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A Multiple Approach

| 11/8/2010 2:42 PM Monday

Usually, the investors take inputs from various sources but decide themselves where to invest, hence portfolio performance becomes their own responsibility. Our experience shows that an investor would make a decision to invest in a particular asset class or scheme when the story is over. How many retail investors would have allocated additional money to equities in Oct. 2008 and how many saw double-digit returns from gilt funds or debt funds from Oct. to Dec. 2008? Empirical research shows that more than 80 per cent of the returns are made through the right choice of asset allocation.

This disciplined asset allocation means a review of allocation to asset classes at market values and not at purchase prices every quarter at least. Rebalancing would be a function of market conditions and client requirements. When the asset allocation is done through independent instruments such as MF schemes, the rebalancing could involve tax incidence, exit loads, etc. However, this problem can be part-resolved through multi-manager asset allocation products with an exposure to equities, gold, and fixed income. In such cases, the expert does a rebalancing between equities, fixed income, and gold with no tax impact and minimum cost to the customer.

A multi-manager fund is a fund in which a fund manager chooses the managers for an investor across asset classes, depending on the investment objective of the fund. Simply put, in a multi-manager fund, the investor leaves his decision to choose the managers to an expert in return for a better performance of the portfolio vis-a-vis his own over a medium to long term. Under Fund of Funds the expert will invest in a range of existing funds available in the market whereas under Manage the Manager the expert will appoint other managers or advisors to run different parts of the portfolio according to a specific mandate. In India, Fund of Funds is popular. Most of the customer and rating agencies rate the funds on the basis of past track record.  The historical numbers are a good way to start with but not the only data to rely on. Take case of the equity markets of 2008 and 2009. Most of the large-cap funds outperformed the mid-cap funds in 2008 as large-cap funds 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 the mid-caps did fare better than the large-caps. In normal market conditions, the range of difference between good and bad managers is small, but in a market-turning situation, it is substantial and can have a significant impact on the returns of the portfolio.

Therefore, if a customer would not have rebalanced his managers in the asset classes after reviewing their portfolios and market conditions, the return impact, especially in the case of equities, could have been between 20-30 per cent at least. A customer could solve this problem by outsourcing the decision to choose a manager, review, and rebalance to a multi-manager expert. The expert would choose the manager after looking at the past data, current market conditions, and the market view. Also, a multi-manager portfolio reduces the paperwork as there is no need to track statements from various fund houses for the schemes invested in, redemption money being credited on time, investment money going on time, and tax calculation on periodic intervals.

 

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