This is a performance review  (with video) of ICICI Prudential Balanced Advantage Fund ( I Pru Bal Adv) against broad market benchmarks like Nifty, Nifty 100 and 200 and composite benchmarks. I Pru Bal Adv is one of the finest dynamic asset allocation funds and here is why. I thank Ravikiran Suryanarayana for this post idea.

Missed the last few posts over the weekend? Catch up now:

• Are we now in a bear market? Market Analysis (October 2018)
• Why Aggressive Hybrid (balanced) Mutual Funds score over diversified funds
• List of funds that have consistently beat benchmarks with good downside protection

ICICI Prudential Balanced Advantage Fund, launched in Dec 2006 has been following a “buy low, sell high” tactical asset allocation model since 2010 (source: see AMC presentation linked below). This model is based on the price to book value (PB) of the index.  Book value is essential the net worth of the stocks in the index (Nifty/Sensex)

ICICI Prudential Balanced Advantage Fund: Investment strategy

The fund can invest across large and midcaps. When the PB ratio is high, it indicates an overvalued market. The fund can reduce equity exposure by as much as 30% under such circumstances. When the PB ratio is low, it indicates an undervalued market and the equity exposure in the fund can increase up to 80%

When the PB ratio is neither high nor low, it has medium equity exposure. It is called “balanced advantage” because of two reasons: (1) It can move from an equity-like fund to a balanced-like fund to a conservative hybrid fund depending on market conditions. (2) When it does this, it utilises arbitrage opportunities (which carry bond-like risk but are treated as equity for taxation) to ensure the overall equity exposure each month is over the required limit of 65%.

Thus it is able to offer significantly lower risk at favourable, equity fund-like taxation. Prior to April 30th 2018, the fund was benchmarked to CRISIL Aggressive Index (65% Nifty 50 and rest bonds) and was changed to CRISIL Hybrid Index (50% Nifty 50 + bonds). Source: fund factsheet

This slide from the fund house provides an overview of the strategy.

Another slide shows how the ICICI Prudential Balanced Advantage Fund’s direct equity exposure varies.

Now if you compare this with the Sensex PB during the same period, you will see an approximate resemblance. I guess the investor should expect 20-30% swings in direct equity exposure!

Review Video

This is the video version of this review. The freefincal youtube channel has several videos on the different aspect of money management. Do check them out and subscribe.

ICICI Prudential Balanced Advantage Fund vs Nifty 50

Although this is a dynamic asset allocation fund, I think it must be tested against broad market equity indices. So I have taken the direct plan and compared 3Y rolling returns with Nifty 50.

There are 929 3-year data points in each curve. That is a very good performance especially when you look at the rolling risk.

That is about 70-80% lower risk than the Nifty 50 with returns that match! It is a performer with low volatility.

ICICI Prudential Balanced Advantage Fund vs Nifty 100

Since it can invest across large caps and midcaps, the Nifty 100 and Nifty 200 comparison is worth a look. Again that is good going. Please take some time to study these graphs. I do not want to offer commentary on aspects that you can see for yourself.

ICICI Prudential Balanced Advantage Fund vs Nifty 200

You can plot such graphs for your funds with the freefincal rolling returns calculator.

Some stats with Nifty 200 TRI

5 years: Fund beat index 86 of 197 times with 100% downside protection. To understand what downside protection is read: What is mutual fund downside protection and why is it important? Essentially it means that the fund always fell less than this index.

4 years: Fund beat index 204/441 times with 100% downside protection.

3 years: Fund beat index 556/686 times with 100% downside protection.

Considering the 70-80% lower risk, this is excellent risk-adjusted performance.

ICICI Prudential Balanced Advantage Fund vs BSE Balanced

Since this is a dynamic balanced fund, a comparison with hybrid indices is appropriate. Unfortunately, hybrid index data is not available for free and so I make my own. BSE Balanced = 70% BSE Allcap + 30% BSE India Bond Index. You can read more about it here: A new and accessible benchmark for balanced mutual funds

For comparison, I have used Fingerprinting: A Visual Tool for Analyzing Mutual Fund Performance. This takes month returns of the fund, compares it with the index and plots them into sections.

Notice that most of the monthly returns fall in “good regions”. You get outperformance with downside protection.

ICICI Prudential Balanced Advantage Fund vs BSE Hyrbid

BSE Hybrid = 50% BSE Allcap + 50% BSE India Bond Index. This is more in line with its present benchmark. Again that is fairly decent performance.

Impression

I Pru Bal Adv is an excellent choice for investors who prefer low volatility and reasonable returns. Although the fund may not always beat broad market equity indices, it should do well given enough time.

Please note that although the volatility is lower, in the event of huge market crashes, this fund will suffer too. So be prepared for that.

My only con with regard to this fund, well with regard to the marketing of this fund is that its dividend option was pushed as “monthly income” option to many especially retirees and this contributes significantly to its AUM. I do hope after April 2018 when all equity dividends will be taxed at sources, investors (esp those holding regular plan units) had the sense to switch to the growth option in the direct plan. Since the NAV is currently down, it is still not too late to switch tax-free. See: Use this “market crash” to clean up your equity fund portfolio tax free!

During turbulent markets, such hybrid funds are pushed more and this can suddenly increase the AUM of the fund if there is a big crash. Large AUM is not a problem per se but a large change in the AUM can be troublesome for the fund manager. Already the AUM is pretty healthy at 28,616 crores! Well, the reason is obvious: the expense ratio of the regular plan is 2.12% and that of the direct plan is 0.99%.  Products with high commissions are “always good for the customer”

So the choice is clear: choose the direct plan of any fund, especially this one, but be wary of spikes in AUM. Other than that, this is a fantastic fund. If you are worried about this, ICICI Prudential Dynamic Equity Fund, now ICICI prudential Multi-asset fund can be a good alternative (it used to follow the same PB strategy). This fund will have to hold equity + bonds + gold at all times and the equity exposure can drop below 65%, but since it does have about 10,000+ crores, we can expect the fund manager to keep it “equity-like”.

Missed the last few posts over the weekend? Catch up now:

• Are we now in a bear market? Market Analysis (October 2018)
• Why Aggressive Hybrid (balanced) Mutual Funds score over diversified funds
• List of funds that have consistently beat benchmarks with good downside protection