HDFC Balanced Advantage Vs ICICI Pru Balanced Advantage FundIn bull markets, the lure of quick wealth is difficult to resist. In bear markets, investors panic and sell equity at rock bottom prices. Most people do this, and as a result, fail to grow their wealth. The smart investors do the opposite – they reduce equity exposure when market valuations are expensive and increase equity exposure when market valuations are cheap. That’s all fine, but how to do this? The answer lies in dynamic asset allocation funds. Dynamic asset allocation between asset classes is a smart approach that helps reduce the risk of tracking individual asset classes. The fund managers use their skill to essentially time the market and simultaneously generate returns out of market cycles.

For any investor wanting to buy a dynamic asset allocation fund, there are two clear choices – the ICICI Prudential Balanced Advantage Fund and the HDFC Balanced Advantage Fund. The HDFC fund is the largest hybrid scheme in India with over Rs 37,000 crore of investor assets. For ICICI Prudential, its balanced advantage is a prized property and also its largest scheme with over Rs 28,000 crore of money riding on it. As you can understand, the stakes are very high. As a part of our new series, we will analytically compare two funds and help investors make an informed decision. Do read the RupeeIQ take at the end.

HDFC Balanced Advantage Fund

HDFC Balanced Advantage Fund is the new avatar of a merger of erstwhile HDFC Growth and HDFC Prudence. HDFC Prudence Fund is a fund that has seen it all. It has sailed through events like the Asian crisis of the late 1990s, the tech bubble in 2000, several elections, Lehman crisis, scams like 2G and coal, demonetisation, and recent global events like the China slowdown, the Greece crisis, the US rate hike, Turkish Lira and so on and yet has been successful in wealth creation.

HDFC Balanced Advantage Fund is an amalgamation, which was necessitated after the SEBI categorisation exercise. Historically HDFC Prudence was managed as a balanced fund with about 75% of allocation maintained in equities. As a balanced advantage fund, the scheme’s current asset allocation is about 82% in equity and the rest is credit exposure.

Prashant Jain is the fund manager for HDFC Balanced Advantage Fund. The fund manager has never changed since the inception of erstwhile HDFC Prudence Fund in 1994 (launched as Centurion Prudence Fund in January 1994, it was renamed as Zurich India Prudence and then finally HDFC Prudence Fund). Jain has been managing such a strategy for more than 24 years, the longest for a fund by a fund
manager in India.

ICICI Prudential Balanced Advantage Fund

The scheme was launched in December 2006. The fund has been generating risk-controlled equity-linked returns. The fund always keeps minimum 65% overall equity exposure to get an equity-fund like taxation treatment. It has attributed its success to the ‘buy low, sell high’ tactical asset allocation approach. It uses parameters, including dynamic Price/Book Value (P/BV) model. The fund believes that historically P/BV has been the most prudent indicator to judge market cycles based on valuation.

It manages net equity allocation between 30% to 80%. Balance 0 – 35% is invested in debt instruments to generate stable returns. Derivative exposure is used to hedge/rebalance the equity portion and maintain net equity allocation as suggested by the model. The derivative exposure also helps the fund maintain equity status and benefit from equity taxation.

ICICI Prudential Balanced Advantage Fund has a large fund management team. The equity portion is overseen by CIO Sankaran Naren (managing this fund since Jul, 2017 & overall 26 years of experience), Rajat Chandak (managing this fund since Sep, 2015 & overall 8 years of experience), Ihab Dalwai (managing this fund since Jan, 2018 & overall 5 years of experience) and Dharmesh Kakkad (managing this fund since Sep, 2018 & overall 8 years of experience). The debt portion is managed by Manish Banthia (managing this fund since Nov, 2009 & overall 13 years of experience). Do note the fund was earlier managed by Manish Gunwani (since Jan 2012), but he quit and joined Reliance MF last year.

Investment strategies

The HDFC Balanced Advantage Fund’s equity strategy is four-pronged. 1. Clear long-term focus. 2. Multi cap strategy, flexibility to invest in small/mid/large cap stocks. 3. Focus on good quality companies. 4. Effective diversification of portfolio. Its debt strategy hinges on portfolio duration that is actively managed based on outlook for interest rates with a 2-3 year view. The scheme has strong preference for good credit quality instruments.

ICICI Prudential Balanced Advantage Fund operates like a 3-in-1 fund. In an undervalued market, the scheme can increase equity allocation up to 80% and thus inherits the characteristics of an equity fund. In a fair value market, the fund maintains balanced equity and debt exposure. In an overvalued market, equity exposure can be reduced to 30%, thus behaving like a conservative hybrid scheme. But, it maintains equity fund status even when equity level goes below 65% by using derivatives position. In terms of equity strategy, the ICICI Prudential Balanced Advantage Fund uses a blend of Large and Midcap stocks.

