There are already 25 schemes in the Balanced Advantage Funds/Dynamic Asset Allocation Funds (BA/DAA) category with assets worth Rs 1.8 lakh crore. These products are useful for investors with moderate risk and help prevent downside during market corrections. Debt-strapped Franklin Templeton (India) has launched Balanced Advantage Fund (FIBAF) after the slowdown. The NFO will be open from August 16 to August 30.
Will FIBAF be different from long-standing peers? Here is a downfall.
What is this?
Franklin India Balanced Advantage Fund seeks to offer a strategic allocation between equity and debt based on market valuations and considerations driven by fundamental factors. A formula-driven approach will advance the fund’s investments, which can help negate the behavioral biases caused by greed and fear.
All BAF/DAA funds have some common formulas given the same mandate; But individual changes have been made to differentiate themselves.
One, they use a model or set of valuation indicators to assess the attractiveness of the stock market. FIBAF will use a mix of quantitative and qualitative factors to determine equity asset allocation. Unlike peers such as Edelweiss BAF, which follow a pro-cyclical model, FIBAF takes a counter-cyclical approach. So, by reducing the debt allocation in falling markets and decreasing equity share in rising markets will increase equity allocation.
Under its quant framework, the month-end weighted average P/E ratio and P/B ratio of the Nifty 500 Index (Trailing) will be taken together with a weightage of 50:50. Recent fund launches like Mirae Asset BAF use a combination of P/B and P/E valuations of Nifty 50 TRIs.
The portfolio will be rebalanced in the first week of the next month.
Two, BAF/DAA funds limit hedging through stock and index futures. High hedged equity exposure makes the fund more prone to market volatility and leads to poor downside controllability during corrections. At any point of time, if the equity allocation falls below 65 per cent, FIBAF’s gross equity exposure will be maintained using equity derivatives. The fund is eligible for equity taxation if the allocation for the equity asset class exceeds 65 per cent for the year.
Third, on the loan side, some BAF/DAA funds carry credit risk and have historically low-rated papers in AA and AA-buckets. FIBAF will look at investment-grade instruments in government, corporate, PSUs, NBFCs, banks and other issuers. It strives to account for more than 80 percent of fixed income portfolios in AAA-rated papers, but would lean a high credit strategy if not going below AA.
Fourth, in terms of portfolio management, Franklin India Balanced Advantage Fund will adopt a flexi-cap approach to equity allocation, which provides greater scope. It will follow a mix of growth and value in terms of investment styles. Larger counterparts like ICICI Pru BAF are also flexi caps. Note that equity portfolios of all BAF/DAA funds with 49-67 per cent allocation have large-cap bias. FIBAF intends to hold 65-75 per cent stake in large-caps.
One year: -0.30 per cent to 16.4 per cent
Three years: 7.6 per cent to 17 per cent CAGR
Five years: 4.8 per cent to 11.4% CAGR
How the BAFs have performed
The category average numbers paint a complex and somewhat distorted return picture. On a one-year basis, the returns vary between -0.30 percent and 16.4 percent. Returns range from 7.6 per cent to 17 per cent CAGR on a three-year basis. Gain spectrum ranges from 4.8 per cent to 11.4 per cent CAGR on a five-year basis.
Let’s take the latest episode of fall and recovery in Sensex. From mid-October 2021, to mid-June 2022, the index fell more than 16 percent. During this time, nearly all BAF/DAA funds beat the market, but the best gained 1.8 percent, while the worst fell 16 percent. Percentage post recovery – 15 per cent gain for Sensex, BAF/DAA fund growth has been between 5 and 12 per cent. Simply put, a more aggressive fund has the potential to deliver higher returns during volatility. Given their hedging and ability to adapt the portfolio to market conditions, BAF/DAA hybrids do not fall like aggressive funds. The downside is the capture ratio ranges from 50 per cent to 80 per cent.
The indicative total expense ratio (investor’s cost) for FIBAF is around 2 percent for regular plans.
Since this is Franklin Templeton’s NFO, there are a few things investors should keep an eye on. The woes of six FT debt mutual funds may be over as five out of six schemes have returned more than 100 per cent of AUM at the time of closure. The four schemes have liquidated all the performing assets. Still, it will be important to keep an eye on credit allocation, especially given that the interest rate cycle has turned the other way.
Ghar already runs the Franklin India Dynamic Asset Allocation Fund of Funds (launched in 2003). That old fund is ranked third in one-year returns, sixth in five-year returns and fifth in both seven- and 10-year returns. In a span of three years, it ranks 17th. Investors can wait and watch for performance evidence in the new fund.
16 August 2022