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Equities – An Asset Allocation Perspective
CIFA 2015. 13th February, 2015
Next 15-20 minutes…
How do Indian investors look at Equities
Holistic approach to Equity Allocation
Investing sans Emotions
How do Indian investors look at Equities
Current Investment Pattern
• Underinvested in Equities
• Equities investments are mostly tactical as opposed to
strategic
• Greater emphasis on products rather than goal
orientation
• Gaps in investor risk profiling
Holistic approach to Equity Allocation
Equity holdings vary significantly across the globe
• Social, political, and tax environments
• U.S. institutional investors average 45% allocation in
equities
• In the United Kingdom, equities make up 72% of
assets
• In Germany, equities are 11%
• In Japan, equities are 24% of assets
• India ~5%
Source: For India; Karvy India Wealth Report 2014
Total Asset Perspective to Equity Allocation
Illustration with Example
Current Assets 10 L
Equity Investment 5 L
Debt:Equity Mix 50:50
Total Asset Perspective to Equity Allocation
Illustration with Example
Total Assets 100 L
Equity Investment 5 L
Debt:Equity Mix 95:5
Source: Based on “Human Capital” concept of Robeco, one of the oldest
provider of Pension Solutions in Europe
Investing sans Emotions
Investors dilemma
• Investors tend to follow the trend and chase the
most “hot” asset class
• Asset classes follow different cycles over different
time periods
• Two important decisions:
• Which is the right asset class ?
• Is this the right time ?
Returns of Retail Investors – US experience
Source: Dalbar, for the 20-year period ending 12/31/12.
Sensex: 35 years history
Source: Motilal Oswal
2935
26
-3
16
44
62
-11-22
79
9
50
-47
66
-14
3
0
16
-4
34
-28
-4-12
83
16
74
16 20
-38
81
11
-10
819 23
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015 Y
TD
267
Sensex Annual Return CAGR since
inception: 16.7%
It is Equity and Debt and not Equity or Debt
• Equities offer best returns over the long term
• But comes with a high degree of volatility
• Debt gives steady returns
• But barely beats inflation
Solutions……..Asset Allocation
Importance of Asset Allocation
• Asset classes can be volatile
• Asset allocation helps in reducing volatility and generate
superior risk adjusted returns
• Helps investors keep a long-term perspective and avoid
knee-jerk reactions (removing emotion out of investments)
• Average Stock and Bond investors have underperformed in
their quest of chasing superior returns from time to time
Life-cycle of various asset classes
Source: Bloomberg. Rebased to 100
Determinants of Portfolio Performance
Asset
Allocation
91.5%
Other
2.1%
Market
Timing
1.8%
Security
Selection
4.6%
Source: “Determinants of Portfolio Performance II, An Update” by Gary Brinston, Brian D. Singer and Gilbert L.
Beebower, Financial Analysts Journal May-June 1991
For illustrative purposes only. Not indicative of any specific investment.
Asset Allocation and Investment Policy
• An investment strategy is based on four decisions
1. What asset classes to consider for investment
2. What normal or policy weights to assign to each eligible
class
3. The allowable allocation ranges based on policy
weights
4. What specific securities to purchase for the portfolio
• 85% to 95% of the overall investment return is due to
the first two decisions, not the selection of individual
investments
Factors To Consider
• Investment objective (e.g., retirement)
• Time horizon for a goal (e.g., life expectancy for retirement)
• Amount of money you have to invest
• Your risk tolerance and experience
• Your age and net worth
Asset Allocation Model
Market Inputs
P/E Level
Bond Yield
Individual Inputs
Investment Horizon
Risk Tolerance
Economic Outlook
OPTIMIZER
Investor Asset Mix
Realized Returns
Model Output
17.5%
66.1%
142.6%
16.4%
63.2%
137.2%
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
140.0%
160.0%
1 Year 3 Years 5 Years
Absolute Returns
Asset Allocation Model Equity
85.9%
155.6%
196.7%
54.9%
94.7%
117.2%
0%
50%
100%
150%
200%
250%
1 Year 3 Years 5 Years
Risk Adjusted Returns
Asset Allocation Model Equity
Source: Internal Workings
Period Equity S.D.Asset Allocation
Model S.D.%age Drop in
S.D.1 Year 29.92% 20.33% -32%3 Year 66.74% 42.46% -36%5 Year 117.07% 72.51% -38%
Thank You
Disclaimer
Mutual Fund Investments are subject to market risks, read all scheme related
documents carefully.
The information used towards formulating the outlook have been obtained from sources
published by third parties. While such publications are believed to be
reliable, however, neither the AMC, its officers, the trustees, the Fund nor any of their
affiliates or representatives assume any responsibility for the accuracy of such
information and assume no financial liability whatsoever to the user of this document. This
document is strictly confidential and meant for private circulation only and should not at
any point of time be construed to be an invitation to the public for subscribing to the units
of Canara Robeco Mutual Fund. Please note that this is not an advertisement. The
document is solely for the information and understanding of intended recipients only.
Internal views, estimates, opinions expressed herein may or may not materialize. These
views, estimates, opinions alone are not sufficient and should not be used for the
development or implementation of an investment strategy. Forward looking statements
are based on internal views and assumptions and subject to known and unknown risks
and uncertainties which could materially impact or differ the actual results or performance
from those expressed or implied under those statements.
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