Do you remember Ms Dipa Karmakar? She was the first Indian gymnast to qualify for the final round of the women’s vault competition at the Rio Olympic Games 2016.
Many admire her for attempting the ‘Produnova’, a manoeuvre as incredibly complicated as it sounds.
Ms Karmakar lost out on a medal, but she won the hearts of a nation with her vaulting performance. Her name is etched in history as the first Indian gymnast to qualify for the Olympics in 52 years, as she attained 4th position in Women's Vault Gymnastics.
At gymnastic competitions, you will often see athletes do flips, jumps, and tricks that inspire awe. Their superhuman ability to defy gravity isn't the only thing we can't help but admire.
To attain such flexibility takes years of training and practice.
Flexibility in investing
Imagine the same flexibility when investing — the ability to move in and out of equity investments in an effort to deal with market volatility and generating superior returns.
Theoretically, if mutual fund managers can even coarsely time the market, they could achieve a substantial alpha.
To try to achieve market timing, one could employ numerous market-timing strategies, which in the simplest form could be based on long-term valuations using price-to-earnings (P/E) or momentum using moving averages or even something more complex, like the Fed Model, that compares earnings yield with interest rates.
Given the short history of the Indian market, that spans only a few decades, it is difficult to test the robustness of such strategies.
Nonetheless, based on these concepts, mutual fund houses offer investors Dynamic Equity Funds. These funds lure investors though their flexibility to move in and out of stocks in an effort to beat the market and other peers.
But, it is easier said than done.
Does this formula driven approach help fund managers to position themselves for the next equity rally or even a crash, just as gymnasts strive to achieve the perfect landing every single time?
Sadly, most such schemes disappoint.
Dynamic Equity Funds: A Performance Review
On checking the performance of Dynamic Equity Funds over multiple market cycles, most schemes adopt a conservative approach and are successful in restricting losses. However, in a bull market, they fail to outperform a broad market index – the
S&P BSE 200.
In some bull market periods, even balanced funds are able to put up a better performance than some Dynamic Equity Funds.
Performance of Dynamic Equity Funds Across Market Cycles
Data as on March 23, 2018
For periods less than 1 year, returns are absolute, For periods, greater than 1-year, returns are compounded annualised
(Source: ACE MF, PersonalFN Research)
Did the flexibility help?
In our analysis, the Dynamic Equity Funds that did relatively better than others did not vary their equity exposure very dramatically.
In other words, schemes that attempted a ‘Produnova’ ended up losing their balance.
Take for example, the Principal Smart Equity Fund. Over the past three years, the equity allocation ranged from a low of around 20% to a high of 80%. Within the past year alone, the equity exposure moved in a wide range of 20%-70%. In August and September 2018, the equity allocation dropped to 20% from 64% in July 2018, before rising back up to 68% in October 2017.
Another example of such volatile equity allocation is a relatively new scheme — SBI Dynamic Asset Allocation Fund. In the past 12 months, the equity allocation peaked at 94% in December 2017, before dropping drastically to merely 6.5% in February 2018. Such volatile movement was seen over 2015-16 as well.
In terms of performance, the returns of the schemes worked out to be more conservative than their aggressive peers. Though these schemes were better equipped to hold their ground when the market declined, it did not significantly boost their long-term performance.
Hence, an aggressive investor seeking long-term market beating returns, would have been utterly disappointed.
Point-to-point Returns of Dynamic Equity Funds
Data as on March 23, 2018
Returns are compounded annualised
(Source: ACE MF, PersonalFN Research)
Among the Dynamic Equity Funds that topped the list have not been very dynamic or flexible in the true sense. The ICICI Prudential Dynamic Plan often keeps the equity allocation at above 70%. Only lately, over the past few months, the equity exposure has marginally dropped under 70%.
Similarly, Invesco India Dynamic Equity Fund has adopted a similar strategy like the ICICI Mutual Fund, keep the equity allocation above 70%. In fact, over the past 36 months, the equity allocation has moved in a narrow range of 70%-85%. Its average allocation to equity over this period is just under 80%.
Other schemes too, like L&T Dynamic Equity Fund, do not let their equity allocation fall below 65%, and have maintained an average equity exposure of around 70%.
As you can see in the table above, the schemes that have done well, were able to do so by not being very dynamic.
Should you consider dynamic equity funds?
Dynamic equity funds are an alternative to route your investments in equity funds during volatile market conditions. Hence, you need to pick a scheme that has a dependable track record and process driven investment approach.
That said, most dynamic funds are avoidable. Adopting a systematic approach to investing will better equip you to deal with market volatility.
Hence, it would be better to invest through a Systematic Investment Plan (SIP) in equity-diversified schemes that have an established record of performance.
| Editor’s Note:
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Aims to create wealth cushioning the downside;
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Offers the potential to outperform the market; and
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Reduces the need for constant churning of your entire portfolio.
‘Core and satellite’ investing is a time-tested strategic way to structure and/or restructure your investment portfolio.
Constructing a portfolio with a stable core of long-term investments and a periphery of more specialist or shorter-term holdings can deliver the benefits of asset allocation and offer the potential to outperform the market. The satellite portfolio provides the opportunity to support the core by taking active calls determined by extensive mutual fund research.
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