Performance of Dynamic Asset Allocation Mutual Funds

Published: February 21, 2016 at 9:36 am

Last Updated on

Here is an analysis of the performance of the dynamic asset allocation mutual funds. That is, funds that change exposure to equity and fixed income based on index PE, 200 day daily moving average (DMA), moving average convergence divergence (MACD) etc.

Why do this analysis? Yesterday we analysed Index PE based Mutual Fund SIP Investing. Here only tactical exposure to investments were  considered. What if existing holdings were also subject to tactical calls. Would that be better? Easier to backtest the performance of dynamic asset allocation (DAA) funds than DIY.

More importantly, there are professional fund management teams with no other job expect to ‘time’ the market. Will be as investors be able to do better than this? I think over the long run, it would be difficult.  The DAA funds are not exactly the hot favourites of distributors. So the AUM is quite small. The fund management is free churn at will.

Features of DAA funds

1) These are portfolio funds. That is, when we talk about the performance of these funds, we talking about the performance of a portfolio which is diversified (tactically) across equity and debt.  So comparing the returns from these funds with that from equity funds is not exactly justified. We

That said, it is reasonable to expect these funds to do well when equity funds tank and that ought to show in their long-term returns (is it not?)

We shall compare the volatility of both fund classes using 5-year and 10-year rolling SIP data.

You can use the Mutual Fund SIP Rolling Returns Calculator to calculate this for your own funds benchmarked to total returns indices.

2) DAA funds are debt funds. Because of two reasons: The equity exposure can decrease below 65% due to tactical calls. Some of them invest in other mutual funds (fund of funds).

3) The expense ratio of DAA fund of funds will be quite small (esp direct option), but the expense ratio of the funds held in the portfolio (often direct funds) should also be considered. So it is too high as it is often made out to be.

Value research lists then as Hybrid: Asset Allocation

Dynamic-asset-allocatin-mutual-funds-0

There are not too many funds and in this post, we will only consider the funds launched before 2010.

Dynamic-asset-allocatin-mutual-funds-0aHave a look at the 3,5,10 year lump sum returns. (VR does not track SIP returns for this category).

Funds from Kotak, Principal and Franklin have done reasonably well, but would you expect fund which make tactical calls to have done better, esp. over the 10 years?

A reminder that these are debt funds and should be compared with an entire portfolio, not just equity funds alone.  My point is, if everyone abandoned their SIPs  to make tactical calls, many will not be able to beat this professional performance.

So don’t be gung-ho about PE, 200 DMA, yield gap, MACD and the like. It may work for a few people (would like to see their net portfolio returns before calling them winners), it is not exactly a generic universal solution.

Now let us looking at rolling SIP returns.

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Franklin India Dynamic PE Ratio Fund of Funds

Dynamic-asset-allocatin-mutual-funds-6
click to enlarge. Source- FT Scheme information document

This is a PE based fund.

Dynamic-asset-allocatin-mutual-funds-1

Dynamic-asset-allocatin-mutual-funds-2

Clearly the funds volatility is lower when compared to Sensex (total returns index). However, that is almost always at the cost of returns.

Birla Sun Life Dynamic Asset allocation Fund

Dynamic-asset-allocatin-mutual-funds-5
click to enlarge. Source: Scheme information document

This is a fund that uses multiple metrics.

Dynamic-asset-allocatin-mutual-funds-3 That is not exactly a great performance over 5 years for a fund taking tactical calls. The same fate is quite possible for an individual investor who wants to time the market too.

Kotak Asset Allocator Fund

Dynamic-asset-allocatin-mutual-funds-8
Click to enlarge. Source: Kotak Scheme information document

The investment mandate of this fund is pretty close to the DAA fund from DSP Black Rock which was aggressively marketed: Dynamic Asset Allocation Mutual Funds: Yield Gap vs. P/E Ratio

Dynamic-asset-allocatin-mutual-funds-4

Now I have plotted multiple DAA funds along with Franklin Blue Chip fund (FIBCF). The younger DAA funds from Franklin and Kotak come close to FIBCF returns.

Dynamic-asset-allocatin-mutual-funds-7

Over 5 years, these funds have considerable volatility. They still have trouble beating FIBCF (as mentioned above, not an apple to apple comparison, but should one expect tactical calls to generate better returns?)

The evidence presented thus far clearly points to a reduction in volatility compare to equity funds, but also a reduction in returns.

My takeaway: Many investors are unlikely to outperform the DAA fund management teams over the long-run. No doubt, some will, but that as they say, exceptions only serve to highlight the norm!

Think twice, nay thrice before abandoning:

fixed asset allocation –> SIPs –> yearly reviews –> suitable changes –> de-risking prior to a financial goal.

Helluva lot easier!

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Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice.
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3 Comments

  1. Under what category does ICICI Balanced Advantage fund fits in?
    They also alter the portfolio dynamically according to the markets right?

  2. very well analyzed! Targeted step up value SIP is the best method to invest in equity with only the exception to avoid the fresh investment beyond 22 PE.

  3. Many investors are unlikely to outperform the DAA fund management teams over the long-run. No doubt, some will, but that as they say, exceptions only serve to highlight the norm!
    I am not able to get this meaning .can u pls explain in detail?

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