The asset allocation levels are fixed annually over a range of probable Sensex levels, based on expected earnings growth and the PE band that the Sensex has traded in the past. This year, the ends of the spectrum are the Sensex at 8,000 (or less) and at 13,000 (or above). At its lowest, the maximum allocations for equity and debt would be 90 per cent and 30 per cent, respectively. At its highest, the inverse holds.
Between September and December 2007, the Sensex rose from 17,219 to 20,286 while allocation to equity moved from 29.47 to 70 per cent. “The fund revises the Sensex band for asset allocation in November every year which is then applicable for the ensuing year. The band fixed for period December 2007 to November 2008 considered the expected consensus earnings growth of the Sensex companies and the prevailing PE ratio. Thus the equity allocation went up in line with the revised Sensex band.” explains fund manager Swati Kulkarni.
In 2008, the Sensex range was put at 18,000 to 23,000, but the market crashed. “It's a problem because we set the levels in November and they get implemented by December,” says Kulkarni. “We are reviewing the product to see how we can work around this issue.” Despite a bad year, the average equity allocation in 2008 stood at 70 per cent, which Kulkarni says was “the least we could have considered under the Sensex band. The fall in equity markets was unprecedented. Once we were sure of the bleak macro scenario by June 2008 when crude prices did not fall and inflation began to rise, we kept to the lower end of the band.”
Its 5-year annualised return of 6.51 per cent (June 30, 2009) is not impressive.