Ihab Dalwai, a fund manager at ICICI Prudential Asset Management Company, has highlighted the advantages of a flexible asset allocation approach over static exposure for the next three years. This strategy, which is part of the Active Asset Allocator Long-Short strategy, is designed to adapt to varying market conditions and optimize returns across different asset classes.
The Active Asset Allocator Long-Short strategy differs from traditional mutual fund offerings like Balanced Advantage Funds and Multi-Asset Funds by operating within the Specialized Investment Fund framework. This allows for greater portfolio flexibility and the use of a wider range of derivative-based strategies. The strategy dynamically allocates across equities, debt, commodities, InvITs, and derivatives, with the ability to recalibrate exposures based on valuations, macroeconomic factors, and risk-adjusted opportunities.
Dalwai emphasizes that in the current market environment, characterized by high return dispersion across asset classes, a dynamic asset allocation approach is more suitable. Equity valuations have corrected in certain areas, while fixed income has become more attractive due to global rate repricing. Commodities, particularly precious metals, have performed well but face challenges due to rising US rates.
“The current environment is more suited for dynamic asset allocation because return dispersion across asset classes could remain high.”
Ihab Dalwai, Fund Manager, ICICI Prudential AMC
The fund manager also notes the importance of macro variables in determining asset allocation. For equities, a combination of valuation and earnings overlays is used, while debt and commodities are assessed based on growth trends, inflation, liquidity, real interest rates, currency movements, and earnings cycles.
Dalwai points out that commodities should be viewed from a tactical perspective rather than a structural one, as they do not provide dividends or interest. He also highlights the diversification role of InvITs in a portfolio, especially in a rising interest rate environment, where selective allocation becomes crucial.
Looking at midcaps, Dalwai sees selective opportunities, particularly in businesses benefiting from domestic economic formalization and government-led capex. However, he cautions that midcaps are not homogeneous, and stock selection and valuation discipline are essential.
Background
The Indian financial markets have been experiencing significant volatility, with asset classes showing varied performance due to global economic factors. Investors are increasingly seeking strategies that can adapt to these changing conditions to optimize returns.
As markets continue to evolve, investors should monitor macroeconomic indicators and remain flexible in their asset allocation strategies. This approach may deliver better risk-adjusted outcomes over the next three years, according to Dalwai.
