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Multi-manager fund can put asset allocation on auto pilot

 

MOST investors love to construct a portfolio of different products on their own. They take inputs from various sources, which maybe advice from a financial advisor, a friend or a website. However, in all such cases, the discretion to invest in a particular asset class or scheme remains with the customer and the portfolio performance is his own responsibility. Experience shows that in most cases, more true in case of retail investors, an investor would take a decision to invest in a particular asset class/scheme when the story is over.

Just imagine how many retail investors would have allocated additional money to equities in October 2008 when the market was at its multi-year low?


How many retail investors and HNIs foresaw double digit returns from income/gilt funds between October 2008 to December 2008?


Research shows more than 80 per cent of returns on any asset class is achieved through right asset allocation. However, this is very difficult and even the smartest of individuals is not able to do it successfully.

So, what is the solution? The trick is in disciplined asset allocation across asset classes. A typical investor would have allocation to equities, gold, fixed income, real estate in various forms such as mutual funds, physical gold, house, office, shares and debentures.

Disciplined asset allocation means review of allocation to these asset classes at market values, and not at purchase prices, at regular intervals.


Whether rebalancing is to be done every quarter or not would be a function of market conditions and client requirements.

When asset allocation is done through independent instruments such as mutual fund schemes, the rebalancing could involve tax incidence and exit loads.


However, a part of this problem can be resolved through multi-manager asset allocation products, which have exposure to equities, gold and fixed income. In such cases, the expert would do rebalancing between equities, fixed income and gold with no tax impact and minimum cost to the customer.

Most customers and rating agencies rate mutual fund schemes on the basis of past track record.


Historical numbers are a good way to start with, but not the only data to rely on. Let us take case of equity markets in 2008 and 2009.


Most of large-cap funds outperformed mid-cap funds in 2008 as they fell lesser. So, if an investor would have assumed that 2009 will be a repeat of 2008, his equity portfolio would have underperformed by 20 ­ 50 per cent as mid-caps did far better than large-caps during this period.

Within a category too, there is a range. Across large-caps, the range for 2009 could be 20 to 35 per cent, as many fund managers never believed in the global economic recovery in the first and second quarters of 2009, and they remained overweight on cash and defensive sectors such as FMCG and telecom. Also, many fund managers could have changed jobs during this period.

In normal market conditions, the range of difference between good and bad managers is small, but in market-turning situations, it is substantial and can have significant impact on returns from a portfolio. So, if a customer would not have rebalanced his managers in asset classes after reviewing their portfolios and market conditions, the return impact, especially in case of equities, could have been between 20 -30 per cent at the least.

A customer could largely solved this problem by outsourcing to a multi manager expert the tasks of choosing a manager and reviewing and rebalancing the portfolio. The expert would choose the manager after looking at past data, current market conditions and future market outlook. When the expert does the rebalancing of schemes, it would not involve any tax impact and, thus, minimise the transaction cost, which the investor would have to do on his own otherwise.

This is where a multimanager fund comes in.


The product allows a fund manager to choose managers for an investor across asset classes, depending on the investment objective of the fund.


In simple terms, in a multi-manager fund, the investor hands over his decision to choose the managers to an expert, in return for a better performance of the portfolio vis-avis his own, over the medium to long term.

A multi-manager fund can be of two types, fund of funds and manage the managers. In the first case, the expert will invest in a range of existing funds available in the market while in the second, the expert will appoint other managers/advisors to run different parts of the portfolio according to a specific mandate.

In India, funds of funds are popular and are offered by various asset management companies.

An additional benefit of choosing a multi-manager portfolio is the reduction in paper work. One does not have to track statements from various fund houses for schemes invested in, check if the redemption money has been credited on time, or calculate tax outgo on periodic intervals.

 

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