Bajaj Finserv’s new BAF has fresh ideas that define its asset allocation model. Allocation is done in two layers: core and satellite. Core level of allocation is driven by fundamentals and satellite by behavioural aspects.
On fundamentals, the fund house has opted for an “ideal” PE which is derived by normalizing forward PE by removing biases. Forward earnings times ideal PE gives the market’s intrinsic value – which then is compared with current market to determine extent of over/under valuation and therefore extent of core equity allocation.
For forward earnings, the fund house considers consensus estimates and then does its internal adjustments based on its own views to arrive at the normalized earnings to consider for intrinsic value.
For the satellite component, the AMC looks at market behaviour beyond just momentum – it considers correlations between equity, bond, commodity and currency markets to get a deeper understanding of lead indicators that markets are signaling in one market, which may show up with a lag in others.
The model’s net equity is a wide range from 25% all the way upto 90%. Currently, with both fundamental and behavioural data flashing green, the model is allocating around 80% to equity – significantly higher than most peer BAFs which are in the 45%-65% range for net equity. This BAF can perhaps catch this bull market better than most (if indeed we are in a bull market!)
Equity will be actively managed with a large cap focus. Large caps are less volatile and therefore better suited for a BAF and they also allow for more efficient hedging. Debt will be actively managed with the current strategy focusing on locking in yields in good quality credits and playing the roll down over next 2-3 years.