BoI BAF has a 78% net equity allocation (range is 30-80)currently, enabling it to catch this bull market better than most valuation-focused BAF models. Its model assigns equal weights to three factors: valuations, market momentum and market sentiment.
With 2 out of 3 factors being market technicals oriented, the model is better geared to ride market trends better. Daily review and rebalancing ensures dynamism and agility. Focus on momentum and sentiment signals including rate of change, open interest etc enables the fund manager to spot signs of weakening momentum and potential trend reversals, which signal cutting back on equity allocations.
The fund’s top quartile performance over last 1 yr can be attributed to the model’s higher equity allocation vs peers. The fund has been re-engineered 2 yrs ago into its current avatar, and results of this new avatar are thus far encouraging.
The strategy is to keep the focus almost entirely on allocation rather than selection. Hence the equity component is invested entirely in large cap stocks, with 50% being fully benchmark oriented and the balance 50% also invested in large caps, but with fund manager discretion.
If valuations (currently in amber zone) rise further into red zone, that would trigger reduction in equity allocation regardless of momentum and sentiment. Extent of such moves is a function of total weight across all 3 parameters.
Alok has a contrarian positive stance on steel stocks – he sees adequate margin of safety from their valuations and dividend yields.
Alok acknowledges that banks are a crowded trade – however he is not so worried about net interest margins topping out as he sees treasury gains compensating for lower margins as a down cycle in interest rates emerges.