imgbd Fund Focus: Reliance RSF Balanced

Will renamed balanced funds become less attractive?

Himanshu Vyapak, Deputy CEO, Reliance Nippon Life AMC

21st November 2017

In a nutshell

Reliance RSF Balanced Fund is on a roll this year - notching up a top decile performance in the highest selling Balanced Funds category. Himanshu points out that the fund is the only one in its category with a CPR 1 ranking - indicative of consistent returns over time. Hybrids, he points out, are netting the industry over Rs.10,000 crs per month - thus earning the distinction of being the largest contributor of retail equity oriented flows. Will all of this change when "balanced" funds get renamed as "aggressive hybrids"? Will they now be perceived as more risky? Himanshu lists out what's driving investor appetite towards equity oriented hybrids and believes that since none of these drivers are going to change under the new guidelines, there is really no need to worry about the category losing investor appeal under a new nomenclature.


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WF: RRSF Balanced seems on its way to posting a strong performance in CY17. What's driving this top decile performance this year?

Himanshu: Thank you. The Fund's calendar year return is 27.1% as of 20th Nov, making it one of the top funds basis the calendar year returns and 1 year return. While we are happy about the fund's recent performance, we also take a lot of pride in the fact that the fund has been a consistent performer in the long term as well. The Fund has a track record of more than 12 years, and has generated a CAGR of over 14% since inception.

Reliance Regular Savings Fund - Balanced Option, RRSF - Balanced, as its popularly known is the only Balanced Fund with 'CPR 1' Ranking (by CRISIL for the quarter ended September 2017), which reflects its consistent performance over 3 years.

We have been managing this fund diligently with an endeavour to generate sustained returns over a period of time. Following are some of the key highlights of the Fund:

  1. 65-75% would be invested into equities.

  2. The equity portion will have a large cap orientation to ensure that investors get a relatively stable investment experience.

  3. Mid cap investments will be tactical and individual mid cap holdings will not be more than 3% of the portfolio. These investments should have a very high margin of safety to find a merit in the portfolio. Generally, we avoid cyclicals and commodities in the mid cap space.

  4. Active sector calls, stock selection within sectors including conscious exclusion strategy, a few contrarian strategies are deployed to create differentiated returns.

  5. The debt portion is managed to generate reasonable accrual as well as capital appreciation through moderate duration.

The Fund had been positioned to gain from India's growth story and accordingly had higher exposure to Indian domestic revival, consumption and Investment themes, consisting of stocks from Banks & Financials, Auto ancillary, Oil & Gas, Building materials, metals and capital goods. Most of these themes played out very well for us, resulting in strong performance in the current year.

WF: How do you read markets going forward? Are oil, GST reduction, bank recap and other factors likely to impact our fiscal deficit materially? In what ways are recent events influencing your equity strategy in this fund?

Himanshu: There have been fears that the recent increase in oil prices, combined with the factors that you have mentioned such as the reduction in GST rates for many items, bank recap, etc., could have an adverse impact on the fiscal deficit.

However, our reading is that the tax receipts of the government so far, at a growth of nearly 16.5% YoY in 1HFY18 is the highest in the last five years. The total tax receipts could even over-shoot the BEs by nearly INR400b. Even if we adjust the estimates of tax collection in 2HFY18 for the loss in taxes due to the recent changes in GST rates (our estimate is ~INR75b for the remaining FY18) and a cut in excise duty on fuel products (~INR130b), tax collection would be higher by at least INR200b. Hence, we think the fears of fiscal slippages are exaggerated. We think the government will not be required to cut spending, but also it is unlikely to breach its FY18 fiscal deficit target.

Having mentioned about the near term possible impact of the reforms, there is no doubt in our minds that these are significant transformational reforms that will put India on a sustained growth path that will help us capture the tremendous opportunities that our huge Nation presents us.

We continue to be optimistic about Indian equities and accordingly, have positioned our portfolio to gain from the India growth story, with prominent investments to the India domestic revival, consumption and Investment themes.

