the time that is one out of four years, markets are non-trending. We see a lot of volatility but clients are not making any money and markets are not going anywhere. In this kind of year, we tend to underperform. This happened in 2018. Before that, it happened in 2015.

So once every three or four years, this kind of market comes wherein we underperform the category by 1.5-2% on an average but in the year where markets are trending and markets are giving double digit returns – 2014, 2017, 2019, 2020, 2021 or negative year like 2008 and 2011. Whenever the market gives double digit returns, that is trending positive or negative return and we outperform the category on an average by 5% to 7%. So, we are happy to underperform in the non-trending year by 1% to 2% because we know 75% of the time markets will be trending and in those trending years, we will more than cover whatever we lose in this non-trending year.
We usually advise investors to stay in equity mutual funds with time horizon of three or more than five years but given that there has been an underperformance since almost a year, a lot of investors might want to exit the fund. What would you tell them so that they hold on to this fund for a longer timeframe?
Even after having a year wherein Indian markets have hardly given a couple of percent as return, if you look at our three year, five years return, it is in healthy double digits and within that, our fund in last three years and five years have given returns in the range of 12% to 14%. Now the basic problem any investor wants to solve over a long period of time is to give equity-like returns with much lower volatility and much lower drawdown and that is something we want to achieve.
Today, the average largecap and midcap fund or an average flexicap fund on a rolling five-year basis is giving returns in the range of 10% to 12% with the volatility of almost 20% or drawdown of almost 40%. At Edelweiss Balanced Advantage Fund, we are also giving returns in the range of 10-12% but with volatility of only 10% compared to the 20% in normal funds and a drawdown of around 14% to 15% compared to a drawdown of almost 35% to 40% in normal long equity fund.
So here is a fund which is very simple in nature and which over a period of time, is giving equity-like returns with a much lower volatility and drawdown. Earlier, people used to think that the Balanced Advantage Fund is a tactical allocation and it is suitable for only retired clients or someone who is coming into equity for the first time or someone who is looking only for steady cash flow. But I think enough data has been provided by this category for the last five to 10 years which shows that it is no longer a tactical allocation and in fact balanced advantage fund should be part of each and every clients core portfolio – be it an aggressive client or a conservative client an old retired person or a fresher coming into equity for the first time.
For all sets of investors, a 20% to 25% allocation in a balanced advantage fund will help with higher returns, lower volatility, stability and consistent cash flows. That is why we say do not look at short term performance.
Any market, any strategy, any fund will have that six months-one year wherein there will be no performance but if you are coming into equity, you should at least come with a three- to five-year horizon. If you look at rolling three years and rolling five year returns for our funds, we are outperforming the category with a decent margin and a much lower volatility and drawdown.
Let us talk about the category breakup. Now equity is almost 60.31% and debt is about 26.16%. What exactly is the breakup in equity in terms of sectors and your investment interest areas?
The number which you are talking about will be our net equity exposure. The equity portfolio we construct is our gross equity. So for every Rs 100 which we get, Rs 80 goes into equity and Rs 20 goes into debt. This Rs 80 which goes into equity is managed dynamically depending on the model which we follow, the Edelweiss Equity Health Index.
Our net equity can be anywhere between 30% and 80%. Now because this fund is supposed to be conservative in nature and protecting downside is our primary objective, it will always be largecap biased. So out of the Rs 80 which goes into equity, almost 65% goes into largecaps, that is top 100 market cap companies; 10-12% goes into midcaps that is 101 to 250 and remaining 3- 4% goes into smallcap that is 251 to 500 market cap company for us because our investment universe is NSE 500.
As of now, the largest sector in our portfolio is in line with the benchmark. The biggest sector in our portfolio will be banking and financial services, followed by IT and other sectors. As of now, we are overweight on some of the economic recovery themes. You will find an overhead position in PSU banks. Cement sectors and some construction companies are the few sectors where we will be overweight and we will be slightly underweight in defensive names in this current environment.
Overall, net equity is determined by the formula or the process which we follow wherein most of the players in the market are on the basis of valuation whereas we are purely on the basis of trend and that is why our net equity exposure today is around 69%.
Are you concerned about the largecap underperformance, which takes down your performance as well? How long do you think it is going to sustain and what is the outlook out here from you?
