The Mutual Fund Show: Everything You Need To Know About Multi-Asset Funds
Choosing the right asset class to invest in has become more important, especially at a time when the benchmark indices have slipped from their record highs that they registered earlier this month.
Multi-asset funds could help investors overcome the challenge, according to Gaurav Mehta, analyst and fund manager at SBI Mutual Fund. Such schemes typically do well in deflationary or inflationary environments, given the active call fund managers take to navigate challenges, he said in this week’s The Mutual Fund Show.
Mehta also spoke about open-ended retirement solution-oriented schemes, which can be broadly divided into four categories.
- Conservative plans, which are largely debt oriented, and for people closer to retirement who wouldn’t want to opt for much risk.
- Conservative hybrid, which has about 10-40% allocation to equities, that’s typically geared towards people who are in the 50-60 age bracket.
- Equity hybrid, which has 80% allocation to equities, and is better suited for people who are in the 40-50 age bracket.
- Aggressive plan, which is for people on the better side of 40, which would largely have 80-100% allocation to equities.
Prableen Bajpai, head of research at Vantage Wealth Management Solutions, said such funds have nothing new to offer and are pretty restrictive in nature. Investors, she said, are better off taking small exposure in such schemes to avoid risk of concentration as all the assets are being managed by the same fund house and the same scheme.
Watch the full conversation here:
Edited excerpts of the conversation
Gaurav, it is a pertinent time to be talking about a multi-asset allocation category because while everything has gone up, what will happen over the next 12 to 24 months might be divergent behaviour. You look at this fund and this space very closely. Talk to us about the merits and demerits of the multi-asset allocation category.
Gaurav Mehta: From an investor’s point of view, the first decision that you have to take is with respect to asset allocation. Typically, we’ve seen that a lot of investors make that decision on a rule of thumb basis or on the basis of what’s happening from here and on. To some extent, it works. So let’s say had you bought after the correction in March of 2020, you moved in significantly into equities, that that would’ve helped. Today with valuations where they are, cutting some exposure, that could also help. But I think largely asset allocation for us doesn’t necessarily have to be something that has to be very tactical in nature. If you look at the market and the macro itself, there are various kinds of cycles that the macro and the economy itself goes through. We all know about the typical business cycle that lasts somewhere between 3-5 years. That in itself is a very important bearing on whether equities, bonds or physical assets will do well. Then if you stretch it a little further if you look at the last 10 years from 2009-2010 or just after the global financial crisis to as recently as the Covid crisis, that entire period has been where the global economy has largely been sluggish, inflation has been pretty low. As a result, interest rates have to be kept to a bare minimum. Now this combination of low inflation, low interest rates and low economic growth has in turn gone into a certain category of assets which typically do well in a deflationary or low inflation kind of an environment. Your conventional assets that typically do well in an inflationary environment, haven’t done well for as long as 10-12 years. Some of these asset allocation decisions can last more than a decade. We ran a cut somewhere during this rally, obviously, a few months before today where in general equity funds have underperformed government bonds for as long as 10 years. Again, these are cyclical things and these will change but to have a handle on whether you are in a deflationary environment or an inflationary environment, it’s in itself is a very important sort of role to play with asset allocation. I could go on because there are some of these cycles are working at even longer timeframes. For example if you look at the government debt to GDP in the U.S. today and the confluence of that high debt to GDP with the surge in broad money growth that you’re seeing across the world, the last time you had this combination was perhaps not even, 5-10 or 15 years ago. It was like, 5, 6 or 7 decades ago, somewhere in the aftermath of World War II. So, there are these cycles which are operating at different levels. There are these multi-decade cycles, there are these multi-year cycles and there are these shorter time frames.
So, it’s maybe difficult for a retail investor to be able to time this and therefore, maybe some of these options might be better. Is that what you’re trying to say?
Mehta: Absolutely, which is why this entire multi asset allocation category becomes that much more important because the investor doesn’t have to take these decisions on themselves and there is a holistic or a framework-based approach that investment managers hopefully will take to cater to these challenges.
In your fund category unless I’m wrong, I was looking at the allocation. So, equity, currently I presume is about 42%, debt it’s about 30%, you’re sitting on 10% cash and commodities 17%. What are the rules that you’ve laid out? Would that never go above 30% or would equities never fall below 35%? For somebody who’s hearing this conversation right now I’m thinking about whether or not he or she should invest in this fund. What are these rules that you’ve set for yourself and why?
