'India's fundamental recovery seems strong, which could help reduce the volatility'

Lately, the markets have been volatile as there are concerns, particularly on the global front with rising inflation, excesses of loose monetary policies, the face-off with OPEC, etc. How do you view these factors in the context of their influence on the Indian markets? What worries you the most at the moment?
IN CY2021, Indian markets gave a return of about 22 per cent (Source: Bloomberg)*. It was among the top-performing markets globally, better than both developed and emerging markets. There is no doubt that India was one of the top-performing economies. The recovery post-pandemic surprised all naysayers. I also believe global liquidity and easy monetary policy by Central bankers played a role in equities as an asset class doing well.

While the economic recovery in India continues to gain traction despite the third wave, there are some worrying factors on the economic horizon.

Excess liquidity and doles in developed markets seem to have led to unbridled inflation. Most Central bankers are treating this as transitory due to elevated commodity prices and are continuing with their loose monetary policies. We need to see the inflation cool in the near future if that be the case. Hence, this would mean that as and when the rates are revised, both globally and domestically, they may be a lot more and faster than what the market participants anticipate.

Historically taper tantrum impacts emerging markets like India till the tapering commences. Post that, markets are driven by fundamental factors. We hope this time also it is the same. We expect Fed to commence the rate hike cycle soon. India's fundamental recovery seems strong, which could help reduce the volatility.

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 the fund manager's judgment in the case of your dynamic equity fund? Can you shed some light on the workings of the proprietary model you follow for managing this fund?
Market participants are often driven by greed and fear, which tends to colour their investment decisions. While time and again, it has been empirically proven that the best time to invest is when there is panic in the market.
We have tried to capture the emotions into a fundamental model. We backtested this over a 10-year period covering multiple cycles, wars, global economic crises, domestic issues, and euphoria. We further fine-tuned the model to optimise the return by calibrating the weight for the factors.

Being a fundamental-driven house, we used only fundamental factors in the model. These factors captured profit-and-loss, balance sheet, cash flows and market rates and related all of them to the current price.

The investment manager has been given some elbow room to deviate from the equity allocation to manoeuvre flows and transition to new equity allocation. The portfolio is rebalanced at monthly intervals.

Backtesting of the data indicated that the fund performs well over a longer duration despite having a much lower equity allocation. Thus, on a risk-adjusted basis, this fund seems to do well.

Kindly refer to the Scheme Information Document (SID) for complete details on the model and investment strategy.

Please explain your framework that determines how you manage the equity portfolio in terms of stock selection, market cap allocation, value vs growth orientation, sector preferences, etc.
The proprietary model is deterministic and determines the net equity exposure, which is the guiding principle for equity exposure.

At Baroda AMC, our approach is fundamental investing only and following EIC (Economy, Industry, and Company). We study various economic parameters, and see how they impact various sectors. Accordingly, sector weights are determined. Our investment comprises dedicated sector specialists who have rich experience tracking the same. Once the sector weight is decided, we follow a bottom-up approach to stock selection using GARP (Growth at Reasonable Price) philosophy.

Thus, you can say we follow a top-down and bottom-up approach to investing and are sector agnostic. Historically, large caps have been predominating weight in the portfolio since the fund's launch three years back. Given the conservative nature of the fund, we take calibrated calls across the market cap.

What is the strategy to manage the debt component of the portfolio in terms of credit quality, accrual vs. duration strategy, etc.?
Being a relatively conservative product, the debt portion is also managed accordingly. We do not take any significant credit calls and typically invest in top-rated companies.

Mandate permits us to manage the debt portion across the entire duration. Based on the current economic scenario and Central bankers' stance on liquidity, we are at the shorter end of the curve with an average maturity of 2.83 years and a modified duration of 2.22 years. The yield to maturity of the debt portfolio is 5.31 per cent as on December 31, 2022.

Since its inception over three years back, the fund has outperformed the category peers. What has contributed to the outperformance of the fund?
Our backtesting data showed that the fund could deliver competitive returns based on equity allocation suggested by the model and hugging the benchmark. Last three years, the fund has done well based on the alpha generated by the fund manager, and this was based on selecting the right sectors and the right stocks.

The year before last, sector selection made a differential in the performance. Our call of going underweight on Banking and overweight stance on IT and Pharma and commodities proved right. Last year, differential performance was delivered by stock selection. What is comforting is that the stock selection was across the sector, and no single stock contributed disproportionately. Thus, it goes to show the stock-picking acumen of the investment team.

The investment strategy may change within the limitations of the Scheme Information Document. For complete details on the investment strategy, kindly refer to it.

Who, according to you, is the ideal target audience of dynamic asset allocation funds? Investors are generally advised to invest based on the investment horizon and the goals.
The fund is suitable for

• First-time investors looking to generate wealth over the long term
• Investors with long-term surplus who do not have time/inclination to rebalance between equity and debt
• Investors who wish to generate regular cash flow through SWP after a waiting period of three to five years

Investors are generally advised to invest based on the investment horizon and the goals. Where do the dynamic asset allocation funds fit in their portfolio in the context of goals-based investment? Wouldn't a static allocation be more advisable for investors investing for a particular goal?
Dynamic equity funds are suitable for most long-term goals such as building a corpus to buy an asset - property, funding a child's higher education, marriage or building a retirement corpus.

Multiple studies have concluded that asset allocation is responsible for 90 per cent of investor returns on portfolio and stock selection contributed a small percentage. Most successful equity investors recommend "buy low and sell high". Dynamic equity fund offers allocation across the asset classes - Equity, Debt & Arbitrage. Our proprietary model suggests increasing allocation (to equity) when valuation is attractive and pairing down when valuations are expensive. This is done in a disciplined and tax-efficient manner.

The disadvantage of static allocation is it requires action (rebalancing) from the investor from time to time. For various reasons, such as emotions, tax considerations, lack of time, investors fail to do so in a disciplined manner. Result - they end up with poor investment experience.

Baroda Dynamic Equity Fund could provide a perfect solution to such behavioural challenges.

Following the amalgamation of BNP Mutual Fund and Baroda Mutual Fund, your dynamic equity fund is being merged with BNP Paribas Dynamic Equity Fund and your Baroda Hybrid Equity Fund. How will the fund run post the mergers? Can we expect continuity of style?
Baroda Dynamic Fund will be the surviving fund and rebranded as Baroda BNP Paribas Balanced Advantage Fund post-merger to reflect the new brand identity and category characteristic. The fund will continue to follow the current investment process that has served us well over the past several years.

With the same investment approach and style bias, the fund would be managed as efficiently as in the past. Following the merger, our investment platform becomes significantly stronger and would provide us with the cutting edge to sustain the investment performance.

How will be the fund management team structured post the merger?
I am very excited about the upcoming merger. We are using it as an opportunity to enhance our investment platform significantly. We are bringing together the two teams and further adding to the research bench strength. With this, each fund and sector will have the requisite focus.

Both Baroda and BNP teams have complementary strengths. The investment philosophy of both teams is similar, which makes the integration easier. Besides taking a fundamental approach to investment, our style bias is to identify companies growing faster than the industry. The company should have a moat to sustain superior growth. The basic filter we apply is the quality of the management.

Both our AUM and range of funds expand meaningfully post-merger. We are building the investment platform with the right size and skillset to deliver on the trust of our investors.