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 usually make a mistake and 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.
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
2.
Scheme Life
3.
Rolling Returns
b. Time Period: 10 years
c. Rolling Period: Daily
4.
Risk Measures
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
5.
Correlation Matrix
6.
Risk-reward scatterplot
7.
Common Holdings overlap
II. 4 action items before choosing a fund
- Remember the objective: What components will help fulfill each need in the portfolio?
- Question the DD process: Is there an unbiased, thorough process for evaluating pooled vehicles, such as active mutual funds and exchange-traded funds
- 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.
- 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:
- 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.
- 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.
- 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.
- 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.
- 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 solutions portfolios that can deliver a smoother investing experience to the investor.
