Asset allocation funds are useful counters for traditional hybrids
THE IDEA that equity investors can time the markets — buy when they are down, and sell when they are up — is frequently pointed out as the greatest fallacy about the stock markets. And yet it isn’t something that ever loses its attraction. The gains that would come to an investor who could actually do something like this appear to be so vast that there’s no shortage of those who lose their shirts trying to do so. The fantasy of perfect timing is best played out with a chart of a market index, “If only I could buy at every trough and sell at every peak.” But it doesn’t happen, at least not in any useful or sustainable way.
However, there is an interesting type, yet little known type of mutual fund, that can achieve a useful approximation of this timing in a way that is accessible to the investor without too much trouble. This type of fund is called a hybrid asset allocation fund. On Value Research Online, you’ll find that this small sub-type of hybrid funds (or balanced) funds that allocate assets between equity and fixed-income investments. Generally, hybrid funds operate within a fixed range of equity and debt proportions. However, asset allocation funds vary this according to whether the equity markets are underpriced or overpriced.
Here’s the interesting part. In some of these funds, the allocation is human judgement. However, in others (such as FT India Dynamic, DSP Blackrock Dynamic Asset Allocation and the newly-launched BoI AXA Asset Rebalancer), there is automated allocation. In these funds, signals including PE Ratio and the YieldGap ratio are used to decide which side to tilt — towards equity and debt. It’s a far cry from the dream of perfect foreknowledge, but in the real world, this is what we get. The result isn’t something that can compete with the best equity funds. But as far as competing with other hybrid funds over long periods of time, automated asset allocators can hold their own.