Motilal Oswal Asset Management has launched an NFO (New Fund Offering) for a Multi Asset Mutual Fund. The NFO is open from 15th to 27th July 2020. We took a look to see if it makes sense for investors.
Short Answer: Overall, we like it. Multi Asset funds have been around for a while but most of them implement asset allocation only in letter by putting a tiny slice in 1 or 2 non-equity assets. This new fund promises to implement asset allocation in spirit. Including international equities brings much-needed low-cost diversification to the Indian investor. We do have a couple of minor reservations about its suitability for all investors.
Read on for our take on how to think about Multi-Asset funds and this new fund in particular.
What is the Motilal Oswal Multi Asset Fund?
From the NFO Document:
How does a Multi Asset Fund work? Using a mix of non-correlated asset classes yields a combination that has far lesser volatility and comparatively better risk-adjusted returns.
What is on offer? A diversified multi-asset fund which aims to generate long term capital appreciation by investing in multiple asset classes with lower volatility, yet aiming for reasonable returns
How have Multi-Asset funds done in the past?
The logical thing to do when a new product of a certain category is launched is to first take a look at the category’s performance. Like we did when looking at the Mirae Asset Arbitrage Fund.
But looking at the performance of existing funds is not particularly useful in the case of Multi-Asset funds. We’ll get into why after looking at their performance anyway.
Click to enlarge
Three things jump out at you from the table:
- There are not that many existing funds. Table shows 14 funds but Aditya Birla has 3 variants of the same fund. Two other funds were launched within the last year and so do not feature on this table
- 85% of category AUM is in one fund: ICICI Prudential Multi-Asset Fund
- Significant variation in performance. Look at any individual year and you can see a wide performance range between the median, best and worst performer
In case of Multi-Cap funds, choice of fund manager has outsized bearing on the results. With Multi-Asset Funds, the underlying strategy, the actual asset allocation strategy matters. Click To TweetIn case of Multi-Cap funds, choice of fund manager has outsized bearing on the results. With Multi-Asset Funds, the underlying strategy, the actual asset allocation strategy matters.
Of the existing lot, we think the SBI Multi Asset Fund has a strong track record as a true Multi-Asset Fund (not the best performer any given year but overall low downside volatility)
Three reasons we think Motilal Oswal Multi Asset Fund’s Allocation Strategy is better
One: Not just “Equity-and-a-bit”
Table below shows the Allocation strategy of a few of the larger Multi-Asset Funds by AUM.
Source: AMC Websites
There is significant variation in the minimum equity allocation.
But the problem is the maximum equity allocation of 80% make these funds “Equity-and-a-bit” funds and not truly Multi Asset funds.
Having wide bands for asset class weights is good for flexibility but then you’re relying on the fund manager’s judgement. And as brilliant as many of them might be, they’re only human. Imagine it’s been a bull market for a while and you’re the fund manager. The stocks in your portfolio are doing well, so it’s only natural to let the equity allocation drift ever closer to the maximum because who doesn’t like high returns.
So when equity behaves like equity is meant to i.e. have a drawdown, that’s where you happen to be mostly allocated. This defeats the purpose of Asset Allocation.
Here’s Motilal Oswal’s stated allocation strategy
From AMC Presentation
The fund allows for lower maximum equity exposure of 50%, and a higher minimum debt exposure of 40%.
The equity exposure also includes international equities of minimum 10%. And that’s where we think this fund has a leg up on the other Multi Asset funds.
Two: Multi-Asset Strategies outperform single-asset buy-and-hold
At Capitalmind, we believe Asset Allocation is a bigger determinant of portfolio performance over the longer term than security selection. i.e. Before asking “which stock”, investors should really be asking “how much in stocks?”
From “How to think about Asset Allocation”
We looked at historical data to answer two questions:
- For an investor primarily in Indian equities, does adding other asset classes like Debt, Gold, and International Equities improve portfolio performance over regular Buy and Hold? (by performance we mean annualised return as well as downside volatility)
- If asset allocation does improve portfolio performance, does it work better only some of the time, or most of the time? What proportion of each asset makes sense to maintain returns while reducing downside volatility or to improve overall returns?
