A Different Perspective

posted on 17 April 2020 by Sunil Jhaveri

Today I am going to write about a scheme about which I was skeptical for quite some time. This scheme just does the opposite of what I believe in, which is invest/disinvest based on Market valuations. Those who know me and follow me will be witness to my thought processes of moving away from Traditional Mantras of Buy & Hold, SIP Karo Bhool Jao and Do Not Time the Markets.

I have been a great believer and proponent (my own Mantras) of a) Downside Protection and b) be in the right Asset Class at Right Valuations. I have always believed that Investors are like Abhimanyu – stuck in Equity Chakravyuha – not knowing how or when to Exit.

These thought processes coincided well with Asset Allocation strategies and in turn resonated with most Dynamic Asset Allocation Schemes (DAAF also known as Dynamic Equity or Balanced Advantage Funds); except one. All DAAF Schemes (except one) in the Mutual Fund Industry follow: Buy Low – Sell High i.e. when Market Valuations become expensive, they will reduce Equity exposure and when Market valuations become Cheap, they will increase Equity allocation and vice versa. These DAAF schemes are termed as Counter Cyclical due to its sheer construct of these schemes of Buy Low – Sell High based on market valuations as explained.

That one scheme which I was skeptical about and which follows just the opposite strategy to achieve similar results of Downside Protection and be in the Right Asset Class at Right Valuations is none other than Edelweiss Balanced Advantage Fund. This scheme follows Pro-Cyclical approach i.e. increase Equity exposure when markets are Trending up and decrease Equity exposure when markets are Trending down.

Since they launched this new Avatar in January 2017, I was monitoring it closely as they had not seen any Trends – upward or downward. Hence, could not gauge effectiveness of their Model. However, events of last few months and intermittent upward trend since 2017 to 2018 and then from September 2019 to January 2020 and then current downward trend has show cased that this Pro-Cyclical Model is equally capable of a) judging and capturing these trends and b) increasing Equity exposure in Upward Trend and reducing Equity exposure in Downward Trend very quickly, efficiently and timely; thereby participating in Upside during Bullish Trends and protecting Downside in Bearish Trends.

Let me share some data points to based on which I have now brought this scheme in my Investment radar. First and foremost, I will actual data of this scheme’s performance in different time horizons from January 2017 onwards:

Reason why I am classifying CY2018 and CY2019 as Non-Trend years as S&P Sensex and NIFTY 50 were going up only on the back of 10-15 stocks moving up in a polarized market; whereas broader markets including Mid and Small Caps were correcting. Since Edelweiss BAF follows Trend analysis; it may underperform during such side ways or non-trending market periods.

Though strictly not comparable with S&P Sensex (100% Equity) as Edelweiss BAF manages Equity between 30% to 80% maximum. In spite of that, they have performed equally well in Bullish Trend Periods and protected downside extremely well during Bearish Trend periods as well.

Now let me share some data on how they have caught these Trends well and increased Equity exposure when Markets were trending up and vice versa: following chart depicts this well:

Following data reveals actual Equity levels during Upward Trending and Downward Trending Markets and swiftness with which these Trends have been captured by this Pro-Cyclical Model:

Another data point which I have considered is Edelweiss BAF (EBAF) (Pro-Cyclical) v/s Other DAAF Schemes (Counter-Cyclical) since inception of EBAF i.e. since January 2017:

Based on all the above factors, I wish to change my skepticism of this scheme and bring it in my recommended Investment schemes under DAAF category. According to me this will be a way to diversify between different models within DAAF models and give option to the Investors to use both the models. On top of that, I have my 3 Investment Solutions with Exit Strategies in place under: Lump Sum. SIP and STP strategies. Here I move between two Asset Classes viz. Equity (Aggressive) and DAAF (Conservative) based on Market Valuations. If recent performance of EBAF is anything to go by, it has done well in Downside Protection (reason why I select DAAF) as conservative scheme. So far, I was not recommending to use my strategies with certain AMCs who do not have DAAF schemes (including Edelweiss AMC). Now I will not have any hesitation in recommending my Smart Investment solutions even on schemes of Edelweiss Mutual Fund by selecting their Equity schemes as Aggressive Option and their BAF as Conservative option.

Now let us analyze how we can use this scheme as a NEED- SOLUTION approach:

  1. Alternate to Small Saving Schemes like Recurring Deposit:

All of us are aware that there is a large section of Investors who invest in Small Savings schemes like Recurring Deposits, NSCs, etc. Recently Ministry of Finance has brought down rates under these schemes by almost 100-150 bps. This has direct impact on those investors depending on these schemes for their regular income and small savings.

As against say Recurring Deposits, if we recommend SIP in Edelweiss BAF; following will be the pleasant outcome for these Investors who will opt for SIP in EBAF:

  1. Where should an Investor of 55 years of age or above do Systematic Investment in? 100% Equity or DAAF?

This question should be tackled very carefully by all Advisors. We have a habit of saying that Long Term investment through Lump Sum or SIP is 3-5 years. Person of 55 years of age who is likely to retire in 5 years at the age of 60 is also recommended to do SIP in pure Equity schemes.

Think again. SIPs have delivered negative returns over certain periods of time in the past.Two instances that come to my mind are: 5 years ending in March 2009 when markets corrected by 60% from its peak in that month and another recent one 5-year period ending in March 2020 when markets corrected sharply within 15-20 days by more than 35%.

See the following 5-year SIP data in different Equity Indices v/s Edelweiss BAF for periods ending in March 2009 and March 2020:

Hence to conclude: SIP for investors with lower risk appetite and those who are about to be Senior Citizens or for Senior Citizens should be in schemes like Edelweiss BAF and not in pure Equity schemes.

  1. Regular Tax Efficient Cash Flows for Senior Citizens:

Unfortunately, when a person becomes Senior Citizen (60 years and above); he has been told that he should not risk his hard-earned money and invest his Retirement kitty only in Debt schemes.

According to me, there are two flaws in this recommendation:

  1. if you understand Rule of 30:30 which says 30 Years of Professional Life and 30 Years of Retirement Life. If Equity generated wealth for the investors during his 30 years of professional life; what logic says Equity cannot generate wealth for the same investor over 30 years during his Retirement period?
  2. Investors treat Financial Assets as single generation assets (which should be protected at any cost) and not treat them as multi-generation assets like property or jewellery they own. They have their beneficiaries to take their Financial Assets journey forward for another 30-40 years and hence should treat even Financial Assets as multi-generation assets
  3. Hence, this segment of Investors should also have some infusion of flavors of Equity through schemes like Edelweiss BAF and generate regular, tax efficient cash flow through Systematic Withdrawal as follows:

By converting positioning of any Scheme into NEED-SOLUTION approach, Advisors can generate both Mind Share and Wallet Share of Investors.

Hope readers will understand need for diversification even within DAAF schemes and look to invest in Edelweiss BAF with a new approach altogether. Also, use the same effectively through Smart Investment solutions of MisterBond (yours truly).