Home / Money / Personal Finance /  Our BAF model will use both price-to-book, P/E ratios: Mayukh Datta, Mirae Asset

Mirae Asset Mutual Fund is launching a Balanced Advantage Fund (BAF) on 21 July (NFO start date) after shying away from the category for a considerable number of years. Its aggressive hybrid fund has been among the most successful schemes of its category and this allowed the asset management company to miss out on launching a BAF without losing a lot of market share. Mint spoke with Mayukh Datta, head, products-strategy & communications, Mirae Asset Investment Managers (India), about the proposed BAF and how it will work. Edited excerpts from an interview.

How will your BAF model work?

It is based on a combination of price- to-book (P/B) and price-to-earnings (P/E). For P/B, we take the current one. We look at P/B value on a daily basis. For P/E, we look at the trailing P/E of the past four quarters and the forward P/E for the forthcoming four quarters. We are putting a weightage of 50-50 to both the P/Es. These both throw up a number that is 25% of the overall weightage and P/B is 75% of the overall weightage. This will decide how much unhedged equity we will have in our portfolio. If we were to put in too many things into the model, then the output itself becomes quite complicated.

Time travel to the past
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Time travel to the past

If you look at the Nifty 50, it is actually an asset-heavy index where almost two thirds of the index is towards companies with huge balance sheets.

Now, if you have a model which tracks only earnings, which are quarterly, this can be very short-term driven. So, in 2020, when businesses were closed, any P/E model would indicate an exit from equity because there were no earnings. Valuations had gone for a toss. The P/B ratio tells you that one needs to look at a slightly longer term as there may not be earnings currently but if you look at the business per se, it is still alive and can sustain itself during bad times.

For an asset heavy index such as the Nifty 50, the P/B value becomes an important metric.

Why Nifty 50 P/E and P/B?

The benchmark for us is the Nifty 50. It looks like the model is based on only two metrics, but those two metrics are important pillars of any decision making. And to give you another angle to it, while we have created a model, the control is still with the fund manager. We have kept an element for the fund manager to also put in his inputs into the model but not to be diverging totally from what the model is saying. Harshad Borawake (equity) and Mahendra Jajoo (debt) will be managing the BAF.

So, it’s going to be model plus fund manager?

That’s what others are also doing. There is a model that is working but nothing is on autopilot. Here, what we are saying is that we are not interfering, but we are definitely overseeing. Let’s say, just for example, if the markets look like they are going down and the model says you need to go to 48% unhedged equity, we may go down further, maybe, down to 46%.

There is a mention of qualitative factors.

That’s because the fund managers will be monitoring the model. Sometimes, they also look at things which we’re not able to bring into the internal model such as interest rates, other economic factors, FII flows, currency movements, etc. If you were to plug these into the model, then it will look quite complicated. But, if a fund manager is able to form a view on this basis, he will be able to capture the trends.

What is the time horizon that you recommend investors to have for this?

I’ll talk specifically about our model, which, based on our back testing, showed that you should stay invested for at least three years.

Why does an investor need yet another BAF?

So, what we are trying to achieve here is to give a solution to an investor during market volatility. Investors have a fear of principal loss and that’s why they move out of the equity market. Then they have a long-term regret in a growing economy like India if they have moved out of equities and are not able to come back at reasonable levels. We are keeping it simple and using something which we think we can use forever and not try to tweak around it too much.

If we are to be absolutely honest, we have been an equity fund house and there have been times when we have seen valuations being at not so comfortable levels. We have reacted in terms of our communication with investors or have stopped flows. So, we are extending that valuation process in a more articulate manner for a model-based approach.

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