Can balanced advantage MFs prove their worth? | Economic Times

The stock market is scaling new peaks at will. Investors are worried the sharp uptick has left stocks overheated and vulnerable to a sell-off. At the same time, some are fearful of missing the bus in case of further upside. If ever there is a ripe time for taking asset allocation-based approach in investing, it may be now. Can asset allocation or balanced advantage funds provide a way out?Asset allocation funds shift between stocks and bonds depending on prevailing market conditions. This shift is guided by the fund houses’ internal models. Different funds adopt their own models for guiding allocation. Sharp swings in the stock market over the past year have tested these models to the fullest. Initially, as markets nosedived, asset allocation funds relying purely on valuation metrics like PE (price-to-earnings) and PBV (price-to-book value) were caught on the wrong foot. These take the counter-cyclical approach of buying low and selling high. They hike exposure to bonds when stocks are expensive and vice versa.As stock prices tanked, index valuation multiples shrunk, prompting valuation-centric models to hike equity exposure. But with indices facing steep cuts almost every day, the incremental equity exposure hurt these funds. At the depths of March 2020 lows, the PB-driven ICICI Prudential Balanced Advantage raised its equity allocation to nearly 80%—at the upper limit of its equity exposure band. Aditya Birla Sun Life Balanced Advantage’s valuation driven model also guided for up to 90% equity allocation. However, a quick rebound April onwards put many of these funds in a position to gain considerably from the uptick.A few funds adopt a pro-cyclical stance, taking higher equity allocation in a rising market and lower in a falling market. Nippon India Balanced Advantage Fund deploys a mix of valuation and momentum indicators to guide asset allocation. Edelweiss Balanced Advantage uses a combination of momentum and volatility factors as core indicators to identify market trend and its sustainability. This fund kept equity exposure modest at around 35% during the sell-off. But as market momentum shifted positively, the model was quick to hike equity exposure and allow the fund to capture the subsequent upside. Radhika Gupta, CEO, Edelweiss AMC, observes, “Momentum has been a very successful strategy over years. Our fund has played to its script, taking advantage of big ups and downs to deliver.”Asset allocation approach does well after sharp market uptickBut given varied strategies in risk profiles of these funds, investors have to be picky. 80893683Now with markets trading at lofty valuations, traditional counter-cyclical funds in this space have pared equity exposure. If the market sees a pull-back, these funds will be able to cushion downside better. But the risk is that fund misses out on an extended rally in equities. Funds taking a pro-cyclical approach still sitting on higher equity exposure will be able to ride the wave for longer. But when the tide turns, these models will be tested for speed of response. Some experts maintain that value-driven, counter-cyclical models work better at such times. “It has been proven that value-oriented approach works out better in the aftermath of market peaks,” says Kirtan Shah, Chief Financial Planner, Sykes and Ray Equities.One set of funds allows for shifting equity allocation within a narrow 30-80% band. Others have the flexibility to move allocation to either extreme at 0-100%. Further, apart from variance in asset allocation at any given time, funds also adopt different strategies within equity and bond portfolio. Some invest mostly in frontline stocks while others take heavy mid-cap exposure. Some funds take active duration calls and pursue high-yield credit strategies within bonds while others rely on high grade, accrual-driven approach. The varied strategies also give rise to highly disparate risk profiles. This is visible from the risk scores. The category currently features funds with risk score ranging from moderate, moderately high, high to very high. Given this, investors must be more discerning when picking the fund. Shah insists, “Don’t make the mistake of painting all funds with the same brush. Be picky and opt for funds that suit your risk profile.”Regardless of strategy, the purpose of these funds is the same—to tackle market volatility and deliver equity-like returns at lower risk. Whether pro- or countercyclical, these follow different routes to the same destination. Investors worried about volatility may take comfort in this space. The added advantage is this regular shift in allocation is without tax incidence. Gupta suggests these funds should form part of an investor’s core portfolio. “Dynamic asset allocation or balanced advantage funds do the work of a large-cap fund at much lower volatility,” she says.