Mutual Fund
Investor’s dilemma Expectations Reality THE DISCONNECT
Investor’s dilemma Expectations Reality THE DISCONNECT
Typical investor behavior observed through different phases of markets Every bull and bear run in the market witnesses different emotional and sentimental behaviors of investors. Often seen that with higher market valuations, the flows in equities mutual fund schemes grows and vice versa. Whereas to optimize returns, the case should be reverse. Source: www.nseindia.com, www.amfiindia.com
Flexibility is the key to Success To score high, the batsman have to adapt to different deliveries in a differently, like… Bouncers have to be left And drive to boundaries on Defend the in-swinging untouched good length balls yorkers Likewise, in investing, one cannot generate returns from same asset class, EVERYTIME. Hence, you need to know when to be invested into equities and to what extent of your assets.
Principal Balanced Advantage Fund Power of 3, Equity Debt Arbitrage based on market PE. To make your expectations meet the reality To build long term wealth using market timing To overcome sentimental and emotional investing
What is Price to Earnings Ratio or PE? Typically, the Price to Earnings or PE is a measure of how are company’s earnings valued in the market . 16000 35 Decoding PE: Nifty 50 TRI (LHS) Historical P/E (RHS) 14000 30 PE is referred to as the price multiple 12000 because it shows how much the 25 investors are willing to pay for per 10000 20 Rupee of company’s earnings. 8000 15 If a stock is currently trading at a 6000 multiple (PE) of 20, the 10 4000 interpretation is that an investor is 5 willing to pay Rs. 20 for Re. 1 of 2000 current earnings. 0 0 Jan-00 Sep-18 Our asset allocation is based on simple indicator called “Price to Earnings” or “PE” . Data Source – www.nseindia.com
Why is PE a reliable market indicator? Nifty 50 TRI - 1 year rolling return on daily frequency since Jan 2000 The adjoining chart depicts 73.78% +ve Observations (%) -ve Observations (%) that at lower PE, the 39.16% probability of generating 27.29% 25.20% above average returns is 0.00% 0.00% Average Returns 17.12% higher and vice versa. -26.22% -60.84% Historically, if one has -72.71% -74.80% invested in markets valued -100.00% -100.00% over 24 PE (red circle), the No of observations 2418 1396 996 258 92 returns generated on 1 1231 years daily rolling basis >18 >20 >22 >24 have always been below PE Bands >26 <=18 but but but but the average of Nifty 50 TRI. <=20 <=22 <=24 <=26 Data as on 30 th Jun 2018. Past performance may or may not be sustained in future. Internal analysis. Data Source – www.nseindia.com and www.amfiindia.com
Why invest in a Balanced Advantage Fund? Though equities have history of generating wealth in the longer run , they also have a tendency to be most volatile in shorter time frames . 8.00 6.00 Daily Returns in % 4.00 2.00 0.00 -2.00 -4.00 -6.00 Nifty 100 TRI 50% Nifty 100 TRI + 35 Crisil Short Term Bond Index + 15% Nifty Arbitrage Index -8.00 Apr-10 Sep-18 50% Nifty 100 TRI + 35 Crisil Short Term Nifty 100 TRI Difference Bond Index + 15% Nifty Arbitrage Index 15.64% 7.87% -7.77% Annualized Standard Deviation Compounded Annualized Returns 10.77% 9.50% -1.27% A Balanced Advantage Fund endeavors to minimize the volatility Internal analysis. Data Source – www.nseindia.com, www.cirisil.com; Data from 1 st Apr 2010 to 30 th Sep 2018.
