How we build DMAS – Our Multi-Asset Model Portfolios

Daulat Multi-Asset Solutions (‘DMAS’) are our fully-managed, low-cost and diversified model portfolios that invests across asset classes, geographies and styles to generate higher risk-adjusted returns.

It invests in a suite of hand-picked mutual funds and fund-of-funds that best fill each portfolio position and work well together. In this blog, we go through each of the step that is involved in constructing DMAS portfolios.

I. Fund Selection Criteria

Investors tend to focus most closely on past performance. But evaluating performance involves much more than simply looking at past returns. A well-established evaluation and selection criteria helps dig deeper into the fund and look beyond just the marketed numbers.

A. Quantitative Parameters

Sr. No.

Parameters

Criteria

Reasons

1.

AUM

a. >1,000 crores

A higher AUM helps the fund in a) achieving economies of scale and 2) cushions it from liquidity issues in the event of a correlated redemption pressure especially in credit markets

2.

Scheme Life

a. >5 years

This ensures that the active fund manager is not simply riding on a market bull cycle but generating alpha due to a skilled approach

3.

Rolling Returns

a. Rolling Returns: 5-year
b. Time Period: 10 years
c. Rolling Period: Daily

Provides a more accurate and reliable picture of a scheme’s performance by measuring the consistency of returns over a given time period

4.

Risk Measures

a. Alpha
b. Beta
c. Geometric Mean
d. Standard Deviation
e. Sharpe Ratio
f. R-squared
g. Sortino Ratio
h. Information Ratio
i. Upside/Downside capture ratio
j. Max Drawdown
k. Treynor Ratio

The past performance of the schemes needs to be evaluated in tandem with the amount of risk it has assumed relative to the benchmark/peer group to generate those returns.

5.

Correlation Matrix

a. Select schemes across different asset classes with minimum correlation

Diversification works effectively only when the assets respond differently to the same set of fundamental economic factors.

6.

Common Holdings overlap

a. Select EQ schemes with minimum over lap

Investing across multiple funds in the same category leads to significant securities overlap which do not add accretive value to the portfolio or leads to diversification. Diversification needs to be done scientifically.

7.

Risk-reward scatterplot

a. Vis-à-vis the appropriate benchmark for the given asset allocation

The performance of the fund must be compared to that of it’s relevant benchmark to gauge its risk-reward performance

Sr. No.

Parameters

Criteria

Reasons

1.

AUM

a. >1,000 crores
A higher AUM helps the fund in a) achieving economies of scale and 2) cushions it from liquidity issues in the event of a correlated redemption pressure especially in credit markets

2.

Scheme Life

a. >5 years
This ensures that the active fund manager is not simply riding on a market bull cycle but generating alpha due to a skilled approach

3.

Rolling Returns

a. Rolling Returns: 5-year
b. Time Period: 10 years
c. Rolling Period: Daily
Provides a more accurate and reliable picture of a scheme’s performance by measuring the consistency of returns over a given time period

4.

Risk Measures

a. Alpha
b. Beta
c. Geometric Mean
d. Standard Deviation
e. Sharpe Ratio
f. R-squared
g. Sortino Ratio
h. Information Ratio
i. Upside/Downside capture ratio
j. Max Drawdown
k. Treynor Ratio
The past performance of the schemes needs to be evaluated in tandem with the amount of risk it has assumed relative to the benchmark/peer group to generate those returns.

5.

Correlation Matrix

a. Select schemes across different asset classes with minimum correlation
The past performance of the schemes needs to be evaluated in tandem with the amount of risk it has assumed relative to the benchmark/peer group to generate those returns.

6.

Risk-reward scatterplot

a. Vis-à-vis the appropriate benchmark for the given asset allocation
The performance of the fund must be compared to that of it’s relevant benchmark to gauge its risk-reward performance

7.

Common Holdings overlap

a. Select EQ schemes with minimum over lap
Investing across multiple funds in the same category leads to significant securities overlap which do not add accretive value to the portfolio or leads to diversification. Diversification needs to be done scientifically.

II. 4 action items before choosing a fund

  1. Remember the objective: What components will help fulfill each need in the portfolio?
  2. Question the DD process: Is there an unbiased, thorough process for evaluating pooled vehicles, such as active mutual funds and exchange-traded funds
  3. Determine the impact on a risk-adjusted return: Is the fund additive to raising the level of risk-adjusted return either by enhancing returns or reducing risk? If the answer is no, it should not go into the portfolio.
  4. Multiple schemes in same category of funds: Avoid selecting or choosing multiple schemes in the same category of funds i.e. 3-4 schemes of Large Cap funds.

II. Putting it together – A 5-step structured and a disciplined investment process

A disciplined investment process remains critical to investment success. Studies have shown that 93.6% of portfolio performance can be attributed to asset allocation. Each asset goes through its own cycle and the investor must stay diversified to unlock the power of asset allocation by following a robust investment framework: 

  1. Investment Risk Profiling (‘IRP’): Establishing an IRP is an essential part of structuring an investor’s investment portfolio, and the IRP is an integral element of an investor’s investment policy statement. It helps in setting up the client’s i) need to take risk ii) ability to take risk and iii) behavioral loss tolerance.
  2. Strategic Asset Allocation: The strategic asset allocation is decided basis the client’s IRP. This helps in determining the equity/fixed income allocation across different risk profiles to create an effective multi-fund, multi-asset portfolio – by striking the appropriate balance between capital protection and capital appreciation.
  3. Core/Explore: Once the IRP has been established and the corresponding asset allocation decided, the screened funds are then categorized as either Core or Explore. By splitting the portfolio into two segments – core and explore – the strategy aims to combine the best of index and alpha-generating investment approaches.

