SBI Dynamic asset allocation fund

An open ended dynamic asset allocation scheme with the primary objective of building wealth and generating return by investing in equities and fixed income securities.

Summary

Type	An open ended dynamic asset allocation Scheme.	Benchmark Index	50% of CRISIL Composite CP Index + 50% of CRISIL Composite CD Index
Min. investment: Additional purchase:	Rs 5,000 and in multiples of Re 1 thereafter Rs 1000 and in multiples of Re 1 thereafter	Plans:	Direct; and   Regular
Face Value	Rs 10 per unit	Expense Ratio:	Upto 2.50%*
Entry Load	Nil	Exit Load:	For exit within 1 year from the date of allotment – 2 % For exit after 1 year but within 2 years from the date of allotment – 1% For exit after 2 years from the date of allotment – Nil.
Issue Opens	March 10, 2015	Issue Closes:	March 24, 2015

*The Direct Plan under the Scheme shall have a lower expense ratio as compared to the Regular Plan, excluding the distribution expenses, commission, etc. related to distributors. The Direct Plan shall also have separate NAV.  

Investment Objective*

The objective of the fund will be to provide investors with an opportunity to invest in a portfolio of a mix of equity and equity related securities and fixed income instruments. The allocation between fixed income and equity instruments will be managed dynamically so as to provide investors with long term capital appreciation.

*Source: Scheme Information Document

 

Is this fund for you?

SBI dynamic asset allocation fund from the stable of State Bank of India Mutual Fund is a balanced fund that invests in debt and equity. The fund manager will employ a combination of technical and fundamental analysis to allocate capital to equity and debt securities. The fund manager will rely on various momentum and price indicators to support his investment decisions. Investments in equity or debt will be based on opportunities prevailing in the market and based on the current investment scenario. There is no bar on the investment limits in equity or debt securities and the fund manager could invest 100% of all the fund’s assets on either equity or debt.

The fund would be ideally suited for moderate risk seeking investors to risk-averse investors as the ability to allocate capital along asset classes based on market conditions reduces exposure to market risk and enables diversification along asset classes. However for those seeking returns over a longer term horizon should opt for a pure equity fund adopting a value or growth style of investing which would generate better returns over a longer duration.

 

Portfolio Strategy

SBI Dynamic Asset Allocation Fund endeavors to meet the objective of this fund mainly from asset allocation between asset classes. This approach will help reduce the risk of tracking the individual asset classes. Based on historical observation, these asset classes exhibit very different risk – return profile and a low correlation to each other. Both Debt and Equity have a tendency to outperform each other on a relative risk adjusted basis under different market conditions. The fund strategy is based on the persistence of such outperformance over longer periods. The Scheme will allocate higher weight to the asset class that is relatively favorable under the prevailing market and economic conditions. The fund manager will aim for a superior risk adjusted returns over long time periods. The entire approach is rule based and involves a list of checklists and filters to generate buy and sell signals. The key feature of this approach is its design to buy into weakness and to sell into strength.

The optimal allocation between Equity, Debt and Cash will be based on three principles:

1. Momentum: The model assess the relative strength of momentum for each asset class by examining whether current prices are above or below historical moving average prices for short and medium term periods. By using a combination of moving averages for different terms, we expect a higher stability and confidence in the momentum indicator. The asset class that shows a higher ratio between current price and the moving average price will get a higher weighting.

2. Rate of change: The model uses the rate of change in the momentum of the underlying assets in addition to the relative strength of the momentum to mitigate the risk of frequent changes in the signals. For an asset class to be considered strongly trending higher not only does the current price need to be above the moving averages but also the rate of change for the moving averages also need to be positive.

3. Exhaustion of momentum: A system based on momentum indicators attempt to identify a trend that is likely to persist and remain strong for a long period. However, even with very strong well-defined trends, there is likely to be a point at which the trend gets exhausted and there will be a reversal in price. The model incorporates the third and essential component of "momentum-exhaustion" which attempts to identify the price and time points at which the probability of a short-term reversal in price trend is quite high. The strategy involves tracking price behavior and identifying price relationships that typically appear prior to and coincident with market turning points.