How Principal Balanced Advantage Fund works? Market valuations alters the investment response Valuations from Typical Retail Fund’s Weighted Average PE (Standalone) of Nifty 50 Index Long Term Perspective Investors Response Response Indifferent / Less than or equal to 18 Very Attractive Bullish Cautious Indifferent / Above 18 – Less than or equal to 20 Very Attractive Bullish Cautious Above 20 – Less than or equal to 22 Attractive Skeptic Positive Above 22 – Less than or equal to 24 Reasonable Skeptic Positive Above 24 – Less than or equal to 26 Not Attractive Bullish Cautious Above 26 Overpriced Bullish Cautious The investment strategy stated above may change from time to time without any notice and shall be in accordance with the strategy as mentioned in the Scheme Information Document of the scheme. The views contained herein are not to be taken as an advice or recommendation to buy or sell any investment or interest thereto. Reliance upon information in this material is at the sole discretion of the reader. This material should not be relied upon by you in evaluating the merits of investing in any securities or products. Diversification does not guarantee investment returns and does not eliminate the risk of loss. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Past performance may or may not be sustained in future. The views and strategies described may not be suitable for all investors. Furthermore, whilst it is the intention to achieve the investment objective of the investment product(s), there can be no assurance that those objectives will be met. Investors are advised to consult their Investment advisors for determining their risk appetite and Tax Advisor before taking any investment decision.
How Principal Balanced Advantage Fund works? PE bands and net equity allocation We use the month-end Weighted Average PE (Standalone) of Nifty 50 Index Net Equity Component (%) Trailing PE Ratio of Nifty 50 Index to understand if the Less than or equal to 18 80-100 market is overvalued or undervalued or fairly Above 18 – Less than or equal to 20 60-80 valued. Above 20 – Less than or equal to 22 40-60 Based on the current Above 22 – Less than or equal to 24 30-50 valuation and using a Above 24 – Less than or equal to 26 20-40 predefined table of PE levels we add or reduce Above 26 15-25 equities in the portfolio. As per the investment strategy of the scheme (as per SID), the rebalancing of the portfolio (if required) to bring the equity component in line with the new PE band would be done latest before the end of the subsequent month. The investment strategy stated above may change from time to time without any notice and shall be in accordance with the strategy as mentioned in the Scheme Information Document of the scheme. The views contained herein are not to be taken as an advice or recommendation to buy or sell any investment or interest thereto. Reliance upon information in this material is at the sole discretion of the reader. This material should not be relied upon by you in evaluating the merits of investing in any securities or products. Diversification does not guarantee investment returns and does not eliminate the risk of loss. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Past performance may or may not be sustained in future. The views and strategies described may not be suitable for all investors. Furthermore, whilst it is the intention to achieve the investment objective of the investment product(s), there can be no assurance that those objectives will be met. Investors are advised to consult their Investment advisors for determining their risk appetite and Tax Advisor before taking any investment decision.
Principal Balanced Advantage Fund – Historical Asset split vs the PE Allocation to Net Equity reduced sharply when markets turn expensive 100.00 31.00 90.00 29.00 80.00 27.00 70.00 25.00 60.00 50.00 23.00 40.00 21.00 30.00 19.00 20.00 17.00 10.00 - 15.00 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Sep-12 Dec-12 Mar-13 Sep-13 Dec-13 Mar-14 Sep-14 Dec-14 Mar-15 Sep-15 Dec-15 Mar-16 Sep-16 Dec-16 Mar-17 Sep-17 Dec-17 Mar-18 Sep-18 Net Equity P/E Ratio Internal analysis. Data Source – www.nseindia.com; Equity allocation is of Principal Smart Equity Fund
The Investment Strategy Equity Investment Strategy Fixed Income Strategy A large cap oriented portfolio. Average maturity of debt portion is managed similar to a mix of Low Duration to Short Term Equity stock selection with endeavor to debt fund category. potentially outperform benchmark in 2-3 years Endeavors to invest in high quality short term timeframe. Corporate Bonds and Money Market Instruments. Active management of the portfolio in Tactical short term trading exposure to GILTS may response to dynamic market conditions. be undertaken. DISCLAIMER: The investment strategy stated above may change from time to time without any notice and shall be in accordance with the strategy as mentioned in the Scheme Information Document of the scheme.
The Investment Philosophy At Principal we firmly believe: Bottom-up stock selection is the most reliable and repeatable source of consistent investment performance Integration of traditional and quantitative fundamental research ▪ Breadth through a sophisticated comparative stock selection framework ▪ Depth through focused due diligence and expertise 3 key attributes distinguish superior stock selection : ▪ Sustainable Fundamental Change ▪ Rising Investor Expectations ▪ Attractive Relative Valuations
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