Death of data and hybrid funds

Data is two dimensional. The real plane, where we feel the impact of data, is three dimensional. And a lot changes in between.

A tall, young statistician was sitting on the bank of a river when a semi-Newtonian moment happened to him. He said to himself “Do I need to know how to swim to cross this river? No. This would be 3 foot deep on average. I am 5’10”. Enough to sail through.” With an urge to put the hypothesis to action, the numbers’ man started walking across the river. But, the river had an average depth of 3 feet. So there were places where the water was as deep as 8 feet! Unfortunately, the statistician died an unheroic death.

Likewise, a lot of data points (mostly known as CAGR) die while crossing over from an excel page to the real world imprint – statement of a client’s folio.

And because of such deaths, an investor’s average equity MF holding period in India is still below 4 years.

Who do we blame?

Equity? No! It is the best asset class for long term.

Manufacturer? Certainly not. He has a range of offerings ready.

The advisor? No! I know of no advisor who doesn’t stress on long term.

Then who? It is the flaw of average.

The answer to the eternal question, “What is the return we should expect from equity?” comes as a harmless “12 – 15%”.

But a human mind always tries to find shortcuts. So the immediate number crunching going on in one’s head gives the following expectation:

Equity, as an asset class, does not believe in linear growth. The actual situation can be a lot different with the average being the same:

the flaw of average!

In fact, the experience of the client becomes even worse if we look at the volatility that actually hits him. On a given morning of August 2017, an investor would have been happy with his past 5-year return. But month after month, this is how his journey would have looked like (period as an example: Aug 2012 – Aug 2017):

In India, the biggest financial savings/ investment pool is with a bank as deposits. That pool is at 150 Lacs Cr odd, which is roughly 700% of Indian MF!

As an industry, Indian MF has tried to find ways to make an investor’s journey smoother. We have presented a category as an answer: Hybrid/ Balance – a mix of debt and equity. Has it grown? Yes. Is it the largest pie of the industry? No.

Source: amfi

Trying to find a better balance between how to maximize return vs how to give a better experience to the investor we have placed different blocks for him/ her to choose from:

● Regular Savings/ MIP: Broadly gives a 25-30% equity exposure along with the balance in fixed income.

Equity Savings: A proportionate mix of equity, fixed income and to retain equity taxation- safe Arbitrage.

Balance: Mix of equity and fixed income again, with equity being heavier (65-80% mostly).

But till here your equity participation is restricted to an extent. Can we look for a solution which can offer a wider range of market participation (say 0/ 10 – 90/100%)? And here comes the beauty:

Dynamic Asset Allocation: Assets move between fixed income and equity following market triggers.

This is a space which can bring your experience to a much better platform. For example, let’s look at DSP BlackRock Dynamic Asset Allocation fund. It considers earning of equity (Nifty) and Fixed income yield (Gsec) and decides which asset class to give preference to (yield gap model).

What it successfully does is to bring the bad experience down by a solid margin.

In this decade Nifty 50 TRI clocked -ve return on a calendar year 4 times: -15%, -51%, -23%, -3%. The model clocked 8%, -12%, 0.7%, 4% respectively.

This is where data is reborn. The return on page becomes the experience off page. The 2D numbers come close to an experience for investor in 3D.

Let’s take the most difficult period for Indian Equities/ MF so far in this century: 2nd half of 2008 to first phase of 2009- market tanked the maximum and started coming up again.

This is how the model reacted, it started building on fixed income before the catastrophy and started taking equity allocations when green shoots started getting visible:

This is why, for an industry, placed in a larger context where apparently non-volatile assets are the larger mind share gainers, the way to move forward to a better tomorrow where we have participation with at least one fund in one household is probably with this asset class.

Standing at a juncture where 2.1 Crore SIPs are registered, 7.1 Cr accounts (/folios) are registered, we might feel proud. But we should remember, that’s not even 10% of the country’s population.

And between the two numbers: total population vs invested population stands the pain point – experience of downside. The antidote is here: funds with asset allocation mix. Do use it wisely. It is the star of tomorrow.

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