The logic for a higher large-cap allocation

Anand Vardarajan of ICICI Bank Wealth Management on why one should change the colour of their portfolio.
By Morningstar |  21-02-17 | 
 
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Anand Vardarajan, Head - Investments, ICICI Bank Wealth Management, participated on a panel at the Morningstar Investment Conference. Below is an excerpt. 

What is it that you're recommending to your investors today? What is the position that you are taking across various asset classes?

We've been telling clients that stay true to their asset allocation. If you think there has been any dislocation which has happened in your asset allocation, just try and cutback, sell the overpriced asset by the underpriced asset.

The other thing that we look at is where the pendulum is positioned - between optimism and pessimism. I think we are somewhere close to the center. At this point in time, there are no points for being brave, but it's kind of important that we also remain centered, don't get carried away by what's really happening.

We tell clients to picture this as a football field with the strikers, midfield and defense. When the pendulum is somewhere at the center, a stronger midfield is required, perhaps build up some defense and reduce the number of strikers in your portfolio.

So, clearly, something which has done very well in the last two-three years, you'd want to cut back exposure to that, build in a layer of protection in your portfolio, be mindful that there will be jerks in terms of volatility which will come and impact. So, clearly, the thickness and thinness of that protection layer can depend on how aggressive or conservative the client is, but that's the way we'd like to position our portfolio.

Does that mean you are moving away from certain market caps?

That's right.

We are making the large-cap block a little thicker. We're saying perhaps there is safety in balanced funds, perhaps reduce or cut back exposure to what has already done well. Because when you came in 2013 and invested, there was a premise to that and perhaps that has played out largely. If you are playing for the tail of it, like Buffett says, when the clock strikes 12, the Cinderella has to go, but just that you never know some of these clocks don't have hands, so you never know when to leave. And you perhaps want to leave that party a little earlier before the music stops and which is why we're saying that have this layer of large-cap, have a larger layer of balanced funds and perhaps reorient your equity portfolio.

That is not a call to change your asset allocation. We are just bringing down the risk in your allocation. We're just changing the colour of the portfolio.

Are you doing anything different on the fixed income side?

I tend to agree with Umang when he says that net of tax maintaining that kind of a run rate is going to be challenging.

(Umang Papneja: “With regards to fixed income, the key in the coming years, when interest rates are lower, is to how to maximize post-tax returns. Which instruments will give you maximum bang for buck on a post-tax basis?)

We're looking at some accrual funds. We are looking at some ideas which are absolute return-oriented.

We are looking at more nimble duration strategies rather than long-only, because I think the pendulum is moving towards the side of optimism on fixed income side with the kind of rate cuts we've seen over the 18-24 months. Those are clearly the areas that we are looking at on fixed income.

Large caps and balanced is clearly where we believe there is value and perhaps, you're betting on some new set of stocks to show leadership in the next 2-3 years.

So, maybe because the price has run up, earnings is still to catch up. So, hopefully, the denominator starts moving up and hence fee levels become more acceptable. And then that could really give you a second level move in the equity space.

You started by saying that you are telling clients to stick to their asset allocation. Most believe that asset allocation is very important in portfolio construction. But do you have a lot of clients who actually go with the plan being recommended? What are the challenges that you encounter in that process?

If someone were to tell me that asset allocation is not important, I would tell them to take a car with an accelerator pedal and remove the brakes or vice versa. Either your car does not move or it does not stop.

You only feel confident about your portfolio when you have very strong acceleration coupled with an equally strong braking mechanism and the steering obviously is depending on situations you move depending on how you steer your car. A decent balance between debt and equity is required.

The challenge we face is when clients tend to become binary or get rattled by the volatility in the market and do exactly the opposite of what they should be doing. Those are obviously natural challenges of our business and to save the client from coming in the way of his returns is perhaps what we think is our primary job, because when he goes through this whipsaw experience of extreme volatility, that's when you make the mistake of moving and distorting your asset allocation.

But do you see a large proportion of those clients really talking about asset allocation?

The year 2008 was a big learning experience for all. Ever since, clients have increasingly started understanding the benefits of asset allocation and they try and remain true to that. On the edges, obviously, it becomes very difficult to manage, but clearly, they see value that, yes, this is the way to go about. Some clients are extremely particular about it. They know their asset allocation to the last two decimals. I think the awareness level is picking up.

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VIJAY KUMAR SUBRAMANIAN
Feb 22 2017 07:08 PM
With inflation again moving up and Fed expected to announce at least two more rate hikes during this year, the room for further rate cut from RBI looks skeptical. Thus aggressive entry into debt funds needs to be moderated.
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