WF: What are the components that go into MOVI and how has it historically proven as an asset allocator?
Aashish: The Fund will use Motilal Oswal Value Index (MOVI) as an indicator for the asset allocation between Equities, Arbitrage, Derivatives strategies and Debt. The MOVI is calculated taking into account Price to Earnings (P/E), Price to Book (P/B) and Dividend Yield of the Nifty 50 Index. The MOVI is calculated on 30 Day Moving Average of the above parameters. A low MOVI level indicates that the market valuation appears to be cheap and one may allocate a higher percentage of their investments to Equity as an asset class. A high MOVI level indicates that the market valuation appears to be expensive and that one may reduce their equity allocation.
The historical back testing of the dynamic asset allocation on the Index (Nifty 50) suggests that the returns are enhanced and at the same time volatility is reduced! One can't expect better than this; not necessarily in terms of absolute numbers but in terms of investors' experience.
Index - Nifty 50; Index Rebalanced - Nifty 50 rebalanced based on MOVI levels
Index and Index rebalanced are rebased to 10 as on 1st January 2004
However when applying the dynamic asset allocation to Value PMS strategy of Motilal Oswal AMC, the results are different. While annualized return reduces by few percentage points, the volatility is cut in half. Here we are taking liberty of using Value PMS strategy because that's the longest running embodiment of BUY RIGHT : SIT TIGHT investment philosophy that we practice. Please note this chart is only for explaining how MOVI rebalancing works, it meant for this discussion and it is not meant to be circulated to investors or used as marketing literature.
WF: Being "equity oriented" in terms of gross equity allocation, advisors will perhaps want to compare it with a vanilla balanced fund, which is also equity oriented, but with less flexibility in asset allocation. In back testing your Dynamic Equity Fund, how does it compare against the basket of balanced funds in terms of returns as well as volatility?
Aashish: If you compare with the benchmark, we observed that the rebalanced Index has delivered superior returns to the CRISIL Balanced Index. Considering that Rs. 10 was invested on 25th March 2003 (Inception date of Motilal Oswal Value PMS Strategy) the investment amount in the benchmark has become Rs. 57.2, whereas in the rebalanced Nifty it has become Rs. 81.9. The same amount in the Value rebalanced Strategy has become Rs. 154.2.
WF: What is your model indicating right now on equity allocation and how has this moved in the last 12 months?
Aashish: Currently the MOVI levels are around 109 and therefore the equity allocation is 55%. The historic movement of the MOVI levels since inception of MOVI is depicted along with the Index values.
WF: Your house philosophy of "buy right - sit tight" advocates a buy-and-hold approach with a strong focus on quality, with little or no emphasis on overall market levels. This product however actively considers overall market valuations to decide equity allocation, though the equity component continues to be fully bottom up focused. Is there perhaps a contradiction here?
Aashish: We continue to manage the equity allocation as a multicap portfolio in line with our stated philosophy. The MOVI index will be used to calibrate equity allocation. While our style of stock picking style is bottom up fundamental driven, asset allocation decisions between asset classes are always made on macro indicators and relative value. Hence, I don't see any contradictions here.
WF: When should a distributor consider recommending one of your equity funds and when should he prefer your Dynamic Equity Fund over others that remain fully invested in equities?
Aashish: Instead of seeing it as a "when to" issue, I would like to position this as a slightly more strategic choice of how we conduct our business vis-à-vis our clients, how we educate them while also meeting their requirements.
I personally believe that an asset allocation decision is to be made by the investment advisor or distributor in conjunction with the client. But this logic works when an investor has maturity to view his performance at portfolio level and not at product level. It works when investors don't just define their investment experience purely by the volatility and their fears but by result at end of defined investment horizon needed for meeting investment objectives. We don't have that maturity in the system yet!
As far as I am concerned I don't even see the MOSt Focused Dynamic Equity Fund as a segregated scheme. It's a solution to a problem that we face; as stated above. If I had it my way I would continue to offer what we have always offered i.e. MOSt Focused Multicap Fund and a MOVI index for taking asset allocation calls in and out of equity. This is why even now this Dynamic Equity Fund will have a passive fixed income allocation and the equity will be similar to our multicap fund. But some of these beliefs of mine are as of now only theoretical and difficult to execute but in future they will be more practical.
There are few challenges in the current context:
Investors see performance product by product and not at portfolio levels so a fund like Dynamic Equity has the great ability of improving investor experience amidst volatility and enhance their stickiness and willingness to remain invested
There are taxation issues with switching asset allocation on an inter-scheme basis hence it is more efficient to do it intra-scheme by maintaining 65% equity and equity arbitrage
There are emotional biases which prevent people from making right asset allocation decisions, if these get hard-coded in the scheme structure they will surely get implemented
Volatility is a reality and volatility is here to stay, instead of worrying about it we need to create structures that benefit from the volatility while improving investor experience
Let me also tell you what are the issues with making a Dynamic Equity Fund kind of structure
The asset allocation decision which according to me is an investment advisor or distributors' decision after understanding the client's requirements is being outsourced to manufacturer like us by embedding it into the product itself. Does it reduce salience of advisory practice? Food for thought!
We are basically catering to the client's requirement of viewing performance product by product not at portfolio level; this is slightly regressive instead of advancing client behaviour in the right direction.
If equity and fixed income are managed separately some discretionary decisions can be taken by clients and intermediaries to enhance performance or to improve liquidity of the investment, which now would not be possible.
WF: There has historically been some reservation among HNI oriented advisors to recommend embedded advice solutions like your Dynamic Equity Fund, as these are perceived to cut into their role as asset allocators. Is this therefore a largely retail proposition or does it merit consideration in HNI portfolios as well?
Aashish: In some way I have answered this question in my previous response. I don't think this is a retail vs HNI issue. This is more a client maturity, investment advisors' modus operandi related choice. If clients insist on seeing product performance instead of their overall portfolio or asset allocated performance, then this product will be ideal irrespective of whether it's a retail client or an HNI client.
WF: Do you see this fund becoming your lead proposition in the online distribution space as well as any "fill it - shut it - forget it" kind of intermediation channel or do you see this largely as a niche offering?
Aashish: I would say that across all channels if there is need for a fill it-shut it-forget it offering from Motilal Oswal then this is it. This is not a niche product but it can serve as a core holding in clients' portfolios.
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