SBI Mutual Fund launches SBI Balanced Advantage Fund

SBI Mutual Fund has launched SBI Balanced Advantage Fund. This open-end fund will invest in the equity, debt, and units of REITs. The new fund offer (NFO) opened up for a subscription on August 12, 2021, and will close on August 25, 2021. Here are a few things that you need to know about the fund.

Dynamically altering the asset allocation in response to the state of the markets is a compelling proposition on paper but perhaps difficult to execute accurately on a sustainable basis. How much of it will be driven by a quant model versus a fund manager's judgment? Can you explain the primary parameters you intend to use - Sentiment Indicator, Valuations, and Earnings Drivers?
Dynamic asset allocation funds are inherently programmed in a way that they can manage volatility in the market. I believe this makes for an attractive investment proposition both on paper and outside of it. The dynamic allocation part of it may seem complicated and difficult to execute on an individual portfolio, but for an asset manager, they have all the tools needed to execute this investment strategy.

At our end, we have an in-house asset allocation model, which is so designed that it helps us understand the market direction based on three parameters - Sentiment Indicator, Valuations, and Earnings Drivers. This model helps us make the right asset allocation call. The idea is to invest in the asset class where the risk-reward will likely be the highest. The sentiment indicator looks at multiple parameters such as the breadth of the market, retail participation, MF flows, primary market activities, etc. This parameter is treated as a contrarian indicator, i.e., high market optimism is treated as an indicator to trim equity positions and vice versa. The model evaluates the current market valuations based on parameters such as trailing P/E, Shiller P/E, Earnings yield / Shiller earnings yield to bond yield spread. Analysis of the current market valuations helps us recognise if the market is overheated or rightly priced. Finally, the earnings drivers' indicators, which involve assessing macro factors such as fiscal/monetary position, real rates policy framework, variables of offshore markets, etc., tell us how economic activity is likely to pan out.

At this point, I also want to highlight that this scheme's investment strategy does not just run on this one model. This is only the first tier in the three-tiered investment strategy. The in-house model helps decide the asset allocation mix, but the strategy tilt (whether it will have a value or growth bias and market-cap allocation) is based on a quantitative framework. The final step of stock selection (bottom-up approach) is decided based on the fund manager's view and the high conviction ideas of the analyst team.

Dynamic asset allocators endeavour to limit the downside when the equity markets correct. Can you share some insights or evidence from any back-testing of your strategy on how successful it has been in achieving this? For example, what kind of relative downside cushion has your strategy offered during market falls?
While designing a model, the back-testing of its strategy and its output based on historical market trends is key to determining its effectiveness. In the case of our model, we have seen that when markets were reaching new highs and reflecting high exuberance and optimism, equity levels were on the lower end of the asset allocation range.

Though the fund has complete flexibility on asset allocation, what is the range in which net equity allocation is generally expected to remain most often?
While we endeavour to maintain the gross equity levels at 65 per cent, the net equity levels will be based on the asset mix that the model indicates. For e.g., if the model indicates the equity levels should be around 40 per cent, net equity will be 40 per cent, and balance 25 per cent will be invested in arbitrage. Similarly, if the model indicates equity levels of around 70 per cent, net equity levels would be at 70 per cent, and no allocation would be made in arbitrage.

Can you please explain your quantitative framework to determine the positioning of the equity portfolio in terms of market cap allocation, value vs. growth, sector preferences, etc.?
What we are trying to do within equity asset allocation is to assess, at any given point, where the risk-reward ratio is high. Our aim is first to figure out the risk-reward ratio within market caps - be it large cap, mid cap, or small cap, and style (value/growth/quality). Once the market cap and style skewness are decided, it's on to individual stock selection, where again we try to figure out where the highest risk-reward is. Based on the above output, we will choose stocks from the highest conviction ideas of the analyst team.

For the equity portion, the portfolio construction process will follow this framework to identify the best possible opportunities in the market. As you can see, the equity allocation in the fund's investment strategy is going to change dynamically based on market conditions which will ultimately benefit the investors. We wouldn't want to categorise this fund as loyal to any sector or market cap or strategy tilt. We want to tilt the portfolio in the direction where we believe there is maximum risk-reward.

Will the equity portfolio be managed in a compact, high conviction style like a focused equity fund, or will it be more diversified?
The equity portfolio will follow a bottom-up approach based on the high conviction ideas of the analyst team. However, unlike a focused equity fund, there is no restriction on the number of stocks in the fund. It will be a diversified portfolio without biases on market cap, sectors, or strategy (growth/value/cyclical). The sole aim of the fund when it comes to equity allocation is to find opportunities in the market which offer the best risk-reward ratio.

Tell us about the strategy to manage the debt component in terms of credit quality, accrual vs. duration strategy, etc.
With respect to the fixed income allocation in the fund, the aim is to maintain high liquidity along with the stability of returns. The fund aims to invest in highly liquid sovereign or high credit quality corporate papers. Just as in the equity allocation, the fund has flexibility on the fixed income allocation as well. The fund manager has the flexibility to invest across duration with the aim to generate alpha.

Can you explain the SWP (A) option you are introducing in this fund? How is it different from a normal SWP?
We believe the SWP (A) facility in the SBI Balanced Advantage Fund is something that can help investors who are looking for regular cash flows. Opting for SWP to meet cash flow needs is a more tax-effective option as compared to opting for dividends. While you have the regular SWP option, which allows investors to withdraw a fixed sum from their investments at periodic intervals, the SWP (A) facility offers one more level of flexibility. Investors through the SWP (A) can withdraw a fixed percentage of their investments periodically, along with having the option to withdraw a fixed amount of their choice on a periodic basis.

Investors can choose to withdraw a fixed percentage or a fixed amount on a monthly, quarterly, half-yearly, or yearly basis, with the minimum withdrawal amount being fixed at Rs 500. Though I would like to point out here that the first SWP (A) trigger will be effective from April 25, 2022. Investors can opt for both the regular SWP and SWP (A) facility, but they will have to apply for them individually.

Note: For detailed asset allocation and investment strategy, kindly refer to the Scheme Information Document (SID).