This framework requires the fund manager to monitor the level, rate of change and pattern of changes in the momentum for these asset classes on a regular basis. Under normal conditions, the fund manager would take the decision to reallocate the funds based on the relative strength of momentum and its rate of change for each asset class. However given the indications of momentum exhaustion reallocation will be based on the contrary stance to the existing momentum signal. In this framework, Fund Manager will use the "momentum-exhaustion" strategy solely on the equity asset class. When either a buy or sell signal is triggered using this strategy, the weight obtained for equity using the Momentum and Rate of change framework will be over-ruled. In other words, under a "Buy" signal, the portfolio will entirely shift to the equity asset class while under the "Sell" signal, the equity weight in the portfolio will be reduced to zero. This will last as long as the buy or sell signal is active. The "momentum-exhaustion" signals will eventually get deactivated either upon realizing a pre-calculated profit target or upon reaching a stoploss level. Buy and sell signals using the "momentum-exhaustion" strategy are triggered relatively infrequently. The frequency of reallocation and portfolio turnover will be maintained under control by allowing small deviation from the target weights suggested by the above strategy. The asset classes will retain market adjusted weights as long as the deviation from targeted weight is below an absolute percentage threshold. The allocation strategy of SBI Dynamic Asset Allocation Fund, under certain volatile market conditions, may signal frequent rebalancing of the portfolio in a short period of time.

The Scheme will use the derivatives for portfolio rebalancing. Use of derivatives will provide us the ability to follow these frequent signals and efficiently manage the fund. Derivatives on major equity indices are more liquid and less expensive to transact in comparison to selling or buying each individual securities in the portfolio. Derivatives will provide the ability to make larger changes in the allocation without increasing the risk of illiquidity. The exposure to derivatives will be gradually reduced as the market retains a stable trend.

The funds collected under the scheme shall generally be invested consistent with the objective of the scheme in the following manner:
 

Instruments	Allocation Range (%)		Risk Profile High/Medium/Low
	Minimum	Maximum
Equity and Equity related instruments including foreign securities#	0	100	High
Debt and Money Market Instrument*	0	100	Low to medium

Notes: The Scheme shall invest in derivatives within the limits, as prescribed by SEBI from time to time
* Exposure to securitized debt may be to the extent of 20% of the net assets.
Exposure in derivatives will not exceed 50% of the net asset of the Scheme. The cumulative gross exposure through Equity & Equity related instruments, Debt & Money Market Securities including derivatives positions will not exceed 100% of the net asset of the Scheme.
The Scheme shall not invest in repo in corporate debt.
The Scheme may engage in securities lending and short selling in accordance with SEBI (MF) Regulations.

(Source: Scheme Information Document)  

SDBF will benchmark its performance to the 50% Crisil 1 year CD Index + 50% BSE S&P Sensex, which is a broad-based index and since its composition broadly represents the scheme’s investment universe.

 

Fund Manager Profile

Mr. Dinesh has over 11 years of experience in the industry primarily as research analyst and is the Head of research at SBI funds Management Private Limited since 2012. From Aug 2004 – Dec 2011 he was a research analyst at Fidelity Investments, USA. He also holds a B.Tech (IIT-B), M. S. (MIT, USA), CFA Charter holder.

 

Fund Outlook

The fund could be slated to perform well in the near term given the favourable market conditions, the RBI has just started easing interest rates and corporate earnings have started to pick up. However stocks are trading at high valuations right now and the future outlook of the equity markets are uncertain as the market has already factored in all the positives. A rise in international crude prices, inflation and the Federal Reserve raising interest rates could impact the markets negatively.

Given the funds slated investment strategy, it appears that the basis of stock selection would lean against price action and will give less importance to the fundamentals of the security. This method of securities selection would be ideal for short term market fluctuations and could be risky in certain conditions.

 

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