Equities – An Asset Allocation Perspective

CIFA 2015. 13th February, 2015

Next 15-20 minutes…

How do Indian investors look at Equities

Holistic approach to Equity Allocation

Investing sans Emotions

How do Indian investors look at Equities

Current Investment Pattern

• Underinvested in Equities

• Equities investments are mostly tactical as opposed to

strategic

• Greater emphasis on products rather than goal

orientation

• Gaps in investor risk profiling

Holistic approach to Equity Allocation

Equity holdings vary significantly across the globe

• Social, political, and tax environments

• U.S. institutional investors average 45% allocation in

equities

• In the United Kingdom, equities make up 72% of

assets

• In Germany, equities are 11%

• In Japan, equities are 24% of assets

• India ~5%

Source: For India; Karvy India Wealth Report 2014

Total Asset Perspective to Equity Allocation

Illustration with Example

Current Assets 10 L

Equity Investment 5 L

Debt:Equity Mix 50:50

Total Asset Perspective to Equity Allocation

Illustration with Example

Total Assets 100 L

Equity Investment 5 L

Debt:Equity Mix 95:5

Source: Based on “Human Capital” concept of Robeco, one of the oldest

provider of Pension Solutions in Europe

Investing sans Emotions

Investors dilemma

• Investors tend to follow the trend and chase the

most “hot” asset class

• Asset classes follow different cycles over different

time periods

• Two important decisions:

• Which is the right asset class ?

• Is this the right time ?

Returns of Retail Investors – US experience

Source: Dalbar, for the 20-year period ending 12/31/12.

Sensex: 35 years history

Source: Motilal Oswal

2935

26

-3

16

44

62

-11-22

79

9

50

-47

66

-14

3

0

16

-4

34

-28

-4-12

83

16

74

16 20

-38

81

11

-10

819 23

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015 Y

TD

267

Sensex Annual Return CAGR since

inception: 16.7%

It is Equity and Debt and not Equity or Debt

• Equities offer best returns over the long term

• But comes with a high degree of volatility

• Debt gives steady returns

• But barely beats inflation

Solutions……..Asset Allocation

Importance of Asset Allocation

• Asset classes can be volatile

• Asset allocation helps in reducing volatility and generate

superior risk adjusted returns

• Helps investors keep a long-term perspective and avoid

knee-jerk reactions (removing emotion out of investments)

• Average Stock and Bond investors have underperformed in

their quest of chasing superior returns from time to time

Life-cycle of various asset classes

Source: Bloomberg. Rebased to 100

Determinants of Portfolio Performance

Asset

Allocation

91.5%

Other

2.1%

Market

Timing

1.8%

Security

Selection

4.6%

Source: “Determinants of Portfolio Performance II, An Update” by Gary Brinston, Brian D. Singer and Gilbert L.

Beebower, Financial Analysts Journal May-June 1991

For illustrative purposes only. Not indicative of any specific investment.

Asset Allocation and Investment Policy

• An investment strategy is based on four decisions

1. What asset classes to consider for investment

2. What normal or policy weights to assign to each eligible

class

3. The allowable allocation ranges based on policy

weights

4. What specific securities to purchase for the portfolio

• 85% to 95% of the overall investment return is due to

the first two decisions, not the selection of individual

investments

Factors To Consider

• Investment objective (e.g., retirement)

• Time horizon for a goal (e.g., life expectancy for retirement)

• Amount of money you have to invest

• Your risk tolerance and experience

• Your age and net worth

Asset Allocation Model

Market Inputs

P/E Level

Bond Yield

Individual Inputs

Investment Horizon

Risk Tolerance

Economic Outlook

OPTIMIZER

Investor Asset Mix

Realized Returns

Model Output

17.5%

66.1%

142.6%

16.4%

63.2%

137.2%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

140.0%

160.0%

1 Year 3 Years 5 Years

Absolute Returns

Asset Allocation Model Equity

85.9%

155.6%

196.7%

54.9%

94.7%

117.2%

0%

50%

100%

150%

200%

250%

1 Year 3 Years 5 Years

Risk Adjusted Returns

Asset Allocation Model Equity

Source: Internal Workings

Period Equity S.D.Asset Allocation

Model S.D.%age Drop in

S.D.1 Year 29.92% 20.33% -32%3 Year 66.74% 42.46% -36%5 Year 117.07% 72.51% -38%

Thank You

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