Active investment and execution
Why do investors put their hard-earned money into stock markets? To give a good return over a period of time.
There has been debate about active and passive investing for a long time. Let’s understand what active investment is all about. Active investment has three broad components
Active stock selection: differs from the benchmark index either in stock component or their weight. Fund management is about stock / sector choices given the macro environment or business cycles. Proper reading of business cycles and business cycles can significantly improve returns. Losing shares in the portfolio will be fewer and the winner will be more. Over a long time, good stock selection can be a significant source of alpha generation.
Active asset allocation: Macro environment can often be challenging. Broader business growth and earnings deteriorate and stocks fall. A smart portfolio manager can minimize the countdown by actively (and hopefully timely) moving the allocation from equities to lower interest-bearing debt or lower volatility Gold ETFs. We have such a design within mutual fund structure. The category is named Balanced Benefit Fund. Not all portfolio managers change the allocations. Many hold equity: the debt distribution is constant and defeats the purpose of the fund. Note that the timing of the stock market is difficult.
However, it pays to be careful when markets ignore the economic / business risks. A timed equity: debt distribution not only improves overall returns, but also the investor experience. Investors are gathering more comfort to allocate their investments in the find for longer when seeing lower volatility. It is often argued that fixed allocation (rather than interpreting business cycles and therefore dynamic allocation) is winning strategy.
My personal observation is that when the expected growth path (and thus return on equity) is long and strong, then there is not much need (or benefit from) dynamic allocation. However, when the return slope is weak (ie expected growth and return is lukewarm) and macro / business uncertainty is higher, a dynamic allocation scheme with a good portfolio manager may be the biggest source of more returns (minimizing countdown).
Active long-short portfolio: This is less appreciated, but comes in very handy. Take the last 5 years. NIFTY touched ~ 9000 mark in early 2015. After 5 years it is still at the same level. A significantly larger number of stocks have fallen, while few stocks have increased. Active short-circuiting equities / weak companies would have significantly boosted the long portfolio return. Such a strategy can be carried out through Cat III long-short AIFs in India.
As we move to higher levels of active investment, ie. Choosing active stocks to dynamically allocate assets and then to active long-short portfolios will make the level of care, reading and skill required more demanding, thus increasing the chances of errors. However, a well-executed active investment strategy has no substitute.
A lot of investors’ efforts are spent on monitoring the economy and markets to decide his risk and non-risk allocation. In an ideal world, this effort should be put in by the portfolio managers with the necessary tools (fund structure) to allow them to invest actively.
Disclaimer: The views expressed are personal and should not be construed as an offer to sell. Offers to sell or request offers to buy securities in the Fund are made only by means of a confidential private placement note and in accordance with applicable laws and will be subject to the completion of a subscription agreement and related documentation. Recipients of the information herein must exercise due care and caution and read the private placement notes for the Tata Absolute Return Fund & Tata Equity Plus Absolute Returns Fund (including, where appropriate, obtaining advice from tax / legal / accounting / financial / other professionals) before making any decision , acts or fails to act on the basis of the information contained herein
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