Balanced advantage funds cut equity exposure

Are local fund managers cautious about the near-term stock market prospects? Balanced Advantage Funds, an asset allocating product that invests in a mix of stocks and bonds, have cut their equity exposure to at least a half from the past couple of years as the record-breaking rally in equities has led to the market valuations turning rich.ICICI Prudential Mutual, which runs one of the largest Balanced Advantage Funds with assets of Rs 32,188 crore, brought down its equity exposure to 35.1% of the total corpus in May. This is lowest equity exposure by the scheme since August 2018 when it was 30.13%.“Valuations are no longer cheap and hence, equity allocation has been lowered,” said S Naren, chief investment officer, ICICI Prudential MF.Kotak Mutual’s scheme has bought down equity exposure to 36% as on May 31. DSP Dynamic Asset Allocation Fund’s equity holding has come down to 30%. All these allocations are half of what they were in April – May 2020 when these schemes had raised equity allocations to 70-80%Balanced Advantage Funds work on a pre-decided investment model that lowers allocation to equity when valuations rise. While most models use fundamental parameters to arrive at the equity component some also blend it with momentum and sentiment to decide equity allocation.This category of funds typically alters their equity allocation between 30% and 80%, depending on market valuations measured by price-to-earnings (P/E) ratio. As markets rose, most schemes have pruned equity allocation to 30-40%, close to the lowest that these schemes can go to.The Nifty rose 105% from its lows of March 23, 2020 with its PE (price-to-earnings) ratio—a popular valuation measure -- rising from 17 times to 29 times.“Liquidity support coupled with near zero cost of capital in most parts of the world has played a big role in ensuring that globally equity markets remained resilient and valuations continue to be elevated,” said Naren.Kotak Balanced Advantage Fund pruned its equity allocation from 79% on March 2020 to 36% on May 31. This scheme uses a blend of valuations and sentiment to decide the equity allocation. DSP Dynamic Allocation cut its equity allocation from 71% in April 2020 to 30%.Edelweiss Balanced Advantage Fund, which decides on the exposure on the basis of the sentiment in the stock market, continues to have a high equity allocation of 63% compared to 65% in May last year.The asset allocation fund category has gained popularity in past couple of years as many risk-averse investors have preferred this product for exposure to the market instead of a plain vanilla equity scheme.“Investors who are unnerved by high volatility in equity could invest through such funds,” says Amol Joshi, founder, Plan Rupee. He recommends ICICI Prudential BAF and Nippon India BAF.Distributors believe investors having lump sum to invest and unsure of where markets are headed in the near term could use such a strategy.“Many first-time investors who fear downside and want to invest lump sum should use this category of funds,” says Viral Bhatt, founder, Money Mantra. Viral recommends Edelweiss BAF and Union BAF. 83215533

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