‘Balanced advantage funds are made to benefit from volatility’
PremiumThe most recent example as to why such an investment framework is necessary was seen during March 2020, says Sankaran Naren, fund manager, ICICI Prudential
Sankaran Naren, Manish Banthia, Rajat Chandak, Kayzad Englim and Ihab Dalwai are the fund managers of the nearly ₹37,000 crore ICICI Prudential Balanced Advantage Fund, the first BAF in the Indian MF industry. The ICICI Prudential Balanced Advantage Fund is run in a countercyclical manner, paring down equity when markets rise and increasing it when markets fall, such as during the 2020 covid correction. The fund management team also takes active calls on investing in mid and small caps when valuations turn attractive or high-risk, high-yield debt (credit) when this type of paper gives attractive yields. The fund also uses derivatives to reduce equity exposure below 65% while maintaining gross equity exposure at that level and thus enjoys favourable equity taxation.The fund management team speaks to Mint on its long-term fund strategy. Edited excerpts:
Could you walk one through the ICICI Balanced Advantage Fund strategy, and some related specifics?
Naren: The strategy of ICICI Prudential Balanced Advantage Fund was a result of the investor experience faced between 2007 and 2009, wherein investors chose to invest in 2007, kept away from the market in 2008, and subsequently resulted in missing out on the ensuing market rally in 2009. So, when we looked back at what transpired from an investor point of view, we realized the need for a strategy which would be cautious in 2007, invest aggressively in 2008, so that the net investment experience will be positive for an investor.
So, the need was to have a countercyclical approach to investing which we have achieved through our in-house model which is predominantly based on price-to-book with other select factors. This model has been in use for more than a decade now.
The most recent example as to why such an investment framework is necessary was seen during March 2020. Looking back, March 2020 was an interesting phase when the country faced lockdown and since offices were closed, investors who wished to deploy cash during market correction too faced some limitations, if they were not hands on with making investments the digital way.
Also, it was a phase when investors were rattled with the market correction both in global and domestic markets and faced a physiological barrier in terms of making fresh investments. This is where balanced advantage strategy comes in by helping investors deploy money in the market thereby helping them buy low, sell high. As a fund house, in that phase, we unwound our debt or arbitrage allocation and the same was deployed into equity.
To what extent was the portfolio in cash or debt in March 2020?
Dalwai: At the end of January 2020, we were around 49.7% in equity, and then we reached 73.7% in March 2020. As of September 2021, we are once again at 34% equity allocation as the market valuation is no longer cheap.
To what extent is your model forward looking and not focusing on varying multiples?
Naren: The advantage of following a countercyclical investment approach is that investment outcomes over long term tends to be good because you are moving against the market. So, even if the fund size is ₹50,000 crore or higher, managing a huge corpus is not a challenge. It is our belief that playing momentum strategy would not necessarily deliver rewarding experience for investors over the long term.
Now, imagine if the fund followed such a strategy, then in March 2020, when the market corrected, you would start selling and eventually destabilize the market as a result of the scale of assets being sold. The reality in India is that liquidity in derivatives market is much higher than liquidity in equity market. So, as the size of the fund increases, we utilize derivatives.
On the equity side, to reduce the mismatch between the derivatives and the long-only portfolio, you have to largely confine yourself to index, or large-cap stocks?
Naren: Our allocation model is very simple, buy where there is relative attractiveness. If you would have looked at the portfolio last year, you would have found that we were buying mid and small caps.
However, post the rally in mid and small caps, we became underweight this space. Other than this, we were buyers in credits, gilts and some perpetual bonds with extremely attractive yields, which was a contrarian decision at that time. Now, a year later, we are happy to share that each of these decisions delivered outsized returns.
At present, you are at a quite conservative position, which is 40% cash, 25% debt. If the bull market continues to power ahead, how do you feel with underperformance right now?
Chandak: We are not worried about market levels, as long as there is volatility. We recognize that there will be periods like 2017 second half or probably now, till last week, when the market continuously went up.
But over a complete market cycle, there will always be volatility in the market, which will throw up some interesting investment opportunities across asset classes, which a fund like the ICICI Prudential Balanced Advantage Fund looks to capitalize on.
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