UTI Balanced Advantage Fund

UTI Balanced Advantage Fund (UTI BAF) is a model guided asset allocation strategy that dynamically manages allocation between equity and fixed income. This approach brings in discipline and overcomes emotional biases associated with market volatility. The fund endeavors to deliver better risk-adjusted returns across market cycles to help investors achieve their financial goals over the medium to long-term.

Investors tend to invest largely based on the sentiments or biases. They generally invest more when the market levels are in rising trends and are expensive as they are driven by both greed and FOMO (fear of missing out) and invest less when the market valuations are going cheap in the downfall trends, as they have the fear of losing out. These emotions of greed and fear lead to investors earning less than what their actual investments would have earned. Carl Richards coined this gap in investment and investors’ return as “The Behavior Gap” (Source: The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money). A study done by Morningstar India (Mind the Gap - Nov 2022) suggests that the investors have potentially lost 2.8% for 10 years investment because of the behavior gap. Which means an investment of Rs 1 crore could have been Rs 3.20 crore at 12.33% (CAGR), the investors earned only 9.53% (CAGR) and the investment value was Rs 2.49 crore (a potential gap of Rs 71 lacs) over the 10-year period. 

A disciplined model driven approach based on valuations eliminates the investor biases and help investors manage their assets with dynamic rebalancing of the portfolio as per the market situations.

UTI Balanced Advantage Fund will be managing assets between equity (net long: 30%-90%) and fixed income (10-35%) driven by an in-house proprietary asset allocation model guided by fundamental and valuation-based factors that determines the net equity allocation for the fund. The fund will take exposure to arbitrage (long stock, short futures) to manage gross equity exposures at 65% of total portfolio. The balance portfolio will be invested in the fixed income securities.

The UTI BAF Model assesses four factors that have been proven for having correlation with the market forward returns to determine the net equity allocation. These factors are:

• Valuation based factors: Have negative correlation with market forward returns
  1. 1Y Forward Price to Earnings (PE) Ratio – Higher the P/E ratios, lower the equity allocation
  2. TTM* Price to Book (PB) Ratio – Higher the P/B ratios, lower the equity allocation
• Yield based factors: Have positive correlation with market forward returns
  1. TTM* Dividend Yield – Higher the dividend yield, higher the equity allocation
  2. Yield Gap – Yield gap is difference of Equity Yield (1/1 year Forward Nifty 50 P/E Ratio) and Bond Yield (10-year GSEC Yield). Higher the yield gap relative to history, higher the equity allocation

*TTM – Trailing 12 months

While the factor-based model will determine the asset allocation between the two asset classes, the fund managers will actively manage the equity & fixed income portions of the portfolio.

The fund manager would employ a blend style of investment (growth & value) for construction of the equity portion of the portfolio. The fund manager will have the flexibility to invest in stocks which have a long runway for growth and participate in cyclical opportunities including turnaround companies. We have consciously chosen a blended approach as we feel it is better suited to the objective of this strategy. 
The equity portfolio will have a large cap bias (80% or higher) to be able to efficiently manage change in asset allocation during the rebalancing activity.

The focus on the fixed income portion will be on construction of a ‘Quality’ and ‘Liquid’ portfolio. The fund manager will be predominantly investing in Sovereign/AAA & equivalent rated papers across the shorter to moderate end of the yield curve. The risk management for this strategy ensures that the strategy does not pick lower rated credits.