The Mutual Fund Show: Are Multi-Asset Funds For You?
Multi-asset funds are hybrid schemes that invest in multiple asset classes like equities, debt, commodities and global markets.
Such funds offer a clear advantage to investors by offering exposure to all asset classes, and the task of allocation to each asset class is left to the fund house, Manish Gunwani, chief investment officer-equities of Nippon India, said on this week’s The Mutual Fund Show. “We felt that by combining different asset classes, we can deliver reasonably steady return with low volatility, which I think is a big requirement for a lot of investors at this point of time,” he said.
Investment advisor Kirtan Shah, however, said the model of multi-asset funds in India is discretionary and is susceptible to the fund managers’ mistakes.
Shah said the Nippon India Multi-Asset Fund looks similar to other existing products in the market, adding that aggressive investors could opt for it over other multi-asset funds.
Watch the full show here:
Here are the edited excerpts from the interview:
Manish, how are our markets looking from an investment perspective because that will directly tie in with the kind of returns and mutual funds at large can give?
Gunwani: I think the market bounce back has surprised a lot of people back from March when things looked so gloomy, and I think a lot of factors have driven that. One, the unprecedented stimulus, monetary and fiscal in the developed side—the U.S., Europe, etc., and two, globally, the economies have recovered better than what a lot of people were scared of. In fact, India I think is lagging a bit because obviously the lockdowns have gone on a bit longer than we thought. But China, Europe, etc. have come back quite well. So, I think a lot of us have been surprised, especially at the last phase, given the steep fall, we did expect some bounce back, but beyond 10,000-10,500 on the Nifty, things have started looking a bit stretched.
Frankly, I am a bit cautious in the near term, although I must say that if you look at stocks not from a March 2020 perspective, but more from a January 2018 perspective, a lot of the stocks, especially in the broader market, mid and small caps, there is a lot of room to make money on two-three-year basis.
In near-term earnings, obviously, the market is looking a bit stretched. FY21 earnings are a bit murky because of the first half being impacted so severely but even FY22 earnings, the market multiple is quite above the average multiple. So, I would think that it’s good to consolidate here for some time. Mid to long term, I still find a lot of stocks offering good value, but I think you need patience with this market now.
Then how does one try and exercise this part-optimism, part-caution via the mutual fund route? In the last 12 months, there’s been a bit of acceptance of multi-cap funds because they give you exposure across the categories. Is this larger acceptance and chatter around multi-cap funds trying to take that step a bit further that you can get multi-assets—you get multi-geographies and you get multi-caps?
Gunwani: Yeah. I mean as a nation evolves, financial assets grow faster and then people want exposure to different types of assets. Also, macro forecasting is becoming very difficult. I mean if you go back to October 2019 after the U.S.-China trade war, global economy had started picking up, Indian economy had started picking up and then suddenly, out of the blue, you get something like Covid, which for some asset classes like equity is bad because it destroys earnings, and for something like gold does phenomenally well. So, I think, as people find the need to deploy money, we need to find different asset classes which meet that requirement and clearly, what we’re seeing is in a low interest rate world, in a low inflation world, the need for stable, low volatility returns. There is obviously a big need for that. It is showing up in the premium for even defensive stocks globally. So that’s why, we felt that by combining different asset classes with a largely uncorrelated, that is they work at different points of time, we can deliver reasonably steady return with low volatility, which I think is a big requirement for a lot of investors at this point of time.
Manish, just trying to understand from a perspective of somebody who runs this whole equity side at Nippon. I’m guessing it would be difficult to even try and comprehend what’s happening within the equity space of a large nation like India, right? How does the house correlate all these data — Indian investments, international investments, commodity investments — and try and fit them into an investor’s multi-strategy fund?
Gunwani: We’re trying to keep it simple. For example, on the foreign equity side, we’re basically replicating the big global index there, we’re not trying to pick stocks. In commodities, we’re largely in gold. We’re not trying to be very opportunistic in commodities by shifting the entire investment from one commodity to another. Even on the domestic equities, on the debt side, we have fairly, what I would say, low active share kind of products in this fund so that the asset return does not get diluted too much beyond a point. So what we’re trying to balance is a steady asset allocation level. So we don’t change the asset allocation in this fund. Our point is that the weights of the asset classes are largely in line with the long-term returns promised by those assets and once we’ve done that, we don’t want to change the weights of the asset classes. Within the asset classes, we’ve have been active to a certain extent, but that activeness is a bit controlled so that the main emphasis is on the asset class return and we don’t get a situation where our portfolios diverge too much from the asset class. So I think we try to strike a good balance between how active we are versus how passive we are in this product so that, as I said, the idea is that get you steady return with low volatility and good diversification. For example, with balanced funds or with dynamic asset allocation funds, which we see in the market right now, at the end of the day, those are Indian assets; rupee assets, right? So, once we have foreign equities and commodities, there is a bit of diversification in terms of year like 2013 or 2018 when let’s say, the rupee depreciates a lot, you get some hedge against currency depreciation as well. So, we believe that diversification capability of the product is a bit more richer than your pure domestic asset classes.
