Nippon India Asset Allocator FoF has handsomely outperformedall asset classes including equity since inception over 2 years ago, and hasdone this with half the volatility of the stock market.
Attribution analysis suggests that all 3 components – asset allocation,category allocation within asset classes and performance of underlying funds vsrespective benchmarks – have contributed to alpha. Underlying funds’performance has been the largest contributor to alpha so far.
The fund allocates dynamically across equity, debt and gold.In recent months, the fund has stepped up its equity allocation from mid 40s toover 60% and has reduced gold tactically from 24% to 17%. Within equity,allocation to mid and small caps has increased recently.
The fund employs an interesting array of global and domesticmacro and market indicators to help decide asset allocation.
Global demand indicator chosen is the LCN (lumbar – copper –nickel) indicator. Lumbar is the best proxy for housing in the developed world(and therefore a good proxy of growth), nickel as a key input into steel makingis a good proxy into the infrastructure focused developing world’s growth andcopper is one of the best known indicators of global growth. LCN is currentlyindicating lower than neutral territory – bias towards slowing growth.
Domestic market momentum indicators are strong – however weakLCN is restraining the model from getting too bullish. Market breadthindicators are broadly neutral – no pronounced bias towards either of the capsize segments.
Trade weighted dollar is indicating mild bearishness for thedollar – which is good news for our import sensitive country.
When INR forward spreads widen, it is a good indicator oflikely market volatility – model will suggest trimming equity allocations insuch cases. There is currently nothing alarming on this front.
Overall bias is pro-equity currently. However the fundmanager will be tracking LCN indicator closely for any further signs of globalweakness – which can result in cuts in equity allocations.