How I would analyse a hybrid/balanced fund if I was an investor?
A thread...
A thread...
There are many questions on how to understand this category. Since it is conceptually my favourite category, sharing a simple framework and some insights from our own review process at @EdelweissAMC. Applicable to balanced advantage, equity savings and hybrid aggressive/cons.
1. Understand asset allocation philosophy
How do you decide how much to allocate to equity and debt? What are the maximum and minimum equity limits?
In some the decision is fund manager driven which is harder to understand. In others it is model driven.
How do you decide how much to allocate to equity and debt? What are the maximum and minimum equity limits?
In some the decision is fund manager driven which is harder to understand. In others it is model driven.
If it is model driven, what is the model? Ask for the basis of the model - is it valuation metrics and if so which ones, forward or historical? Is it momentum metrics?
Ideally get a document of the model. See historical conditions when the model does well or not.
Ideally get a document of the model. See historical conditions when the model does well or not.
Also ask when managers deviate from the model and why? Do see if the fund is following the model. For instance if valuations are falling and the fund is a valuation based one, it should be increasing exposure. Having a model and following it are both critical.
2. Study the equity portfolio
What’s the equity philosophy? Hybrids are conservative as a category and an extremely aggressive equity portfolio philosophy adds another element of risk.
What is the market cap philosophy? You don’t want your hybrid fund hiding in midcaps.
What’s the equity philosophy? Hybrids are conservative as a category and an extremely aggressive equity portfolio philosophy adds another element of risk.
What is the market cap philosophy? You don’t want your hybrid fund hiding in midcaps.
Do check in equities what kind of concentration the manager takes. Concentration is an additional source of risk that you should be aware of.
It’s a good idea to ask an AMC - the beta of the pure equity portfolio. If it is much higher than 1, or peers, it is worth asking why.
It’s a good idea to ask an AMC - the beta of the pure equity portfolio. If it is much higher than 1, or peers, it is worth asking why.
3. Check the fixed income policy
Very important - this isn’t a place to take debt risk.
What is the limit on duration (shouldn’t be more than 2-3 years)? What is the credit policy - basic check of ratings and debt paper in hybrid funds will give comfort.
Very important - this isn’t a place to take debt risk.
What is the limit on duration (shouldn’t be more than 2-3 years)? What is the credit policy - basic check of ratings and debt paper in hybrid funds will give comfort.
It is very important when you look at hybrid funds to understand what their source of good or bad performance was. Attribution between these 3 buckets helps understand that better.
Underperformance because of a model or equities is understandable, because of debt not so much.
Underperformance because of a model or equities is understandable, because of debt not so much.
Another good idea is to compare similar hybrid schemes of one AMC to see how the AMC does. For instance ESF and BAF are similar funds with the first being more conservative. If an ESF is falling more than a BAF of one AMC, perhaps worth asking why.
Standard disclaimer: love the category and want people to understand it better and use it more. Keep asking better questions and you will get better answers.
Happy investing!
Happy investing!
