Publication – Morningstar.in
Ideally, one looks forward to an optimal portfolio, a portfolio which provides maximum potential returns for a given level of risk. This is where the “Right Asset Allocation” comes into the picture.
Studies show that asset allocation explains about 90% of the period-to-period variability of a portfolio. Extended research also reveals that about 40% of the return variation between funds is due to asset allocation, with the balance due to other factors. But because the average of all investors is the market itself, with good asset managers and bad ones cancelling each other out, asset allocation ultimately accounts for 100% of the absolute level of returns for a portfolio.
Asset allocation thus becomes one of the most important principles of portfolio construction and one of the primary drivers of portfolio performance. By being in the market, and doing a strategic asset allocation across a variety of investments, investors can reduce portfolio volatility and improve performance, as different asset classes may outperform at different times.
How do ETFs support asset allocation?
For asset allocation to work its best, each asset class must be accurately reflected within a portfolio, and that’s where Exchange Traded Funds, or ETFs, play an important role. An ETF provides a true representation of an asset class, tracking the performance of a specific index, such as equity, bond or commodity index, mirroring its returns.
ETFs give investors easy and efficient access to:
- Different asset classes (equity, fixed income and commodities).
- Various markets (domestic, international, and emerging).
- Different market segments (sectors and themes across asset classes).
Hence ETFs play a crucial role for investors looking to implement their optimal asset allocation model as accurately as possible.
Some popular known strategies used to build portfolios through ETFs are:
- Low cost long index exposure – ETFs are known for being one of the lowest cost exposure to the indices at large.
- Core and satellite investment strategies – ETFs allow altering asset allocation in a single trade, maintaining broad-based index ETF as their core and moving to more strategy based ETFs as satellite exposure.
- Sector rotation and tactical allocation – ETFs are used to add or be overweight in specific markets, sectors or industries to a core portfolio.
- Portfolio completion – allows investors to fill gaps in a portfolio in specific asset classes or sectors.
Hence, one of the most popular uses of index based ETFs these days is plugging them into asset-allocation models and many investors have already started utilising low-cost diversified ETFs as their portfolio building blocks.
The views expressed above are the author’s and not necessarily the organisation he represents.
Publication – Business World
The Indian MF industry notched up a whopping 1,412 per cent growth in 15 years. The going is only going to get better. So strap up for the ride of your life
(This story was published in BW | Businessworld Issue Dated 20-04-2015)
By Vikaas M. Sachdeva
Publication – Financial Intermediaries Association of India (FIAI), March 2015
In reality, I believe there are three types of AMCs:
A] Ones with vintage, who happen to have a sizeable AUM under their belt (Let’s call them “Large”)
B] Ones which are progeny of the crisis during the global crisis of 2008 – 2011 (Let’s call them “Young”)
C] Ones with vintage, who do not have an AUM equaling their vintage (For lack of a better word, they could be termed as “small/ mid sized AMCs” So what makes the breed of young AMCs go forth in a world dominated by size? Few things which we noticed are:
1] Sharp positioning: Each of the young AMCs has the most amount of consolidation happening.
While one does not want to romanticize the travails of a young AMC – and there are quite a few – I think the level of ambition and audacious thinking is what needs to be had a baptism by fire. Knowing fully well that they cannot compete on the existing set of rules laid down
by the industry, they have striven to pick a niche and establish themselves in that. So whether it is low volatility equity investing, buy and hold strategies, value driven investment prowess or a strong fixed income base, most young AMCs have picked their battles
2] Keeping costs low: One of the striking features of young AMCs is the way they have managed to keep their costs low and their heads down till the time the crisis was over. Now, with the benefit of hindsight and strong tailwinds, these AMCs are scaling up operations at a far lower cost than what you would have expected them to do
3] Pick and choose your distribution partners: The younger AMCs have focussed on a clear set of distributors across geographies, who they think can support their cause. This breed of distributors itself is smart, hungry and ambitious and they have been more than willing to support a good AMC when they see one
4] Smart products and initiatives: What is common between an absolute return fund, investment through Whatsapp, creating a product to cater to behavioral finance, benefits of very long term investing and an aggressive FoF portfolio? They all are smart products and ideas coming in from young AMCs As a small / mid-sized AMC, the perennial question is “Should I invest more to grow, or should I rationalize my resources to be profitable….. which is where you find watched out for. After all, it is not the size of the dog in the fight which matters; it is the size of the fight in the dog which counts…
Disclaimer: Mr. Vikaas M. Sachdeva is the Chief Executive Officer of Edelweiss Asset Management Limited and the views expressed above are his own.