GEM GAZE
February 2010

Regular rebalancing to retail rescue...

Long term equity will create wealth ONLY if we follow the rules. There are three simple rules: invest regularly; make an asset allocation; rebalance portfolio. It sounds easy but almost impossible to do. Investing regularly is now more or less under control with the emergence of SIPs as viable investment vehicles. But the other two are still hard nuts to crack. You need a product that will deploy your savings in the chosen asset allocation and then rebalance the portfolio according to the ratio chosen. Fund of Funds is the answer. You can park your funds in those FoF schemes which match your investment objectives, rather than in different schemes of a mutual fund and keep track of your NAVs on payment of single fees to the FoF.

Fidelity Multimanager Cash FoF and Optimix Asset Allocator Multimanager FoF have lost their sheen and have been shown the exit door. The following are Fund of Funds that have stood the test of time and retained the glittering glory and the much sought after status of a GEM in 2010.

FT India Life stage Fund of Funds Gem
Leading through life stages

Franklin Templeton Lifestage Fund of Funds offers a choice of five plans that reduces the equity component as you move up the age ladder or down the risk ladder and reviews its investments once in six months. FT Lifestage FOF adheres to its strategic asset allocation in each plan by judiciously allocating funds to five of its funds – Franklin India Bluechip Fund, Templeton India Growth Fund, Franklin India Prima Fund, Templeton India Income Builder, and Templeton India Income Fund. The schemes are the Rs. 14.47 crore 20s Plan, with 80% in equity and a one-year return of 71.29%, the Rs 8.56 crore 30s Plan, with 55% in equity and a one-year return of 59.92%, the Rs 14.63 crore 40s Plan, with 35% in equity and a one-year return of 43.2%, Rs. 12.57 crore 50s plus Plan, with 20% in equity and a one-year return of 28.99% and Rs. 180.61 crore 50s Plus Floating Rate Plan, with 20% in equity and a one-year return of 20.67%. For investors in different stages in their journey through life, using these schemes for no sweat investing makes sense.

ICICI Prudential Advisor Series Gem
Tactical advice

ICICI Prudential Advisor Series has four funds - varying in investments as per the risk appetite with the Aggressive FoF being heavy on equity and the Very Cautious FoF tapering down to very little equity. The Rs.8.05 crore ICICI Prudential Very Aggressive Advisor FoF, with nearly 85% in equity has given a one-year return of 66.39%. The Rs. 7.72 crore Aggressive FoF, with 75% in equity has given a one-year return of 54.65%. The equity component and the one-year returns have been 60%, 35% and 0% and 41.94%, 27.71%, and 4.59% in the case of the Rs. 7.71 crore Moderate, Rs 3.67 crore Cautious and Rs. 1.45 crore Very Cautious FoFs respectively. Tactical change in investment mix has worked for ICICI Prudential Advisor Plans at various stages, thereby, enhancing the value of the advice.

Birla Asset Allocation Plan Gem
In defence of value

Interestingly, this is one of the rare fund of funds which has an open mandate to invest 30 per cent of its corpus in well-performing funds outside the Birla Sunlife umbrella of funds. But the current portfolio they hold in all their 3 plans - Aggressive, Moderate and Conservative - does not include any outside fund. Investors with aggressive risk appetite can look at the aggressive option, which currently has 77 per cent of its corpus in equity and 23 per cent in debt. The one-year return of this Rs. 10.03 crore fund is 72.04%. The moderate fund has about equal weightage in debt and equity (55% at present). This Rs. 5.53 crore fund earned a return of 50.14% over the past one year. The fund’s equity portfolio appears to hold a value strategy what with higher exposures to sectors such as IT and financial services, that hold attractively valued stocks. The fund’s debt portfolio also attracts attention for its strategic mix of short-term, income and bond funds from the Birla stable. The Rs. 6.17 crore conservative plan invests nearly 80 per cent in income and bond funds with a one-year return of 22.41%. The conservative option loosely follows the Monthly Income Plan structure in its asset allocation, without the monthly dividend payout feature, of course. The lack of monthly payouts may be an advantage, as it removes the need for the fund to churn its portfolio and book profits at monthly intervals to meet dividend commitments. Over the past ten years, the worst yearly returns from this fund came when its NAV lost 6.5 per cent (in 2008, when both debt and equity options took a hit). But its best yearly show saw its NAV appreciate by over 24 per cent (2009) — a good risk-reward ratio! The fund has managed this show by actively shuffling the debt portion of its portfolio, even while picking the more defensive equity funds (the Index Fund, MNC Fund and Dividend Yield Fund) from the Birla repertoire for the equity portion.

FT India Dynamic PE Ratio Fund of Funds Gem
Dynamism in seeking safety and opportunities

The Rs. 416.8 crore FT India Dynamic PE Ratio FoF follows a dynamic and systematic asset allocation strategy. The fund changes its asset allocation based on the weighted average PE ratio of the NSE Nifty Index. At higher PE levels, it reduces allocation to equities (exposure to Franklin India Bluechip Fund) in order to minimise downside risk. When the PE is low, the fund would invest in equities to gain from a potential upside. While the downside is limited, the gains could also be limited because by selling in a rising market, the fund may not be able to fully capitalise on the further upside, if any. In that scenario, a fully-invested equity fund would generate superior returns than this PE ratio based fund. It is a safe haven for risk-averse investors. This fund is the only fund of funds in this category and invests in Franklin Bluechip and Templeton India Income funds. FT India PE Ratio Fund has earned 59.31% in the last one year. The fund has strictly adhered to its mandate and sought safety and opportunities with equal dynamism and has exhibited an exhilarating performance.