Balanced Advantage Funds, or BAFs, with equity allocations of 30-40%, have a huge number of stocks, sometimes touching 120. Why?
Balanced advantage funds invest in a mix of stocks, debt, and arbitrage opportunities. The actual exposure to equity will depend on the market and parameters set by the respective asset management company, or AMC. Typically, when stock valuations are stretched, the exposure to equity will drop, and increase when valuations are more attractive.
Harish Krishnan, senior fund manager (equity) at Kotak Mutual Fund, explained the huge number of stocks to me.
Most BAF have three sleeves of portfolios:
- Pure directional equity portfolio
- Arbitrage portfolio
- Debt portfolio
The pure equity sleeve will typically be run as a diversified portfolio, with broadly 40 to 50 stocks. Though, some fund managers also run concentrated positions.
The arbitrage portfolio will have a universe of 175-200 F&O stocks. It maximises the spread opportunity within these F&O counters. There are also additional constraints on exposure to market wide limits, etc. So, the arbitrage portfolio can vary from 40-50 to even 120-140 stocks per month (depending on size of portfolio).
Needless to say, arbitrage holdings have no directional impact on the underlying portfolio, as one will have long cash equities on a stock and be short equal number of shares in futures. Thus, cumulative total of holdings tends to be very large.
Investment adviser Sunil Jhaveri also mentioned that the reason for investing in many stocks is that no single stock/sector should drag returns down. When the same stocks don't perform, it drags returns. So, returns should be generated from the strategy and not depend on stock/sector performances.
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Articles authored by LARISSA FERNAND
