Canara Robeco MF has launched its Balanced Advantage Fund with a 3 factor asset allocation model which includes trailing P/B, forward P/E and equity risk premium (yield gap).
With the benefit of watching so many other models in operation in the industry and after rigorous testing of parameters over a 1year period, Shridatta and his team narrowed down these 3 factors which he says delivers the optimal balance between upside participation and downside protection.
He is clear that BAFs have to balance out both these variables and that including too many market technical factors can run the risk of focusing too much on upside participation, at the cost of exposing the portfolio too much to downside drawdowns.
Forward P/E, measured on a rolling 10 year basis, addresses both the issues of legacy models driven by trailing P/E with static bands. Forward P/E accounts for earnings momentum – which is the key driver of market momentum; and rolling 10 year periods ensures that P/E bands are contemporary.
While we are mid-cycle in an economic expansion phase, itis now time to take some profits from relatively expensive domestic cyclicals(auto, some industrials) and rotate into zones of relative value within the domestic space (select consumer discretionaries) and selectively in sectors exposed to global trends including IT and pharma.
After a robust earnings growth of 25%+ in FY24, we are looking at a more subdued 13-16% earnings growth in FY25. Expect therefore a little more subdued market behaviour as well.
He believes banks may struggle in the near term as NIMs have topped out. However, he does not rule out a rally in the second half of this fiscal year, as markets start discounting FY26 earnings numbers.