Prime Recommendation: A low-risk option for the conservative equity investor

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If you’ve got a 5-year-plus timeframe, equity is the way to go as we explained this week. And yesterday’s steep correction offers up more buying opportunities for those with the risk appetite and timeframe. And if you need money in the very near term, we’ve asked you to stay safe with fixed deposits, liquid funds, and ultra short-term funds, given that the current climate offers no room for risks in the short term. But what about the in-between timeframe? What are your options should you have a horizon of 2-3 years and want better returns that fixed deposits or low-risk debt funds?

conservative equity

 ICICI Prudential Balanced Advantage fund fits this requirement and is suited for conservative equity investors. This hybrid equity fund stands out for:

  • its steady history in using valuation metrics to shift between equity, derivatives and debt, unlike other balanced advantage funds
  • its ability to contain losses even in very short timeframes such as 6 months, along with lower volatility compared to peers
  • its deft juggling of equity and derivatives to make the best of market movements, and consistent strong performance

If you have a 2-3 year time frame or have a longer time frame but cannot handle equity funds directly, then this fund is a tax-efficient option.

Strategy clarity stands out

Balanced advantage funds are clubbed with dynamic asset allocation funds in terms of SEBI category classification.

But such clubbing and no clear definitions on what the category itself is, leads to inconsistencies among funds. There are some, like Aditya Birla Sun Life Balanced Advantage, that hedge only a small part of the portfolio, to those such as HDFC Balanced Advantage that is exactly like an aggressive hybrid fund.

The confusion is compounded as many dynamic asset allocation funds also use derivatives, such as DSP Asset Allocation and BNP Paribas Dynamic Equity. The far more aggressive nature of asset allocation funds and the wide range that equity can go to makes it hard to pinpoint risk levels or understand fund behaviour. More, most funds in this category lack history to judge ability to correctly shift allocations or contain volatility – they are either recent launches or were different funds that came in post the SEBI mandate in 2018.

ICICI Prudential Balanced Advantage (IPru Balanced Advantage) is among the few funds that has been around across market cycles and has maintained a steady strategy. It uses a long-term price-to-book value to shift allocations, upping derivatives when valuations are high and vice versa. For example, unhedged equity dropped below 50% early on in 2017 and went all the way down to 30%-odd levels as markets heated up. Allocation then crawled higher towards the end of 2018 and moved to around 50-55% over 2019. Unhedged equity exposure runs a strong negative correlation with the Nifty 50’s price-to-book ratio as well as the index itself.

Unhedged

On the debt side, IPru Balanced Advantage more or less maintains a 30-35% allocation. It also tends to have a short maturity profile for the most part, briefly dipping into duration strategies in periods such as 2016 where opportunities were ripe. Over the past five years, the average portfolio maturity has been 2.7 years.

Suitability

IPru Balanced Advantage suits different needs:

  • For investors with a 2-4 year timeframe, who want returns above pure debt funds and willing to take on a little higher risk. As the fund is an equity-oriented fund, it is more tax-efficient than debt funds and more so in timeframes less than 3 years.
  • For conservative investors, even for those who have long-term timeframe, who want equity exposure without the high risks.
  • For investors worried about the ongoing correction and wish for funds that can contain downsides, manage volatility, and deliver over time.

As a equity-oriented fund, it is not immune to market corrections in shorter periods of less than 6 months. The fund has delivered negative returns 30% of the times when returned were rolled daily for 1-month periods, since 2015. In this aspect, it is more volatile than pure debt funds. However, over longer periods, this whittles down. Rolling 6-month returns from 2015 shows that the fund delivered losses just 13% of the time. The average such loss was 2%.

Performance

IPru Balanced Advantage on an average delivered a 1-year return of 10.8% from 2015 to now. Short-duration debt funds, in the same period, delivered an average of 7.6%. The fund has, in strong markets, delivered returns in the 15-25% range as well. In this aspect, it does fit longer-term portfolios for conservative investors too. But do not enter the fund expecting equity-like returns.

Returns

Strictly, IPru Balanced Advantage isn’t really comparable with peers given the wide variety in strategies and allocations. Still, in ability to contain downsides (measured by the downside capture ratio using 1-month returns against the Nifty 50), it scores above average. The fund captures just 35% of a month’s market downside. On other risk-return metrics such as Sharpe ratio and Sortino ratio, IPru Balanced Advantage scores well above peers.

Performance

IPru Balanced Advantage’s recent performance, obviously, has been hurt by the meltdown of the past few days. The hedged equity portion of the February portfolio is also low at 8.6%. While the recent fall may be sharp, it needs to be noted that the fund may find good buying opportunities in this time. The fund’s ability to contain downsides is also strong, and as explained above, 1-month losses generally tend to dissipate over time.

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Please note that any specific queries on any of our recommendations will be answered ONLY through email. If you are a subscriber, please mail contact@primeinvestor.in.  Only general queries or discussions will be answered through the comment section of the blog. For full details, please refer to this post – How to communicate with PrimeInvestor.