WF: You have maintained a large cap orientation in your balanced fund consistently. What is the rationale for this strategy? Some fund houses advocate a multicap or midcap orientation in balanced funds since the debt portion arguably allows for higher risk capacity in the equity side: how do you react to such a stance?

Himanshu: Balanced Funds, or aggressive hybrid funds, as they would be called going forward, would have a substantial portion of the portfolio invested into equities (65%-80% - In our fund, we typically keep the equity component around 70%). With so much equity, the equity component will be the major driver of overall returns.

Our understanding of the profile of investors who come into this category is that their risk appetite would be relatively lower when compared to someone coming into an 100% equity product. Many of the investors would also be first-time investors. There are also investors who invest into balanced funds and seek regular income through Systematic Withdrawal Plan (SWP) or dividend plans such as Monthly Dividend payout options. Such investors may not be able to stomach the volatility of mid-caps and small caps, especially during flat or down-trending markets.

Hence, with an endeavour to provide a reasonably superior investment experience on a consistent basis, we have opted for a large cap orientation. Our overriding philosophy in the fund is to provide consistent returns, with a focus on capital preservation and risk mitigation.

WF: What themes and sectors are you overweight on now and why?

Himanshu: We believe India is likely to witness a structural growth trajectory for the next 8-10 years andare focused on domestic growth opportunities which can benefit significantly from lower interest rates, higher disposable income, policy actions etc. The equity portion of the fund is well positioned to gain from India's growth story. In line with the same, we have significant allocation to domestic revival & consumption themes like Banks including corporate lenders, Auto, Consumer Services. These themes account for nearly 55% of the overall equity allocation. Another 35% is into Investment themes like Capital Goods, Building Materials and Metals. In the backdrop of improving global growth,we have about 10% allocation to Outsourcing Themes like Software & Healthcare as well.

WF: How is the debt component of the fund managed? How have recent events in debt markets influenced your strategy and portfolio composition?

Himanshu: Our debt component of the portfolio offers potential return from accrual and capital gains through moderate duration. Again, like the equity strategy, the idea is not to expose investors to extreme risk either by way of a diluted credit (and hence, very high YTM) or very high duration (and hence, high volatility through interest rate risk). The credit profile of the fund would be relatively high grade and duration would be moderate (around 3-4 years). As of October-end, the portfolio YTM was 8.26% and duration was 3.43 years. Recently, with the problem of NPL issue largely getting behind, and the Government's announcement of Bank Recapitalization, we have added perpetual bonds issued by a few private and public sector banks to our debt portfolio.

WF: In what ways will SEBI's product rationalization guidelines impact your fund suite in the Aggressive Hybrids category? Will this fund's name now be changed to retain it within the aggressive hybrids category?

Himanshu: Yes. The Fund would be classified under the aggressive hybrid category, and accordingly, the name would also undergo change. We will also be carrying out some changes in the Scheme Information Document. However, the portfolio of the scheme, the philosophy with which the Fund had been managed over the last 10+ years and our approach to building the portfolio and managing the scheme would continue to remain the same.

WF: Balanced funds ( >65% equity) have enjoyed huge inflows over the last couple of years. Do you see their attractiveness diminishing if they are renamed as aggressive hybrids instead of a more comforting nomenclature of "balanced"?

Himanshu: Balanced Fund category (including the conservative balanced funds such as equity savings funds) is the single largest driver of equity inflows. These funds account for nearly 40% of the total equity inflows and are netting 10,000 crs on an average every month. The reasons why these funds are attractive are multi-fold:

  1. These funds are a convenient package of equity and debt, providing both the growth potential of equities and stability of debt under one roof.

  2. Automatic rebalancing (to have 65-70% equity exposure) ensures regular profit booking.

  3. Equity taxation, including for the 30-35% debt component.

  4. Some funds have a good track record of dividends, providing regular cash flows.

None of the above features or benefits would change due to the change in nomenclature. Hence, we believe these funds would continue to be as attractive. Investors would quickly get used to the new names.

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