Equities An Asset Allocation Perspective CIFA 2015. 13 th February, - PowerPoint PPT Presentation

Equities – An Asset Allocation Perspective CIFA 2015. 13 th February, 2015

Next 15- 20 minutes…  How do Indian investors look at Equities  Holistic approach to Equity Allocation  Investing sans Emotions

How do Indian investors look at Equities

Current Investment Pattern • Underinvested in Equities • Equities investments are mostly tactical as opposed to strategic • Greater emphasis on products rather than goal orientation • Gaps in investor risk profiling

Holistic approach to Equity Allocation

Equity holdings vary significantly across the globe • Social, political, and tax environments • U.S. institutional investors average 45% allocation in equities • In the United Kingdom, equities make up 72% of assets • In Germany, equities are 11% • In Japan, equities are 24% of assets • India ~5% Source: For India; Karvy India Wealth Report 2014

Total Asset Perspective to Equity Allocation Illustration with Example Current Assets 10 L Equity Investment 5 L Debt:Equity Mix 50:50

Total Asset Perspective to Equity Allocation Illustration with Example Total Assets 100 L Equity Investment 5 L Debt:Equity Mix 95:5 Source: Based on “ Human Capital ” concept of Robeco, one of the oldest provider of Pension Solutions in Europe

Investing sans Emotions

Investors dilemma • Investors tend to follow the trend and chase the most “hot” asset class • Asset classes follow different cycles over different time periods • Two important decisions: • Which is the right asset class ? • Is this the right time ?

Returns of Retail Investors – US experience Source: Dalbar, for the 20-year period ending 12/31/12.

Sensex: 35 years history CAGR since Sensex Annual Return inception: 16.7% 267 83 81 79 74 66 62 50 44 29 35 34 26 19 23 16 20 16 16 16 11 9 8 3 0 -3 -4 -4 -12 -10 -11 -14 -22 -28 -38 -47 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 YTD Source: Motilal Oswal

It is Equity and Debt and not Equity or Debt • Equities offer best returns over the long term • But comes with a high degree of volatility • Debt gives steady returns • But barely beats inflation

Solutions……..Asset Allocation

Importance of Asset Allocation • Asset classes can be volatile • Asset allocation helps in reducing volatility and generate superior risk adjusted returns • Helps investors keep a long-term perspective and avoid knee-jerk reactions (removing emotion out of investments) • Average Stock and Bond investors have underperformed in their quest of chasing superior returns from time to time

Life-cycle of various asset classes Source: Bloomberg. Rebased to 100

Determinants of Portfolio Performance Market Other Security Timing 2.1% Selection 1.8% 4.6% Asset Allocation 91.5% Source : “ Determinants of Portfolio Performance II, An Update ” by Gary Brinston, Brian D. Singer and Gilbert L. Beebower, Financial Analysts Journal May-June 1991 For illustrative purposes only. Not indicative of any specific investment.

Asset Allocation and Investment Policy • An investment strategy is based on four decisions 1. What asset classes to consider for investment 2. What normal or policy weights to assign to each eligible class 3. The allowable allocation ranges based on policy weights 4. What specific securities to purchase for the portfolio • 85% to 95% of the overall investment return is due to the first two decisions, not the selection of individual investments

Factors To Consider • Investment objective (e.g., retirement) • Time horizon for a goal (e.g., life expectancy for retirement) • Amount of money you have to invest • Your risk tolerance and experience • Your age and net worth

Asset Allocation Model Market Individual Inputs Inputs Investment Horizon P/E Level Risk Tolerance Bond Yield Economic Outlook OPTIMIZER Investor Asset Mix Realized Returns

Model Output Absolute Returns Risk Adjusted Returns 160.0% 250% 142.6% 137.2% 140.0% 196.7% 200% 120.0% 155.6% 100.0% 150% 117.2% 80.0% 66.1% 63.2% 94.7% 85.9% 100% 60.0% 54.9% 40.0% 50% 17.5% 16.4% 20.0% 0.0% 0% 1 Year 3 Years 5 Years 1 Year 3 Years 5 Years Asset Allocation Model Equity Asset Allocation Model Equity Equity S.D. Asset Allocation %age Drop in Period Model S.D. S.D. 1 Year 29.92% 20.33% -32% 3 Year 66.74% 42.46% -36% 5 Year 117.07% 72.51% -38% Source: Internal Workings

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