Mehta: Before I talk about the fund itself, I’ll just talk about the category because different funds in this category are run in a very different manner. There are certain funds where you will typically find that equity is always 65% or higher, and that obviously is because of the equity taxation benefits that you get along with it. We have taken a conscious call that this is going to be a much more of a risk focused strategy. This is why we are much more conservative in our asset allocation overall. If you look at our benchmark, our benchmark has 40% as NIFTY TRI and total return index, 45% is G-Secs and another 15% is gold. So, in that sense, we think that on a longer time frame, both equity and bonds will have somewhere in the ballpark of 40-45% allocation. Now within that obviously we will take active calls and we do take active calls in generated alpha. Today, you’re right that we are only slightly overweight equities versus our benchmark and that’s largely because of run up that you’ve already seen in equity markets. Overall, I think if you look at the macro environment today in India, not because we were very fiscally profligate with respect to spending but largely because of collections themselves, our debt to GDP is now inching higher. In this environment, when we think that it’s not down to stay low for a long period of time just so that—if you look at for example the U.S. are doing and servicing this high government debt to GDP ratio. One simple way is to keep the interest rates low and over a period of time this high debt to GDP ratio will take care of itself because the denominator will rise at a much faster pace than the numerator. In that context if interest rates are supposed to go for a long period of time you would want to be somewhat underweight on debt and look for alternative avenues to generate that extra return, which is what you’re seeing in the fund today. But at the same time as you said we are maintaining a very high level of cash because a lot of things have moved a bit too fast, and because 2020 was a year where liquidity meant that all boats rise together. Come 2021 we’ve already seen some inch up in bond yields so even though they will stay low versus historical standards. As liquidity becomes less abundant, you will see some bouts of volatility come through. So, even though you might have a structural view, you will get opportunities to exploit that structure and that’s exactly what we are expressing.
To the other conversation and that is for the NFO that is from your stable. Tell us a bit about this. It’s I reckon an open-ended retirement solution-oriented scheme. What is it about, what kind of investors should look at it?
Mehta: I think retirement is an objective which all of us plan for and the better it is, the greater the chance of attaining that objective is. Largely if you look at it we are offering four different plans. One is a conservative plan which is largely debt oriented, much closer to the retirement and would want to go about it in a much less risky fashion. Then there is a conservative hybrid, which has about 10-40% allocation to equities, a slightly higher allocation and a slightly higher risk but that’s typically geared towards people who are in the 50-60 age bracket. Then there is equity hybrid, which has 80% allocation which has a very significant allocation to equities, that we think is better suited for people who are in the 40-50 age bracket. And for people on the better side of 40, we also offer this aggressive plan, wherein it would largely be an equity-oriented scheme with a 80-100% allocation to equities. So, there is an auto transfer option where according to the age of the individual, they automatically move across these four categories starting aggressive and then eventually ending at conservative. Then there is a ‘My Choice’ option where the investor thinks that no, he or she is better suited for a certain risk profile and wants a particular plan, they can choose that particular plan. This is a plan where, as you rightly said, is an open-ended plan. There is, however, a five-year lock-in which is the case with all funds in the retirement category. Eventually, if you look at this fund as we talked about the multi-asset allocation category, there are multi-asset allocation funds available and then there are these individual equity, debt and hybrid funds available. The reason this fund is a little different than those funds is that it anchors the investors expectation to the long-term achievement of a certain goal. Otherwise, we all see that typically SIPs don’t last more than a few years and that’s because either we want to sort of dip into these liquid investments to meet our expenses or in some cases just because markets are going through their ups and downs, emotions get the better of us. But in any case, for some short-term gratification we lose focus of the long term and we lose sort of that compounding benefit that comes along with investing for the long term. Which is why we think we can get a solution-based fund in general, because the investors’ expectation towards the achievement of a certain goal, and as a result instils that discipline to continue with that investment in a disciplined fashion.
What kind of returns should an investor expect? Let’s say the person is happy to be anchored for 10 years, what’s the base expectation that somebody can expect and I don’t know the age bracket of this investor she could be 40 or 50 or 55 years old. But let’s say she’s watching the show right now and trying to wonder, and why should I park my money in this fund, what is the kind of return that I can expect, what would you say?
Mehta: As I said, there are four different plans with very different risk and return characteristics so it depends on which of those plans you are in. But I think largely speaking the key objective of a retirement fund is to be able to meet and hopefully beat inflation in a comfortable fashion. That’s what we endeavour to do through this fund. The higher the equity allocation, the greater are the chances that you will do that much more comfortably especially if you have a 10-year sort of an investment horizon. With a 10-year investment horizon we typically see that returns are handsomely in excess of inflation through the equity route. But even on debt to the extent that we’re even in the conservative options, to the extent that the debt portion will be actively managed and at the same time there is some equity allocation to that, even on those options we do think that we’ll be able to greet and meet our inflation target very comfortably. But, if you are asking me in terms of a particular return number, unfortunately I’m unable to say that.
Could you give a ballpark range or a guesstimate about what the return could be?