It is a tricky question for me because I am fund manager for both our largecap fund as well as our Balanced Advantage Fund but more or less, even we are getting convinced slowly and steadily that instead of largecap fund, the balanced advantage fund will become a much better category because today our balance advantage fund is able to outperform average largecap fund with 50% lower volatility and almost 60% lower drawdown. Finally, from a customer’s point of view, this is something which we require.
Return-wise, today the average largecap fund and balanced advantage fund do not have a big difference but in volatility and standard deviation and drawdown, the balanced advantage fund easily beats any largecap fund.
Today generating alpha in largecap category is becoming more and more difficult task and that is why one needs to either move into fund like index or into funds wherein some thematic plays will be there like say a momentum based fund or a volatility-based fund or different factor based funds which are getting launched. A plain vanilla largecap fund will find it really difficult to outperform even the Nifty Index on a TRI basis.
What about the debt allocation that we are actually talking about what is in it?
In any hybrid fund, the arbitrage fund or equity savings fund or for that matter balanced advantage fund, I think the most important part of the portfolio is fixed income portfolio because equity will have short-term pain and short-term volatility but debt will have permanent loss of capital and in that context, we have a clear-cut strategy that all our fixed income investment will strictly be into AAA related paper. We will not carry an average maturity of more than five years. We will not have a single paper having residual maturity of more than say 15-20 years a single paper.
As of now, we are around 7% into fixed income papers. Most of them are in PSUs and of that have 16-17% in T-Bills and G-Secs, some of which we have placed with the exchange for derivative margin. So out of the 21-22% we have in fixed income, 16-17% is in PSUs that are either T-Bill, Gsec or AAA rated PSU companies and hardly 4-5% in some of the large NBFC papers in our portfolio.
Do you maintain some amounts in cash or is the fund fully invested at all times?
Most of the time, we are fully deployed. Out of every Rs 100 we get, Rs 80 goes into equity and Rs 20 goes into debt because anyway our asset allocation model takes a call which indirectly changes our allocation from equity to hedged equity. Hedged equity is nothing but an arbitrage kind of situation wherein we are long stocks and short either index futures or stock futures. So because our asset allocation model keeps on doing it on a daily basis, we look at our signals on a daily basis and take that call. So we do not take any additional cash call in our portfolio but that 20% which is in debt it is into very liquid debt so as and when required, we can easily liquidate that 20% portfolio to create cash.
How much allocation an investor should put into a balanced advantage fund considering the core portfolio is already formed where one is already diversified across all the market caps? Over and above that, do you think it is necessary for one to have a balanced advantage fund? If yes, how much exposure should be allotted?
Each and every client should have a balanced advantage fund in his portfolio. Whatever you do, whatever you say, whenever you construct a portfolio, either an advisor or a client himself or when we advise some of our clients or some of our distributor partners. Our hypothesis or our understanding is simple that a client is generating or making a portfolio with different largecap, midcaps, small cap, multicap, some liquid funds and some debt.
The final objective is very simple; number one he wants to improve his return. Number two, he wants to reduce his risk and as I told you this dual goal or this dual objective can be achieved easily by one single fund that is a balanced advantage fund. If you put a balanced advantage fund in a client’s portfolio say 20% or 25% or maybe 50% for a conservative client – return wise, you are not compromising because over a five-year or seven-year period, you are giving him returns which are as good as any you can say your index fund or your Nifty. You are also reducing his portfolio drawdown and volatility by almost 40% to 50%.
So on a risk-adjusted basis, if I look at that return, we are almost giving him double the return compared to what he will get in his normal portfolio. So by default, a balanced advantage fund should be part of each and every client’s portfolio. For aggressive clients, it can be 10-15% of his portfolio so that in tough times that 10-15% of the money which will be in balanced advantage fund will give him that liquidity wherein he can average it into his other funds like midcap and smallcap at lower level and at the time of correction and for a conservative investor rather than putting everything into fixed income and generating say 6-7% return. If you put in the balanced advantage fund, the average five-year return in this category is between 10% and 11%, which I do not think even in today’s high interest rate environment, none of the FD or none of your fixed income will be in a position to provide for.
In that context, it is a win-win situation and a balanced advantage fund should be a must in each and every client’s portfolio.