The Mutual Fund Show: How To Build An All-Weather Portfolio

Swarup Mohanty: When any one of us launches funds or starts building a track record in the fund, our job is to give an option to the investor. On Rohin’s side, it is deciding whether a particular fund needs to fit into a client's portfolio based on the risk profile or the goal. Our job is to give a wide array of products.

When this whole thing of global investing started in India, it started a long time ago, but it's really gotten serious in the last three to four years. Our first job was to bring two or three exciting products that were both on the core side of the portfolio as well as on the satellite side of the portfolio.

As you rightly said, we have the S&P Top 50, which is like a solid core portfolio, and we have at the extreme end the FAANG… What has unfolded in the world is not something that happens often. It's a very special situation. The U.S. data is probably a one-time data in the last 40–50 years... The impact has been across not just in Nasdaq stocks but across the market.

When you look at our long-term investing, and I would believe anybody who invests in equity if he is a long-term investor, you have to know for a fact that these stocks comprise nearly 80% of the global market cap of the U.S. as a market.

India, with all its strength in the global economy, now accounts for three percent of the world's total market cap. When you look at strong, time-tested products, yes, the S&P Top 50 or the S&P 500 is a core product that needs to be held over a period of time. The question is not whether you want FAANG or not.

The question is how much you allocate. If one is overallocated, then one would be concerned, and rightfully so, and will probably correct that in the future. It's very niche... but it's about the balance of your portfolio. If, when you look at investing, you are saying that the U.S. is not a good place to invest, then one needs to revisit that story.

If you look at the last 11 years, seven out of the last 11 years, the U.S. markets have been top performers. And look at the sizes of these companies; it's just incredible that you get to own them at this moment. So yes, on the portfolio, they definitely make a case, and at this moment, since the data is so bad and the market is bleeding, you look at why Warren Buffett says, "You buy when it bleeds." These are probably great accumulation times for those products, again with the caveat that one should stick to the right allocation. Allocation makes money, overallocation kills money. So that's the bottom rule that one has to follow, while allocating.

Swarup Mohanty: Niraj, I am telling you this time, or anytime, that we have fully invested money, and I believe in the philosophy that the best time to invest is when you have the money. When I have the money, I will buy, and there is no point in timing the market.

Swarup Mohanty: I have never broken down my lump sum to form staggered investments. The SIP, according to me, is a cash flow solution. The moment you change it to a staggered investment, you are invariably timing the market. So, for me, an SIP is part of my salary since I am a salaried person. Some part of it is available every month, and that goes in. My lump sum investment goes in the day I have the money, and that will never change. In the U.S., that's what I was doing in the S&P top 50 until it got closed two days ago: I bought in bulk, and I am very happy with my allocation there. It's a core portfolio; 20–25% of the global market cap is these 50 stocks, and I don't get to own these stocks at these prices often.

Rohin Pagdiwala: So, I would stick to the asset allocation strategy that is built around the portfolios, the individually invested portfolios. So, for example, if it were my portfolio, I would start to increase it given that the prices have corrected so much and that the valuation is so much better now.

To add to the point that Swarup made, you must have some allocation to U.S. equity over time. I will start to increase my allocation gradually. Having said that, I wouldn't take it to the point where it is excessive. In my mind, if you want and there are specific reasons for having exposure to U.S. equities or any other international market, you are primarily doing it for diversification. You are potentially doing it in case you might need dollars in the future. So, you want to hedge your currency risk. So, depending on the purpose of the investment, I would take a sort of tactical allocation; I would increase the tactical allocation at this point. About five to 10% is what I would go at max, I wouldn't go over that.

To add to what Swarup mentioned on the SIP versus lump sum sizer question and preempting that question from your end, I will do a mix of both because I believe, especially when I am talking to clients, I will definitely go the SIP route. But if there was a lump sum that you had available, given the valuation, now's an opportunity to try to take advantage of that. So, I will make a mix of both; if I have a bit of a lump sum, I will go in now, but I will continue to do SIPs after that because you still don't know how volatile markets may remain. You don't know how the war might progress or when it might end. Therefore, you don't know about other factors.

