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Could this be a better volatility busting wealth creator?

Suraj Kaeley, Group President, Sales & Marketing, UTI MF

21th September 2016

In a nutshell

Our market now has a few products that dynamically straddle the space between MIPs and balanced funds, but with the tax advantage of equity funds. We also have a set of multi asset products that allocate across equity, bonds and gold. What UTI has done with its re-positioned Wealth Builder is to marry both these propositions to create a comprehensive wealth building solution - one which dynamically allocates to equity based on a prop model, is a multi-asset solution that also allocates to gold and bonds, and yet retains the tax advantages of an equity oriented product. Could this then be a better volatility busting wealth creator? Suraj takes us through why he believes this product ought to be on the consideration set of all distributors.

WF: In what ways are you reorienting UTI Wealth Builder and why?

Suraj: UTI Wealth Builder scheme was launched as a fund that invests across assets viz equity, debt and gold etf. The asset allocation was intended to be static with a major portion being invested in equity to preserve the tax efficiency and balance in remaining assets. Though the fund has delivered decent returns since inception, it was felt that there was a need for a fund that has a dynamic asset allocation switching across assets but at the same time maintaining the equity nature of the fund. The fund will switch to arbitrage or derivatives when it wishes to limit the equity portion. In short, the endeavour is to provide a complete solution for wealth creation.

WF: Will this now be perhaps the only dynamic asset allocation fund in the market, with exposure to all three asset classes (equity, bonds and gold), yet enjoying tax breaks of equity oriented schemes?

Suraj: Though there are several funds with the theme of multi asset allocation but not with the tax efficiency of equity. UTI Wealth Builder has a distinct positioning i.e. a dynamic asset allocation fund with the tax efficiency of an equity fund.

WF: Gold as an asset class seems to be coming out of a prolonged bear market. Do you see the gold allocations in this fund contributing meaningfully to returns going forward or should we continue to view it as a hedge in an uncertain global economy?

Suraj: We intend to keep gold in the band of 5-10% band as gold as an asset class as it serves as a reliable store of value in challenging and uncertain times.

WF: How will you calibrate your net long equity position? What models will you be using and how have these fared in your back-testing?

Suraj: Our equity allocation is based on a proprietary model developed by our international team and internalized by us. This is a stock selection model modified as an asset allocation model. This model scores the BSE 200 stock constituents on variety of four broad factors of value, momentum, quality and earnings and sentiments. There is an universe of 58 factors across these groups and finally 12-14 factors are selected on the basis of back testing for each of these factors over an eight year time frame. The 200 stocks are ranked on the basis of the scores on these factors and divided into five buckets and the weightage of index in the buckets decides the equity allocation. If more than 50% of the index weights resides in the first two buckets and bucket one being more than 20% and bucket two being more than 30%, the model triggers a buy signal and conversely, if bucket 3 and 4 is more than 50% with bucket 3 more than 30% and bucket 4 more than 20%, sell signal is triggered.

This model has back testing data of more than 8 years. Additionally, we have an asset allocation committee ( comprising senior fund managers) in place to oversee asset calls and adherence to overall investment philosophy.

WF: There is - at long last - healthy distribution interest in model based auto-rebalancing dynamic asset allocation funds. To what do you attribute this interest? Is it just anxiety about current market valuations that is driving appetite for this category or is there a more sustainable story behind it?

Suraj: Model Based dynamic asset allocation has been in industry for long, however they have seen lesser amount of interest from investing community. However, in the last two - three years the category has gained motion and we have seen growing appetite in the markets. The key reasons for this trend an element of higher risk in the markets, portfolio diversification as last two years, investors have significantly allocated towards pure equity funds and also shift in preference in favour of asset allocation in a dynamic manner. Moreover, the funds in the category have delivered/are delivering superior risk adjusted returns on various time periods.

We believe this category will sustain going forward given the market dynamics and traction in concept based selling in the industry.

WF: How would you suggest distributors position this product to different client segments?

Suraj: Essentially, distributors have their own set of challenges in creating a positioning for a fund specially in an already crowded place. Ultimately, the relevance of the product and its benefits will bring greater attention from the investors. Generally, due to advice gap, investors end up owning a bloated portfolio of several funds such ( 1-2 large caps, 1-2 multi cap, 1 -2 mid caps & small caps , 1-2 sector or index funds , 1 duration or accrual fund etc) . However, if one is looking for a blended return, a single fund which brings all asset class together can make more sense and that's where UTI Wealth Builder Fund's suitability is. Taking this into consideration, distributors may pitch this as a complete investment solution. It's not just the destination, It's also the journey that matters. The fund captures most of the upside of a diversified equity fund moderating the volatility, signifying that the route to wealth creation also matters as much the creation of wealth.

WF: We keep talking about simple products to expand the market. This product can be viewed as complex in its construct, yet simple in terms of the customer proposition. How do you propose to take a simple message about this product to all Indian savers and how would you like distributors to work with you in this endeavour?

Suraj: The product offers complete investment solution. The investor has a choice of investing across asset classes or funds to create a portfolio or invest in UTI Wealth Builder. The volatility of returns may not be inimical to an investor but is definitely annoying. The investor reaction to volatility especially during market extremes when emotion rule high and the cost of infidelity to one's own commitments can be very at these points. This fund by containing the volatility enables an investor to maintain equanimity even under market extremes.

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