In investing, choosing across the spectrum of asset classes, in different proportions, helps create a good portfolio.
Cricket is the most celebrated sport in India. And with IPL, cricket followers have increased, making it one of the premier sports globally. Drawing a few cricketing parallels to investing - let us try to understand multi-asset funds, a little better.
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Choosing the right mix of players
While different conditions require different combinations of players, an ideal combination which works across conditions is a mix of batsmen, 2-3 all-rounders, bowlers and a wicketkeeper. In some formats, the limitation of having only 4 international players make it imperative that the choices are made even more carefully. So you may have a squad of 20-25 players – the choice of the playing eleven - against a particular opposition - will make all the difference.
Similarly in investing, choosing across the spectrum of asset classes, in different proportions, helps create a good portfolio. A combination of Domestic Equity, International Equity, Debt, and Gold which could help, with each category playing a different role in the portfolio. Debt helps reduce volatility while equity can generate alpha, international exposure provides geographical diversification and gold play a hedge against inflation/geopolitical events; thereby increasing the likelihood of better risk-adjusted returns.
Different conditions, Different bowlers – Different economic conditions, different allocations
A dusty, turning, day five-pitch, favours spinners; while a green-top pitch on the first day of a test match assists seamers. Hence you need to have both kinds of players in your team. In investing, different asset classes perform in different economic conditions. So while some conditions and time periods favour a particular asset class, they may work completely against the other. For instance in the CY 08, Gold was the best asset class while in the very next CY, Equity delivered 77% returns. To win across time periods it is wise to have a mix of asset classes.
Only pinch hitters?
The temptation to have a team full of master blasters is quite irresistible. With only sloggers in your batting line up, you will score runs during the initial power-play overs. But during middle overs with no field restrictions, your batsmen might end up in making mistakes in shot selection and throw their wicket away. Hence you need batsmen who can keep the scoreboard ticking with ones and twos in the middle overs. In investing parlance, your asset classes should have a low correlation with each other. The negative correlation is a relationship between two variables in which one variable increases as the other decreases. In such a relationship, underlying assets move in opposite directions – thereby ensuring that some portion of your fund is delivering at all times.
Lopsided v/s balanced teams
A team full of bowlers may find it difficult to chase even a meagre target and on the other hand, a batsmen heavy team rarely succeeds at getting the opposition out. Such teams may even end up leaking more runs in the bargain. Similarly in investing, if you increase allocation to a single asset class with an intention to boost the performance, you may end up paying a heavy price during a correction. Making drastic changes in asset allocation based on recent performance may prove costly. A rule-based rebalancing without a view on any particular asset class is a more scientific way of asset allocation.
Staying true to the format
Each format has its own demands. Test matches demand a patient, conservative approach while T-20’s demand players to be effective from the word go. It may look easy to score quick runs in a test match with fewer fielders on the boundary, but it is not wise, as one error can cost you the match or series. Hence, technically sound players, who are adaptable, do well across all formats. Investing in a multi-asset fund is like playing a test match; it may not generate alpha on day one, but will definitely keep your scoreboard ticking throughout the innings.
To conclude, cricketing parallels help us relate to seemingly difficult asset allocation concepts used in multi-asset funds. Multi-asset funds are meant for conservative investors who seek reasonably stable returns, slightly higher than fixed-income investments, without much volatility of pure equity funds.
-by Umang Thaker, Head-Products at Motilal Oswal Asset Management Co Ltd
Disclaimer: This article has been issued on the basis of internal data, publicly available information and other sources believed to be reliable which is as on date. The information contained in this document is for general purposes only and not a complete disclosure of every material fact and is not sufficient to be used for the development or implementation of an investment strategy and advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. The statements contained herein may include statements of future expectations based on our current views and assumptions and involve risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Readers shall be fully responsible/liable for any decision taken on the basis of this article.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
First Published: IST