We considered six hypothetical investor profiles based on their target allocations
And the results were resoundingly in favour of picking a multi-asset strategy and rebalancing regularly
Our takeaway from the exercise was that an allocation between the ‘Textbook’ and ‘Stars & Stripes’ investor profiles is likely to deliver better risk-adjusted returns.
To read the detailed posts: How to think about Asset Allocation in India | Part 1 & Part 2
Three: Rule-based allocation to Indian Stocks
Existing Multi-Asset funds do not have a clearly defined framework to decide target allocation within the stated limits. This means the fund manager will decide. Which is fine, except, it also means person-dependent variability. Refer previous comment on them being only human.
Motilal Oswal will use something called MOVI (Motilal Oswal Value Index). MOVI is a statistical score combining NIFTY Price-Earnings, Price-Book, and Dividend Yield to determine how cheap or expensive the market is. The fund’s exposure to Indian equities will be an outcome of the MOVI score. Higher the score lower the allocation to Indian equities.
Source: AMC Presentation
It’s not the soundness of the metric itself that is reassuring. Using non-stationary measures like Price-Earnings has risks, especially for a market like India that barely has three decades of data. You could have a rule that says reduce allocation to stocks when the NIFTY P-E goes above the 75th percentile. But depending on how far back you go and what periods you include or exclude will change the 75th percentile of Price-Earnings.
In spite of this reservation, using an objective rule-based approach to increasing or decreasing equity exposure is likely to outperform purely subjective calls.
Three reasons why we think Motilal Oswal Multi Asset Fund Allocation Strategy scores over others: 1. Not just equity-and-a-bit 2. Includes international stocks 3. Rule-based allocation to equities Click To TweetWhat we don’t like
Too much debt for some: The 40% minimum allocation will cause most salary-earners to be over-allocated to Debt when you add Employee Provident Fund balances. Considering debt does not outperform equity over the long-term, this might mean a too-conservative portfolio for those with a 15+ year time horizon
Choice of international equities: The S&P500 feels like the safer, more diversified benchmark of international equities. But the over the last decade, the most innovative companies feature on the Nasdaq 100 list. This list is not just technology like most people think, but has companies like Starbucks, Walgreens, Pepsico. And most of these companies derive a large percentage of their revenues from outside the US.
Which is also what we said when Motilal Oswal launched the S&P500 Index Fund
Mixing Active and Passive:
Source: AMC Presentation
International Equity exposure comes from a passive index fund. Gold is by definition passive. They could have taken it all the way and used NIFTY 50 or NIFTY 100 ETF for Indian Stocks, and a bond index fund for Debt. This would have ensured the lowest possible cost for this implementation and also a sure test of asset allocation as a strategy as opposed to the impact of active security selection.
Maybe another flavour of the fund could have been into active selection. But for now the overall performance of this fund will depend on the quality of stocks, and bonds picked by the four fund managers.
Bottomline
Motilal Oswal’s Multi Asset Fund promises to be the first fund to offer true diversification across assets to Indian investors. The inclusion of US stocks, and hopefully consistently applied rules towards allocation are big positives in the fund’s strategy.
Its taxation as a non-equity fund (3 years+ to qualify as LTCG with indexation) should not be an issue given it makes sense to invest only if you plan to hold for the long term. Had it not been for some niggles like overallocation to debt for some investors (when you add in Employee Provident Fund balance), and a mix of active and passive management, this could have been the one fund most investors needed in their portfolio.
Unless you enjoy the idea of picking out your investments, the amount of exposure and the performance of each, this fund is an excellent “fill-it-shut-it-forget-it” instrument that will work for a lot of investors over the long run.
The devil, will as always, be in flawless execution against what looks like a sound plan.
To make sure there is no confusion, this is NOT a sponsored post and is purely our objective opinion. Our strategy in the Capitalmind PMS starts with asset allocation as step 1 of the portfolio planning process for our clients. Connect with us on twitter @capitalmind_in or write to premium [at] capitalmind [dot] in to know more.