Manish, should (multi-asset) this be a first stop for somebody who is starting into mutual funds, or should one start off with domestic large caps or domestic multi caps, then get into debt funds and then eventually get into a category like this? What do you think?
Gunwani: I think the way investors should think about it is where you are ending up in the end. I mean, with this product you have a certain amount of domestic equity. With a large cap product, you’re 100% domestic equity. People should build their portfolios in terms of how much is the end asset class you’re owning; whether it’s equities or debt or commodities, etc. Having said that, we believe that this can be a big part of the portfolio’s core product because essentially at one shot you get access to four big asset classes, and believe you me, a lot of people say ‘Oh! we can do this asset class ourselves with one pure equity fund’, ‘we can do a gold fund’, but when you look at the AUM of international funds and gold funds, you will clearly find that Indian households are massively under invested in these asset classes. We don’t expect Indian households to be 40% in foreign equities, but if you take the AUM of international funds, they are a minuscule fraction of the overall AUM, which basically suggests that a lot of Indian households have not invested in this asset class broadly and therefore there is a gap. One of the reasons, I think, people don’t invest in international funds or commodities is that there is a bit of cumbersome process. People feel they don’t understand this.
I think beyond a point you have to look at the correlation of asset classes more than trying to be very bottom-up in an asset class, and therefore, we do believe that it should be a big part of the portfolio because this kind of gives you a foundation on which you can add a lot of pure equity funds, sectoral funds and thematic funds, which tend to be much more volatile of course. But clearly, the big allocation in any portfolio has to be steady-return, low-volatile products.
And would you be slightly different from the other funds in this category in India or would funds largely be following suit? Any idea?
Gunwani: I think we’re definitely different in terms of having these four asset classes. Most of the other products tend to have two or three asset classes. And our strategy is as per the asset class. So domestic equities, we are active but with a lot of guidelines around what kind of paper we will hold. In international equities, we are basically mimicking a global index, but we are compressing that because the global index has more than thousand stocks. So, we are compressing that to smaller number of stocks like 25. For commodities, what we’re saying is 15%, of which 10% will always be gold. So the big opportunity is basically where we will be dynamic is only 5%, but gold again you can hold it to different forms to maximise your returns. So as I said, it’s a balance between being active with a framework of risk you can take and passive in terms of the fact that the asset levels—domestic equities will always be 50%, foreign equities will always be 20%, debt will always be 15% and commodities will always be 15%—so that is fixed. In the asset class, we’re trying to add a bit of value from being active.
Manish, let’s assume that you are invested in these domestic equities which is discretionary in nature and not passive. Should that weightage go up? Would this be rule-based or would this be at discretion?
Gunwani: I think that’s an important part of the fund construct that we will do partly re-balanced because that will help us maintain valuation discipline as well. So for example, at the beginning of the quarter if domestic equities were 50% and let’s say foreign equities were 20%. Let’s assume that the Indian market outperforms global markets, what we will find at the end of the quarter, let’s say, domestic equities has become 53% and foreign equities has become 17% from 20%. Then at the end of the quarter we will re-balance so that we are selling off something which has done well and we are buying something that has not done well. Over the long term, asset classes revert to the mean. So this will be an important construct of the product.
Kirtan, what are your thoughts on this multi-asset fund category?
Shah: As per SEBI’s definition, multi-asset funds have to keep 10% minimum in equity. Now that can be domestic or international because both are comprised as equity as per SEBI definition, and you should have 10% in debt and 10% in gold. Now, this is what the SEBI definition highly focuses on in terms of structure. Now of course because all of these asset classes have very little correlation or negative correlation in some cases, of course this tends to make a very good basket of a portfolio of unrelated assets and probably over a period of time the risk adjusted returns may turn out to be really decent versus some other independent asset class investment and can also reduce draw downs. That is for sure. But I have a small apprehension the way most of us talk about these funds saying that this will take care of asset allocation. In my opinion, asset allocation as a strategy has to be taken care of at the client level and it cannot be taken care of at the fund level. What I really mean by that is you cannot have 10,000-20,000 clients invested in a particular fund, and then expect that the fund will take care of the asset allocation strategy of all of those clients invested in the product.
Why would you say that?
Shah: It is not more to do with timing of the asset, but the allocation of the asset in itself. So what do I mean when I say this? Let’s say for example there is a conservative client would not want a 70-80% allocation to equity irrespective of how risk-adjusted return may turn out in the future. But at the same time an aggressive client would have a 70-80% asset allocation towards equity. Now if both of these clients are going to be a part of this particular fund, which is going to move asset allocation anywhere in the range of let’s say, 10% equity to 80% equity, at the fund level it might be correct where the fund manager is taking a prudent call of whether the equity is undervalued and I should be overweight on equity, or equity is overvalued and I should be underweight on equity, it does not solve the asset allocation purpose for somebody at the client level. So as a conservative client, even if the equities are cheap, I may not be very comfortable with 70 or 80% of my portfolio in equity and which is why I said that this can be a part of your overall asset allocation strategy, but this may not be a one-product-fit-for-all kinds of investors.