Mehta: I think if I just approach it from an asset class point of view as that you know bond yields today to begin with, are at a lowe rate. So, at least for the next few years, you should expect modest returns from debt versus what you’ve seen over the last 3-5 years. On the flip side, equities are coming from a 10-year stretch of close to non-existent earnings growth. When I say non-existent, I am exaggerating but with the earnings growth number has been very muted 3-4%, which from a longer-term point of view, is over at around a 12% CAGR. So, from that point of view if you’re looking at it from a point in time perspective, very clearly equities are coming from a very depressed, corporate earnings base. If those corporate earnings take care of themselves over the next few years, then even with these high valuations for 3-5 year investment horizon, you should see decent returns comes from equities. But unfortunately the reality of the world today is that, that all asset classes are relatively expensive so you should moderate your return expectations. But on a 10-year time frame, I think that’s a long enough time frame for you to expect healthy returns and definitely returns in excess of inflation.
Prableen, any quick thoughts on this fund? I don’t know if you got a chance to hear, but you would have read about this or you would have researched into this NFO. What’s your sense? Should people subscribe or should people give it a pass?
Prableen Bajpai: I think retirement is one of the most important goals for each one of us. So, it’s very nice when you see a product which is offering a solution. So that’s the good part of it and also that these four categories that they have, it’s kind of a mix of different assets because they’re going to have exposure to gold as well a bit of REITs and debt and equity. It captures the idea of, goal-based investing and that’s good. It can bring in the discipline because five years of lock-on so the investor knows that he or she cannot exit. Another good thing in this fund is that you won’t make the panic or hasty withdrawals. So that’s the good side of this. Now, on the negative I would say that the four categories that they offer, these are actually already existing as individual categories in the equity mutual fund space. So, there is nothing new as such. Second what they offer is an automatic transfer based on age or an optional transfer. That would be considered as a buy and sell. That means every such movement will involve you getting into all the taxation hassles as well. Now having said, asset allocation is a great thing so age-based asset allocation, we need to follow that as one ages of course you want to reduce your equity in the overall allocation. But, again, do you want to do it at the scheme level? I would say from a taxation point of view, it would be better if you as an investor you’re keeping your fixed income assets in a government-backed scheme such as an EPF or a PPF where you’re doing a final withdrawal are totally tax-free and for the equity part, I think investors can probably just manage with an index fund, one mid-cap fund and maybe an index fund in the global markets and that can do the trick for them. So, I think that can be a simpler approach. This can be slightly restrictive in nature and also that if you’re taking a small exposure, it won’t really work. If you’re taking a very large exposure, then there’s risk of concentration because all the assets are being managed by the same fund house and the same scheme. So, a very big exposure is not good that way and a very small exposure, wont makes sense. So, my take is that investors can avoid and actually do asset allocation at their own end.
If the investor is not equipped enough then one either must approach a financial advisor for the same and if the person is wanting to do direct, then, is this a good option or are there other options available?
Bajpai: Gaurav mentioned about the asset, but when you’re working you have an EPF and opening a PPF account is not difficult at all. They beautifully allow you to compound your money at risk-free mechanism, where your proceeds are complete tax free. I think that’s one thing and for a ‘Do It Yourself’ investor, I guess you would just go with the index fund, a Nifty 50, Nifty Next 50 and if nothing else, if they’re not aware of anything else, I feel that that’s easy because we are talking about really long-term investing. It’s going to be for three decades do I want to pay taxes every 10 years or shift because there will be some involvement from the investors side even in these funds.
You mentioned in one of in the opening answer that for a long-term investor the mid-cap category might not be a bad idea. Now, we were looking at the mid-cap category—YTD performers, three-year performers and there were two or three funds which stood out in terms of really good performances. There was Mirae, there was Axis, I think UTI mid-cap, Edelweiss did well. So, there are these three or four funds which have done very well. Do you like any of these as a mid-cap fund which people can approach? Why or why not?