Swarup Mohanty: We have four products, of which two are direct ETFs, the S&P Top 50 and FAANG, which have closed because we have completed the limits. I think in the last two weeks in particular, there was a good buying opportunity that people took, so we sort of hit the ceiling. We have two other very futuristic products... the future in the form of EVs and artificial intelligence... This is the beginning of EV globally, and an AI will be a pretty diversified sort of investment; there is no business that will function tomorrow without AI blended into it. So, two very large, long-term (10–20 year) products that we have are still open.

Rohin Pagdiwala: I would be careful saying one fund versus the other because you don't know how investors might end up picking. But one theme that I particularly like is from Invesco, where there's a consumer trends fund of funds. It's basically an investment in digital lifestyle across the globe; the primary allocation is to the U.S. market, but it does take exposure to other markets as well. We all have it in China. But what I like particularly is the theme that they follow, which is digital lifestyle and the potential for digital lifestyle adoption, like gaming, OTT content providers, etc. So, a lot of interesting stories are there. Having said that, the fund has been volatile, to say the least, in the recent past, especially because it's tech-heavy. So given the meltdown that we have seen in the U.S. market, this fund has also underperformed. Nevertheless, I think on a long-term basis, the story is still pretty interesting. The theme is pretty interesting.

Swarup Mohanty: Niraj, can I add just one small point here? When we invest as Indians in the INR form, we have to also understand that we are investing in a dollar product, and you cannot take away the fact that gains which happened because of the dollar strengthening. When you compare the fall of that market with the fall that we have actually gained... This gain has also come to the investor. So, if you are investing against a stronger currency, those gains should also be added to the portfolio.

Swarup Mohanty: I think building an all-weather portfolio has got to do more with asset allocation than markets. I mean, you have to balance your product in such a way that... you catch the length and breadth of the market and isolate yourself from the volatility of the market, because that is inbuilt in stock markets. The second is aligning it with your risk profile, because sometimes one person can take a 30% loss and be okay with it, but another person may not be okay with a 10% fall. So, understanding your risk profile is a journey. I mean, you become better by the day and by the experience you gain in the market. So, to be right on day one on the risk profile is impossible, but you keep on adjusting that. But when you build any portfolio, I think it's very important to keep the core part of the portfolio intact because the core is the solid part of the portfolio, and for the kicker of returns, you take a satellite position. Now the trick—or the art—of it is how you balance the two. Over a period of time, any investor graduates to that journey. I am using myself as an example because what I was in 2008–09 and what I am in 2022 are two different investors, made by the same person. So, it's a progression that happens, but I do agree that anytime it is good to form a very good all-weather portfolio, but how you differentiate amongst different assets and asset classes is key to forming an all-weather portfolio.

Swarup Mohanty: Yes, that's the right question, and over the years, you know, I did not know about core and satellite portfolios. That also developed in the last 10 years or so. But when you look at my own allocation, my broad need for life is now my retirement, and my son is getting ready for his higher education. So that was the large chunk that was left in my portfolio for other users. But now I am in retirement mode, which is nine to ten years from here. From that perspective, I am a very paranoid retirement-kitty guy. I mean, I am a little aggressive on that point. I would rather be on the right side than on the left. When I have that big goal in mind, then I am a little aggressive on the equity side. So broadly, my equity is 70%, 25% is debt, and 5% is digital gold, which I have started owning now as a hedge because of the volatility in the market. Recently, I have started believing that when you look at equity, I don't differentiate between India, Globe, or whatever. I will make it very stock-specific, and my S&P Top 50 will probably go up to 15% of my overall holdings, because those are the 50 largest companies in the world, and I would rather hold. What used to be the Nifty 50 is now divided between the S&P Top 50 and the Nifty 50. So I don't invest in two large caps or two flexi caps. I look at different management styles and try to blend in with different managers when I form the rest of the portfolio. How to differentiate styles is very easy to do. I am not a small-cap investor because my portfolio return requirement is 10 to 11%. Not that I am against small caps, but when my overall portfolio requirement is 10 to 11%, I would rather be sure of getting 10 to 11% than take any downside from that perspective. I have only nine years of cash flows in my hands from a working income perspective. So, it's mostly large and mid. More importantly, if you look at the six or seven funds, including non-Mirae funds, that I would be invested in, 85% of my money is in Mirae. Thanks to the 20% clause that we have, a lot of asset allocation is out of our hands. So anyway, it goes into our own funds, and I like it because the performance has been fairly decent. But out of the six funds that I have that are not Mirae, they have very differentiated fund managers, which gives me a different flavour of different styles.

