ICICI Prudential Balanced Advantage: Good fund in volatile environment

FY 2017 was a good year for equity investors; the Nifty gave over 18% returns in the last one year and 12% returns in the last three months. The January to March quarter was stellar not just for the Indian equity market, but stock markets around the world with risk appetite returning to equities in a big way. While experts expect the momentum to be sustained in FY 2018, they are also wary of uncertainties at a global level.

Since the market is at its all time high, some India watchers are worried about valuations. Rising commodity prices and the prospect of a “not so good” monsoon are also factors which cause concern. While there is more clarity on the actions of the Federal Reserve in the short term, a change in stance by the Fed will worry equity markets. There is also some uncertainty with regards to the policy actions of the US administration. All these factors may lead to volatility in the year ahead. Volatility affects different investors in different ways. Investors with high risk appetites are less affected by volatility, but volatility can be stressful for investors with more moderate risk tolerance levels.

Balanced funds are excellent investment option for investors with moderate risk tolerance, since they can generate steady returns for the investors and limit downside risks in volatile market conditions. The other major advantage of balanced funds is the capital gains taxation. Balanced funds with equity allocation of 65% or more are treated like equity funds from a tax perspective. Dividends and long terms capital gains are tax free for such funds. While there are fairly large numbers of schemes in the balanced fund category, the ICICI Prudential Balanced Advantage fund is an ideal investment option for investors with moderate risk appetite, compared to more aggressive schemes in the balanced fund category.

The equity allocation of ICICI Prudential Balanced Advantage Fund ranges between 30 – 80% based on dynamic asset allocation strategy determined by Price / Book ratio of the equity market. This means that, the fund shifts its asset allocation from equity to debt when valuations rise and from debt to equity when valuations fall. This fund, in a way, is a contra fund, which means that fund manager bets against the current market trend. The underlying belief in contra-investing is that, most market operators have herd mentality. They chase assets which are hot which leads to mispricing of assets and subsequently steep corrections.

While the equity allocation of some of the aggressive balanced funds in the market is currently between 65 to 75%, the equity allocation of ICICI Prudential Balanced Advantage Fund is 55% only. The lower allocation to equity is due to the fact that, the rally over the past few months (as discussed earlier) have valuations run up sharply. The contra style of ICICI Prudential Balanced Advantage Fund immunizes the fund from volatility related downside risks to a certain extent. However, investors should note that, this strategy will also prevent the fund from riding the momentum in the market. Therefore, this fund is suited to investors with moderate risk tolerance.

The investment strategy of ICICI Prudential Balanced Advantage Fund has enabled it to outperform balanced fund category in different market conditions. Please see the annual returns of the fund versus the hybrid equity oriented funds (balanced fund) category over the past 5 years.

Source: Advisorkhoj Research

You can see that, ICICI Prudential Balanced Advantage Fund outperformed the hybrid equity oriented funds category every year over the last 5 years except in 2014, which as most of our readers may know, was a momentum year for stock market in India (due to the Modi election effect).

ICICI Prudential Balanced Advantage Fund was launched in December 2006 and has more than Rs 17,800 Crores of Assets under Management (AUM). The expense ratio of the fund is 2.06%. The turnover ratio of the fund is over 400%, but it is consistent with the investment strategy of the fund. The chart below shows the NAV growth of ICICI Prudential Balanced Advantage Fund since inception of the scheme.

Source: Advisorkhoj Research

The fund has given more than 11% annualized returns since inception. While this may not seem spectacular compared to top performing aggressive balanced funds, the investment objective of ICICI Prudential Balanced Advantage Fund is to generate steady (not spectacular returns) and to limit downside risks. Manish Banthia, Manish Gunwani and RajatChandak are the fund managers of this scheme.

Rolling Returns

The rolling returns of ICICI Prudential Balanced Advantage Fund will reveal useful characteristics of the fund performance. The chart below shows the 3 year rolling returns of the fund over the last 10 years. We chose a 3 year rolling return period because, investors should have a sufficiently long time horizon (3 years at least) for balanced funds.

Source: Advisorkhoj Rolling Returns Calculator

You can see that, the 3 year rolling returns of ICICI Prudential Balanced Advantage Fund outperformed the category average rolling returns from 2008 onwards. Investors should note that, the period from 2008 to 2017 had 3 bear markets (when the market fell by more than 20%). ICICI Prudential Balanced Advantage Fund outperformed its peers in the bear market periods and this led to superior rolling return performance of the fund. Our regular blog readers know that, rolling returns is the best measure of the performance of fund, because it is not biased by specific market conditions.

Let us now discuss some other interesting rolling return characteristics of the fund. The 3 year rolling returns of ICICI Prudential Balanced Advantage Fund was in double digits more than 90% of the time, irrespective of interim bear market periods. This shows that, the fund was able to generate steady returns for investors over a 3 year investment horizon. In fact, 3 year rolling returns of ICICI Balanced Advantage Fund was over 15% nearly 50% of the times. The strong rolling returns performance of this fund is a result of the investment strategy.

Other Performance Measures

On several risk / return parameters, ICICI Prudential Balanced Advantage Fund outperformed Balanced Fund category (please see table below).

Source: Advisorkhoj Research

Dividend Payout Track Record

ICICI Prudential Balanced Advantage Fund has an excellent dividend payout track record over the past few years. The table below shows the dividend payout history of the fund over the past 5 years. You can see that the dividend yield is quite good. Investors should know that, balanced fund dividends are tax free for investors.

Source: Advisorkhoj Historical Dividends

The monthly dividend option of the fund has been paying regular dividends since May 2013. The monthly tax free dividend yield is also quite good. To see the monthly dividend payout track record of ICICI Prudential Balanced Advantage Fund, please click on this link, Mutual Funds Historical Dividends of ICICI Prudential Balanced Advantage Fund - Monthly Dividend.

SIP Returns

The chart below shows returns of Rs 5,000 monthly SIP started in ICICI Prudential Balanced Advantage Fund, Growth Option, over the past 5 years. By investing Rs 5,000 monthly, the investor would have accumulated nearly Rs 4.4 lakhs. The SIP return over the past 5 years was nearly 15% annualized.

Source: Advisorkhoj Research

Conclusion

ICICI Prudential Balanced Advantage Fund has completed 10 years since inception. The popularity of the fund among retail investors has sky-rocketed in the last few years. While the returns of ICICI Prudential Balanced Advantage is slightly on the lower side relative to its more aggressive peers in the category, the stability of returns and outstanding tax free dividend track record makes this fund an ideal investment choice for investors with moderate risk appetite. Investors should consult with their financial advisors if this fund is suitable for their investment objectives.