Comparison on returns, risk measures

If you have come so far, you must be really interested in knowing which of these funds are better. A lot of investors try to decide better performance by only looking at returns. Though mutual funds, at the end of the day, are all about investment returns, we believe it is important to dig deeper.

1. Against benchmark – Lump sum returns can vary depending on the date of entry and exit. Still, a look at 1, 3, and 5 year performance does give a rough idea. But comparing the fund returns with respective benchmark is a better way to analyse. In the following table, you can see how HDFC Balanced Advantage Fund has fared against ICICI Prudential Balanced Advantage Fund and their respective benchmarks. We are not using Nifty index as their benchmark because of the 65% equity play that the funds maintain. The HDFC scheme has under-performed its benchmark in the last 1 year, but maintained a good lead over 3 and 5 year period. Unfortunately, the ICICI scheme has marginally under-performed its benchmark in both 1 and 3 year period (up to October 30, 2018). It has however outperformed benchmark in the 5 year period.

Lump sum returns %
Period HDFC Balanced Advantage – Growth NIFTY 50 Hybrid Composite Debt 65:35 Index ICICI Prudential Balanced Advantage – Growth CRISIL Hybrid 50+50 – Moderate Index (Benchmark)
1 year -3.84 2.1 0.61 0.66
3 year 9.85 9.08 8.07 8.96
5 year 16.54 10.78 12.45 11.41
Source: Fund factsheets

2. Rolling returns – As explained earlier, lump sum returns only give a small picture. You as an investor should be concerned about consistency in returns. The best way to assess this is look at rolling returns. It allows you to examine the behaviour of returns for holding periods, similar to those actually experienced by investors. It will tell you whether the fund is a consistent performer. As you can see in the following table, in the last five year period, the 1-year rolling return stats can be seen. The HDFC fund enjoys a higher average, but its minimum return is also steeply negative. The ICICI fund fares a tad better. The picture changes a lot if you look at three-year rolling returns. The ICICI Prudential Balanced Advantage Fund not only has a higher average but, it also doesn’t have a negative return. The HDFC fund seems a bit more volatile.

Rolling Return Statistics – 1 Year
28-Nov-2013 to 27-Nov-2018 Return Statistics (%) Return Distribution (% of times)
Fund Name Average Maximum Minimum Less than 0% 0 – 10% 10 – 20% 20 – 30% More than 30%
HDFC Balanced Advantage Fund(G) 17.19 65.11 -19.19 18.48 20.76 21.94 14.51 24.3
ICICI Pru Balanced Advantage Fund(G) 14.77 45.15 -7.09 4.05 33.33 38.48 11.73 12.41
Rolling Return Statistics – 3 Year
28-Nov-2013 to 27-Nov-2018 Return Statistics (%) Return Distribution (% of times)
Fund Name Average Maximum Minimum Less than 0% 0 – 10% 10 – 20% 20 – 30% More than 30%
HDFC Balanced Advantage Fund(G) 13.36 23.56 -0.94 1.52 14.68 76.96 6.84 0
ICICI Pru Balanced Advantage Fund(G) 14.97 24.27 7.04 0 13.08 71.39 15.53 0

3. Risk measures – Just returns don’t mean much without looking at the risk. We have used Standard Deviation, Sharpe ratio and Sortino ratio to look at these parameters. As you can see from the table below, the HDFC Balanced Advantage Fund is clearly more volatile because it takes more risk. Probably, that is why it also has better return yielding capacity.

Risk measures – head to head HDFC Balanced Advantage – Growth ICICI Prudential Balanced Advantage – Growth Remark
Standard Deviation 14.47 8.17 A greater standard deviation indicates higher volatility
Sharpe ratio 0.28 0.21 A higher Sharpe ratio indicates better return yielding capacity of a fund for every additional unit of risk taken by it
Sortino ratio 0.42 0.29 Higher sortino ratio indicates that there is lesser chance of downside deviation in the mutual fund scheme.

RupeeIQ take – The ICICI Prudential Balanced Advantage Fund seems to be a consistent performer with low volatility. The HDFC Balanced Advantage Fund appears to be ideal for balanced advantage fund investors who want more returns and are okay with higher risks. From a market timing perspective, both funds are pretty good. From a portfolio perspective, both the schemes have promising equity and debt constituents. In terms of fund manager risk, the ICICI scheme is going through a period of consolidation given that a relatively new team is at helm on the equity side. In that context, the HDFC scheme is a rare product since it has never seen its fund manager change. Known for his contrarian calls, Prashant Jain’s equity strategies can sometimes frustrate you because of his tendency to latch on to things quite early.

Disclaimer: Please note that investors are requested to consult their financial, tax and other advisors before taking any investment decision.

Author
Rahul Sharma

Rahul Sharma is a contributing writer with RupeeIQ. He can be contacted on contact@rupeeiq.com