When I look at the indicative asset allocation that Nippon India multi-asset fund at least is saying — domestic plus international equity will be 50-80%. So, they’re not talking about taking equities down to 10% any which way, right? So, if I’m comfortable having my overall equity exposure about 50% and want asset allocation while not having the time to look at all the other asset classes myself, does this give you an option?
Shah: In that case, it definitely gives you an option. But if I talk about anything outside of Nippon, this entire category unfortunately, though it is a multi-asset kind of a category, this is more equity-focused. So, if you look at most of these other funds outside of Motilal Oswal fund, that got launched the last month, are equity-heavy and they were very little debt exposure and a very little gold exposure, and which is why, in my opinion, this does not solve the purpose of an entire multi-asset re-balancing kind of a strategy, but it is more of an equity-focused fund with a little bit of debt and a little bit of gold.
Correct me if I’m wrong here, I’m looking at four or five other mutual fund houses — ICICI Prudential Multi-Asset or SBI Multi-Asset Allocation Fund or Motilal Oswal for that matter, equity exposure ranges from 10-50% or 10-80%, in which case, they are probably not very heavy on equity side but are just leaving a lot of range. So is your issue with the fact that they are heavy on the equity side or because the ranges are so high that they whittle it down to 10% also and bring it down to 60-70%, and therefore there is no clarity?
Shah: While the objective of the scheme in SEBI definition will say 10-80%, there is a big caveat here. If your fund goes down below 65% on the equity allocation, you don’t get equity taxation. Now, to support this point or to suffice this equity taxation that you really want to end up giving to clients who invest in the funds, most of these funds for all the historical performances that you look at have always been higher than 65% on the equity side. So my entire discuss here is that though the objective of the fund might say that I have a higher range of 10-80% for all practical purposes over the last three-five years, that you see most of these funds have been equity-heavy with 65%-plus exposure to equity because that will give an equity taxation to the client. And hence it is not actually a proper diversified portfolio that we are really looking at while we are talking about and multi-asset fund.
Now, people who do not have an adviser or do not want to go to an adviser, they do not have any kind of global diversification or commodity diversification. So for that category, would this, even if it’s only less than 35%, still be an option?
Shah: I am absolutely in for why multi-asset funds are a great product because somebody like the one that you pointed out who does not have the understanding or the bandwidth to understand domestic, international, gold and debt separately, this is a brilliant product. So if I have to really boil it down and make it very simple, so let’s say for example if there is a client who understands that I’m conservative, I think a Motilal Oswal fund that came out last month makes a lot of sense, and then there is a client who understands that I am slightly on the aggressive part, I think the Nippon fund makes a lot of sense because they’re completely different in their fund construct. Both of these funds will give exposure to gold, domestic equity, international equity, as well as debt, but the way the funds are constructed, I think the Motilal Fund makes more sense for a conservative client and the Nippon fund makes more sense for a moderate to an aggressive client.
Now, Nippon is of course the NFO but there are funds like these which have existed in this category in the past. Anything that you think these funds have not done which they could have done in your observation to give better returns and better quality of returns to investors?
Shah: See, I think there are three disconnects that I really have with the existing funds so far and I’m not talking about the NFOs. I think the first disconnect that I already pointed out to you is for me, these are low equity funds. So what most of these funds have done is, kept equity exposure above 65% and up to 80% like the investment objective says just to give that equity taxation to the client. And to a certain extent, I feel given the way these funds are constructed with 65-80% equity exposure, I think what we are trying to do is not give a multi-asset kind of an exposure but try and compete with a balance advantage or a dynamic asset allocation kind of a category in the market which I think I’m not very comfortable with looking at the funds there.
The second very important point that you really want to drag here is that if you look at the existing funds, most of these funds do not have a rule-based approach and all of these funds are discretionary funds. Now what I really mean by that is, because they have 10-80% exposure that they can take in equities or for that matter 10-50% exposure that they can they take in debt or 10-25% exposure that they can take in gold, depending on the objective of the fund; I think if you look at these schemes very closely at the three-year, five-year period, I think what these schemes are doing is, they chase performance, and most of these funds have not been rule-based which is why if you look at their returns very closely—calendar wise and CAGR over three or five years—you would understand that all of these funds have very very different return perspectives. For example, if you look at the last one year up to July 30, you would understand that there are funds which have given in the same category 2.76% return in one year, but another fund has given close to 16% in the same year. So if it’s the same category of multi-assets that we are talking about, this divergence of one fund giving 2-2.5% and another fund giving 16% in the same category in itself shows that there is no rule-based model approach that everybody is using, but a discretionary model which I think is a big drawback of the existing funds in this category in my opinion that I’ve observed over three-five years.