23 thoughts on “Prime Recommendation: A low-risk option for the conservative equity investor”

  1. Hi
    I want to invest some money into Dynamic scheme. When I compared Prime ratings, DSP has a 5* rating, ICI Pru comes next only. Shall I go ahead with DSP? how do I decide on such occasions (where a recommended fund has a lower prime rating than a peer)

    1. Hello Sir, if you are a subscriber, please look at our Prime Funds (our recommended list) to pick a fund in this categry provided you have made up yur mind on dynamic bonds. Our recommended list should be the desired list for chosing funds. Then our MF review tool can be used to know whether the fund you hold or choose is a buy/hold or sell. Ratings should be to only to know how funds compare with peers and not for decision making. thanks Vidya

  2. Dear Team,

    First of all congrats on the amazing job you are doing. This website is in fact way different than all the others out there!

    This article, however, made me wonder whether this fund (ICICI Pru Balanced Advantage Fund) will be suitable for conservative investors. I am an investor in this fund since the last 3 years, the returns, however, have been not satisfactory. It has fallen a lot which should not have been the case as the dynamic asset allocation quant model that it follows, had less than 50% invested in equities for a very long time. It was also not spared in the calendar year 2018 downfall when it also underperformed its category and peers.

    So, having doubts about it going forward? Please clarify if I am wrong.

    1. Bhavana Acharya

      Hello sir,

      Thanks for the appreciation!

      Regarding the fund – Yes, it suits conservative investors who want equity exposure. The only lower-risk alternative that gives equity exposure is equity savings funds which have very low open equity. Equity itself wouldn’t be an option if a fund like this is considered too risky.

      Returns – it will be lower than funds such as hybrid aggressive, so expecting high returns from this type of fund is not really a good idea. Comparing it with category is very tricky because, as explained in the analysis, each fund is doing something very different and have widely varying debt, equity and derivative exposure. In a year like 2018, any fund that had high debt would have scored – like DSP Dynamic, for example. So comparison in this category is not at all straightforward and is very misleading unless each fund’s asset allocation trend is taken. Also note that 2018 was a year where funds were re-aligning to SEBI categories and peers again are not really comparable. IPru Bal Advantage didn’t underperform category in 2018, even ignoring asset allocation patterns – it was not the best performer, yes, but it was above-average. But a fund that’s above average consistently is preferable to one that’s at the top sometimes. A fund can’t really be the top every single time.

      Ipru is not a dynamic asset allocation fund. By true definition, a dynamic asset allocation fund will move from 0-100 in each asset class. Funds such as Franklin Dynamic PE are cases in point. I Pru maxes out at 35% in debt. In this current market, yes it has fallen. But that’s because its open equity is high, which is actually a good thing because markets are low. Equity exposure and market movement are conversely related for this fund. This is also why we’ve said that it’s better suited for a 2-4 year holding now.

      Thanks,
      Bhavana

  3. Narendranath Baliga

    Dear Bhavana
    Good analytical article on why ICICI Bal adv fund among all the choices available.
    Has the fund confirmed they will maintain it as an equity oriented fund with min 65% in equity and derivatives? Otherwise, one will lose equity tax advantage. They seem to keep the option open. Tax is an important element to consider.
    Btw, another group of potential investors for this fund: Those who have a lump sum on hand and want to invest it in equity fund (in addition to equity SIP they might already be doing). Invest the available lumsum in this fund (instead of parking it in debt fund and executing an STP) and when the equity portion crosses say 80% , start shifting to another pure equity fund. This way, you are allowing the experienced fund manager to ride the volatility and then shift to equity fund at own convenience. Isn’t this a better strategy than an STP from a debt fund?

    1. Bhavana Acharya

      Hello sir,

      No, the fund will remain an equity oriented fund. By mandate, it cannot go more than 35% in debt.

      Regarding the strategy you’ve outlined – no, it would not be a good idea at all. It over-complicates the investment, without benefit. The concept of an STP is simple – you have a large sum to invest in equity, investing at one go throws up market timing risks, so you spread it out. And instead of it earning sub-par returns in your SB account, you put it in liquid funds because you don’t suffer losses on liquid funds (under normal circumstances) even on 1-day basis.

      By putting it into a bal adv fund, you are already taking on equity market risks. These funds can deliver even 6-month losses. If the equity portion has to cross a high level then it means equity is undervalued, and you will be redeeming at lower returns at that point. That’s unnecessary. This negates the objective of STP from debt to equity. And if the equity mark is not reached – because the level you’re setting is your own and arbitrary – you can be holding the fund too long and miss investing in equity itself.

      Thanks,
      Bhavana

    1. Bhavana Acharya

      Hello ma’m,

      No, as explained in the analysis, the fund is a balanced advantage fund and is taxed like an equity fund.

      But you’re correct where dynamic asset allocation funds are concerned – here, tax depends on the date on which you sell. The equity allocation of the preceding 12 months is taken to see whether it is equity-oriented or debt-oriented. Some dynamic asset allocation funds are trying to maintain equity orientation for taxation purposes, of late. And therefore the category gets even more confusing 🙂

      Regards,
      Bhavana

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