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Fed rate hike led to rise in volatility of all asset classes

Cockroach investment – a mix of cash, equity and debt has performed better than combination of debt and equity or either of these asset classes individually

Fed rate hike led to rise in volatility of all asset classes

Fed rate hike led to rise in volatility of all asset classes 

Ever since the US Fed has begun to increase the interest rates, there's been a tremendous increase in the volatility of the assets prices. Of course, it's not just limited to equity but also to debt, commodities and even crypto. Almost no asset class remained immune, at least completely against the rising interest rates by all the central bankers.

In the US, the traditional 60-40 equity-debt portfolios have taken a hit for the first time in many decades. Even they'd seen negative returns as both equity and debt have underperformed simultaneously beating their conventional understanding of divergence.

Also, a study found that the cockroach investment ie, a mix of cash, equity and debt has performed better than combination of debt and equity or either of these asset classes individually. Though, this philosophy has remained in vogue for a while, the last one year's performance made analysts to notice their historical performance vis-à-vis their relative risk.

Although, Indian assets haven't taken such a huge beating, were subjected to volatility even as equities have made a smart recovery notching up new all-time highs on the broader indices. If one were to put aside the exceptional year aside, each asset class goes through a cycle.

So, by allocating to mere one or two asset classes, one might find themselves exposed to those vagaries and subject their portfolios to undue risk. Instead by diversifying across assets one could not only reduce the risk but enhance the overall return profile of the portfolio. This makes the portfolio robust and to generate better risk adjusted returns.

Multi-asset funds try to address this need by allocating across multiple asset classes. The Securities and Exchange Board of India (SEBI) also has made a categorisation to this effect so that they could be distinguished from the generic hybrid category. These funds explore investing across different asset classes like equity, debt, gold and real estate, there by generate capital appreciation to the investors.

As per the definition by the SEBI, a fund which invests in at least three asset classes with a minimum of 10 per cent in each asset class is classified as a multi-asset fund. While it's simple to understand the equity and debt investment exposure by stocks and bonds respectively, the gold is through investing in a gold ETF (Gold Exchange Traded Fund), Real Estate through REIT (Real Estate Investment Trusts) and InVIT (Infrastructure Investment Trusts).

The latter both options are listed on the exchanges. Also, the fund has the flexibility to operate among the assets while changing the allocation which the fund manager deems better suited with respect to the prevailing investment environment.

For instance, ICICI Prudential Multi-Asset Fund formerly known as IPru Dynamic Plan equity of over 58 per cent, an allocation of 8.31 per cent to debt, 1 per cent to real estate with a larger chunk of close to 41 per cent to cash and equivalents. For a comparison, the same fund as of June 2018, had about 66 per cent in stocks, derivatives through index F&O of about 5 per cent and over 20 per cent in debt holdings.

Interestingly, the fund owns about 11 per cent in MF units which have exposures to 10 per cent in Gold ETFs and the rest in Bharat 22 ETF. Another popular fund is HDFC Multi-Asset Fund has allocation to equity at about 55 per cent, over 15 per cent in debt, 11 per cent in commodities, little over 2 per cent in real estate and the rest in cash and equivalents as per their latest disclosure. This fund benchmarks itself with 90 per cent NIFTY 50 Hybrid Composite Debt 65:35 Index +10 per cent of gold price in India.

Axis Triple Advantage fund, the pioneer in the multi asset strategy has since long propagated the combination of investing in equity, debt and gold as strategy to create wealth at lower risks. The fund manager has however, the discretion to allocate in various asset classes but the latest fund allocation shows a skew towards equity with about three-fourths of the investment. The current portfolio stands with close to 73 per cent to equity, about 15 per cent to debt and 10 per cent in commodities (gold) with the remaining in cash.

Most of these funds are equity heavy to take advantage of the capital gains taxation and so they indulge in derivatives to show the overall equity at 65 per cent or above. This also helps in hedging against any equity volatility risk which is generally higher than other asset classes.

An allocation could add a bit of flavour to the portfolio however a higher equity makes them behave like equity funds albeit at a tad bit lower tracking.

(The author is a co-founder of "Wealocity", a wealth management firm and could be reached at [email protected])

K Naresh Kumar
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