AMC Speak

This category can become as large as equity AuM in 5 years

Manish Gunwani, Deputy CIO - Equities, ICICI Prudential MF

13th May 2017

In a nutshell

As investors shift from physical assets to financial and from fixed income to equity within financial assets, advisors often confront situations where lumpsum allocations are being considered by their clients. Should you really be making lumpsum equity allocations at current market valuations? Manish believes it is far more prudent to make these lumpsum allocations into dynamic asset allocation funds, which can ride out volatility that usually comes when markets reach these valuation levels. Its not only a tactical call - Manish believes the track record of this category in managing volatility and yet capturing most of the equity upside, coupled with investors' low appetite for volatility means that the category of dynamic asset allocation funds has the potential to grow over the next 5 years to the level that pure equity funds have reached today.

WF: The Sensex, BSE Midcap and BSE SmallCap indices are all trading currently above their long term averages. History suggests its time for mean reversion while some analysts point out that since the E in P/E hasn't really grown so far, historical P/E is misleading, especially if we believe an earnings spurt is indeed around the corner. What is your sense on this debate?

Manish: We believe that there is a good chance for capacity utilisation to improve in several sectors over the next 2-3 years and this portends well for a strong earnings recovery. However part of this is being discounted by the market already as valuations on near term earnings are on the higher side.

WF: Why do you believe dynamic asset allocation funds are the best investment solution for investors in today's market context?

Manish: When Sensex is at 30,000 level and an investor is looking for investing lumpsum, we believe such an investor should invest in dynamic asset allocation funds. Even if the rally were to continue, by investing in dynamic asset allocation funds, one can be assured of equity exposure. The only limitation here could be the possibility of the entire rally not being captured in terms of market gains. Thereafter, when the markets are likely to turn volatile, investors can consider investing in this fund.

WF: What is the equity allocation currently in your Balanced Advantage Fund and how has this moved in recent months in response to rising valuations?

Manish: The current equity allocation is around 50% which is based on valuations along with the macroeconomic parameters incorporated in the model.

WF: How are you managing the equity segment in your Balanced Advantage Fund in an environment of rich market valuations?

Manish: The equity segment of Balanced Advantage Fund currently has a bias towards large caps and structurally strong companies which have demonstrated track record over time.

WF: Some fund managers believe that the interest rate reduction cycle has ended and that one has to be ready for a gradual rise in interest rates. What is your view on fixed income and how is the fixed income segment in your Balanced Advantage Fund being managed in terms of fund strategy?

Manish: View on Fixed Income: The fixed income market remains supportive for investments, due to favourable macroeconomic indicators such as inflation, Current Account Deficit, Fiscal deficit and low credit growth. We expect yields to moderate from the current levels on the backdrop of real interest rates being higher, weak inflation drivers and impact of global inflation receding. With reasonable state and central fiscal deficit, appreciating INR and forecast of a normal monsoon are also positive triggers for bond yields.

BAF debt portion management: The debt portion is dynamically managed to exploit the various opportunities available in the debt market from time-to-time.

WF: The Indian MF industry's flagship retail offering has always been diversified equity funds and SIPs in them. Is it time for us to think of dynamic asset allocation funds as the flagship offering for retail investors?

Manish: Doing SIPs in diversified equity funds remains the core equity offering. However, through dynamic asset allocation funds what we are aiming is to offer is a volatility solution. Given the huge allocation to traditional fixed income avenues, we believe there is considerable potential for this category of funds to grow much bigger in size. We are comforted by the investor experience these funds have delivered and expect this category to grow as much as the current industry equity AUM over the next five years.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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