    Core investments form the cornerstone of the profile and make up typically 70% of the total assets. This is usually composed of a low-risk pooled investment offering low-cost diversified exposure to a market or index. The aim is to deliver beta returns – earnings that track overall market performance. The balance of the capital is allocated to specialized explore investments for their potential to generate alpha.

  4. Asset Allocation Optimizer: Each of the selected schemes within the Core/Satellite allocation is then put through an advanced analytical optimizer based on the 10-year historical return (if available) and correlation matrix to decide the appropriate sub-asset class allocation. The allocations are optimized to achieve the highest Sharpe Ratio or risk-adjusted returns.
  5. Portfolio implementation: After the final portfolio has been constructed, the focus is on executing it in a timely and cost-efficient manner. It is usually recommended to initiate the investment with a majority allocation to fixed-income securities and then gradually bring that down over a 6-12 period to achieve the original asset allocation.

    This (a) avoids any specific market condition from having a disproportionate impact on the portfolio( b) prevents the investor from trying to time the market and (c) allows to take advantage of the power of rupee-cost averaging by buying more units when markets are falling and less units when markets are rising.

In the current volatile market, it has never been more important to build long-term, multi-asset, diversified portfolios that can deliver a smoother investing experience to the investor.

Don't wait until it's too late.

Start today and secure your future.

Building a Core-Satellite Investment Portfolio

A Core and Satellite Investment Portfolio is a systematic and disciplined portfolio-building technique that has gained ground in recent years. 

Investors like you today seek predictable and consistent results in an increasingly uncertain environment. We believe the only way to achieve that is by being guided by a disciplined investment approach.

In India, a common trend is focusing on individual, high-performing funds. However, by evaluating them in isolation and accumulating a hodgepodge of them, you expose your portfolio to unintended risks. We believe to create optimal solutions suited to your risk profile, financial profile and unique life situations — one needs to take a holistic approach.

Our multi-fund solutions are all research-driven, from macro research that drives our asset allocation to underlying fund research that informs what building blocks we use to implement our portfolios. We use the most advanced analytical tools available in the market that help us rigorously back-test your portfolios on a wide variety of scenarios.

Core

Let’s start with Core investments. The ‘core’ of each asset class is the exposure designed to track the overall performance of the index with very low levels of portfolio turnover. It consists of low-cost, diversified, passive products. For e.g. An Nifty50/S&P BSE Sensex index fund/ETF can form the ‘core’ portion of your equity allocation while a short term debt fund can form the ‘core’ of your fixed-income allocation.

Satellites

‘Satellite’ positions consist of actively managed funds that seek to outperform the broader market/index. These positions provide the overall portfolio alpha by increasing the risk-adjusted returns. For e.g. A small/flexi-cap fund can ‘satellite’ your ‘core’ positions by diversifying exposure and increasing the opportunity to seek enhanced performance.

Thus, a Core-satellite portfolio strategy has the ability to give a boost to your investment returns without hampering or changing the direction of the goals you were aiming to achieve.

In the next post, we shall talk more about our portfolio-construction technique to get an in-depth understanding of our methodology.

Don't wait until it's too late.

Start today and secure your future.

Introducing Daulat — digital wealth-management platform for every Indian

Today, we’re introducing Daulat, a new-age, tech-enabled wealth management platform helping Indians invest better. 

The inspiration to begin this can be traced back to what I have already been doing informally for my friends and family over the last 3-4 years i.e. helping them invest in a disciplined manner.

How it all started

Like most Indians, I was pushed by my parents to invest in ‘safe’ investment products like FD, PPF etc. But also like most Indians, I grew up amongst the constant household chatter of ‘Bazaar girega ab’ (The stock market will fall now) and ‘IPO overvalued lag raha hain? ’ (This IPO seems overvalued). 

Yet, I intuitively knew, that is not a good starting point if I wanted to build wealth over a long period. 

To get started and keep things simple, I started with researching mutual funds/ETFS — because it was less time-consuming than picking individual stocks. Like everyone else, I did everything — asked my peers, went through a bazillion investment websites/forums, signed up for premium memberships etc. 

But, something was amiss

Everyone and every website had its own recommendation. There were just too many of them to make any reasonable sense out of. E.g. there are over 2,000 mutual fund schemes, across 48 fund categories, offered by 45 Asset Management Companies.

And that old-school broker and distributor of my father ? Well, he was more focused on ‘selling’ me all these investment products than helping me understand what they meant in the first place. 

Introducing Daulat

I never felt confident enough to invest — because I did not know what combination of them was a right fit for me and whether if I could trust someone/something who was not completely invested in my success.

There must be a better way of doing it

Stock market, please meet COVID

March 2020 was a pivotal and defining moment. All my friends and family who had investment and accumulated some corpus in the markets were terrified to see their portfolio value drop by -20-30% essentially overnight. I started getting frantic calls for advice. 

But my experience working at some of the world’s biggest and best investment firms — which had shaped my investment journey until then — allowed me to approach this momemt with calm and comppsure. Events such as these often shine a light on the importance of following a disciplined investing approach. 

Hindsight is 20/20 (pun intended 🙂 ), but people who displayed the psychological strength and stayed invested through that period then experienced one of the best-performing bull markets the world had ever seen. 

Putting it all together

Come, join us

Don't wait until it's too late.

Start today and secure your future.