Rohin Pagdiwala: So, to a large extent, I would have a mix of three or four asset classes. I would even add it to what Swarup mentioned, which is equity, fixed income, and gold. I would also add a little bit of commodities to it. But I would caution viewers here not to do this on their own and to use some funds to do this. There are a lot of funds available that provide multiple asset allocations and have been doing it reasonably well over time... A lot of these asset classes are not exactly correlated. So, they work in the opposite direction at times, which is why it's better for investors when markets are very volatile or very negative. Having said that, I would go with what Swarup said: 60% equity, maybe 20% fixed income, and 10% in gold and commodities. but I would let a fund manager manage this actively over a period of time rather than the investor or customer having to rebalance the portfolio from time to time.

Rohin Pagdiwala: I would do it from time to time. I would, of course, look at it with the investor from time to time. But yes, when I am recommending, if I am building an all-weather portfolio, which is by design conservative, in an ideal world, if equity markets were not as volatile, you would have a lot more allocation of equity. But to build a conservative portfolio, I would choose a basket of multi-asset funds, maybe even balanced advantage aggressive hybrid funds, and build an overall asset allocation that meets your requirements. A large chunk of that will be in multi-asset funds, specifically so that they can be rebalanced from time to time when markets turn choppy. 

Rohin Pagdiwala: I haven't seen the data. I think it's very recent data that's come out, but I would imagine two potential behavioural attributes. One is rebalancing away from large caps to mid- and small-cap funds because the mid- and small-cap funds are potentially in a better position right now. You might see outperformance there. The other could be the shift from actively managed flexi-cap and large-cap funds, which have not been able to beat indices, to actually actively managing mid- and small-cap funds, where there might be a lot of outperformances still available from active management in the mutual fund industry. So, I would imagine these are two reasons why there's a shift currently happening, but tactically, it might be a better time for mid- and small-caps that may be the bigger driver of the movement. 

Swarup Mohanty: Yes, we have seen that data too, and the data is right, and data is always right. But from what Rohin says, which is absolutely bang on... you have to also understand the basic thing when you look at the industry portfolios that have come in and look at the industry being say 25–26 years old prior to last year. They had some portfolios worth Rs 2.3 crore to Rs 2.25 crore. In the last year, we have added more than a crore of portfolios, and that is where the twist is. The twist is the fact that the India demography is playing out. The investors who are coming in are far younger than the investors of the past. By virtue of my going through this experience with FAANG, let me tell you that the risk profile of investors has completely changed. Nobody has come and asked me why FAANG has fallen so much. The only question is when it will open so that we can buy. That speaks of the changing risk profile of investors, and when you combine the two, this shift to mid- and small-cap is natural, and it just shows that we are beginning to see a penetration of mutual funds in this country, which is something I thought would not happen at all... Whether it's a little too late from what Rohin alluded to in the benchmark versus alpha discussion, time will tell... the simple point I am making is that the risk profile is, you know, differentiating and people are embracing the volatility of the long-term nature or have understood investing in mid- and small-cap funds is far better than what they did four or five years ago.