Bajpai: Out of these, I have picked Mirae, so I’ll talk about that one. Though I am invested in Axis myself in the mid-cap but I like Mirae and I’ll tell you why. First is, I feel it comes from a very sound fund house and they have actually proven their worth especially in terms of stock picking in the mid cap category. Second, they’re very clear in terms of the sectoral allocation. So, it’s typically that you have the benchmark kind of an approach when it comes to the sectoral allocations and within those sectors, is where they use their skills and they do the stock picking. It’s a compact portfolio. It should not go beyond 50, it’s around 49-50 currently and yet it’s well diversified with a capping of about 5% maximum that you’re planning to allocate to any particular stock. Now, if we deep dive and if we see how this is constructed and when you are talking about Mirae, it’s hard to not mention about the emerging blue chip. So, if you actually go back and see how emerging blue chip was constructed, the framework of Mirae mid-cap is very similar to how emerging blue chip initially was. So that’s one interesting thing in terms of the approach because it’s a combination of growth and values, it’s a blend. The capping at 4- 5% per stock that’s been followed here as well, which was done in emerging and the fund manager who’s currently managing the mid-cap, Ankit Jain, is assisting Nilesh Khurana in the emerging blue chip since the January of 2019. This fund was launched in middle of summer of 2019 after a bit of his probably six months orientation. Of course, it’s the same fund house and structurally also there’s some similarity. Having said that, there is no guarantee that this is going to be the next best performer from the fund house. Nothing like that, but it’s a nice, diversified combination. Also, we will be comparing this fund with the other names UTI, SBI and Edelweiss. Currently, even if we are seeing from the valuation point of view, the portfolio has the least PE and the PB at present. So, it’s just about 21 for this fund and it’s as high as 36 for the UTI mid-cap. So, it’s a huge difference there. Another interesting differentiation here for Mirae is that they’re holding about 18-20% in large caps vis-à-vis all the others who have about 1-3%. That’s something which gave me comfort because I’m happy to be invested in mid-cap but I don’t mind a bit of a cushion in the form of large-caps as well. And the allocation to small-cap again is limited at around 10% which is as high as 26%, let’s say, in SBI mid-cap. This is my personal view and the kind of portfolio I would like to invest my money in. Of course, investors have to do their own research. A couple of other points are that, 2019 till now, since it has been launched, I think it has been a difficult time and in a very difficult time, a new fund has actually performed reasonably well. It’s I think the third or the fourth if we see the overall funds. We’ve picked funds which have more than Rs 1000 crore AUM. It has kind of proven, bit of its worth in a very hard time but it has a long way to go and comparisons will be made with the other funds from the fund house, but I think it seems like a decent bet on a risk-adjusted basis as well. One point that I’d like to add that there’s a lot of consciousness about the expense ratios. This has an expense ratio to the debt plan, it’s just 0.37 which is again the lowest because UTI and SBI can actually go about 1% and even Edelweiss has about 0.8. So, in terms of expense ratios also it’s the least as of now, it can change going forward.
Prableen, a fund within a category that you are recommending and why? I mean this is something that I think investors would really want to know that where is it that you believe that your clients should put in fresh money.
Bajpai: If you’re saying right now, I think it’s a very difficult call to make. But honestly, a dynamic asset allocation category as a category for somebody who’s really confused right now I would suggest that. The fund I’m going to talk about is from the mid and large category because I feel again it’s a combination of both the worlds. It’s the top 250 stocks is what the Indian markets are broadly all about. So, I will go with this category and the fund that I’ve picked is the Axis growth opportunities. Now why I like this fund is because it’s a combination of large, mid and global. So, I am quite an advocate of global investing. I feel that any portfolio must have some bit of an allocation towards your international markets and this fund is a good starting point because the global allocation that it takes is only in the large caps. So, it can invest up to 35% globally and within that it’s got a huge portfolio of about 30 global stocks. So, the allocation to one particular global stock is not more than 1.5%. Currently it’s got about 25% globally. It’s a small allocation spread across about 30 stocks globally. So that’s one thing I like because I think valuations even abroad are really high. So, from the point of view of risk, I think that’s something nice. Axis again as a fund house, I think has proven itself as typically this fund follows a growth style because that’s how they run their funds. So, the focus is on growth stories, its bottom-up stock picking and there’s a lot of focus on the governance and the pedigree of promoters. The filters that I think they deploy, whatever I’ve understood is that there’s a huge focus on governance and they are quite away from any kind of PSU stocks because there is less of ownership in PSU stocks. So, good governance and it’s a good combination of mid, large and global stocks with a focus on sustainable competitive advantage. So, valuations I don’t think is much of a concern for them if they see that the company will continue to grow and even if the valuations are slightly higher, I think that’s the approach that they take, they focus on innovation. So broadly, this is my pick from the category. Another two points here, that the international investments are being advised by Schroders, so it’s not totally that the Indian fund managers’ taking the call. They are being advised by Schroders for the International allocations. But, again, on the negative the same point I would say Mirae in this fund also is that they both are comparatively young funds and I think it’s still a long way to go for them to actually prove themselves. But the fund manager for Axis, Jinesh Gopani is already managing some of the very good funds from Axis—Axis Long Term Equity and Axis Focused 25. So, investors have to keep that in mind that it’s still a long way to go for these funds to prove themselves. Hence, these are two of the funds that I have liked.
Bajpai: Axis, of course, because we operate as distributors and we do business with Axis but here, this is my recommendation. It does not give us any other advantage or there is no compensation directly or indirectly, which is attached to this particular discussion of ours. One thing I’d like to add here quickly. That if there’s somebody who’s looking at a significant global exposure, with Axis—it’s just one third of the portfolio which goes globally but somebody who is looking for a significant portfolio globally, will have to probably add another global fund, because overall it’s out of your 3,000 or 10,000, so, only a small part will go away. So, that’s something that investors must be careful about while investing.