The Hindu Business Line : Tactical plans fail to enthuse

FOR investors who have been through the bear markets of 2000 and 2001, the fear of losing money in down markets will be much higher than the greed to earn more in a bull market.

To cater to such investors, a few asset management companies came out with tactical asset allocation plans in 2002. However, such plans have in the short period since the beginning of 2003 failed to deliver.

The performance of FT India PE Ratio Fund has, in particular, been quite unimpressive. Investors can exit from the fund. The performance of PruICICI Dynamic Plan has been much better than the other funds. However, even that fails when compared to the change in the index of S&P CNX 500 for the same period. Investors can, however, hold on to the fund for now.

The performance of UTI Variable Investment Scheme has been good in terms of reducing net asset value volatility. However, performance in terms of generating returns is still uninspiring. Investors can hold on for now.

Disappointing show: The January-March period saw the indices lose 9-10 per cent. Tactical asset allocation plans are expected to lose less than that of the indices during this period. However, only UTI-VIS' performance was creditable during this period.

The other two lost as much as that of the index. The performance of FT India Nifty PE ratio fund has in particular been quite unimpressive. With an average of 85 per cent in Nifty Index, the fund lost marginally more than what Nifty did during the period. The aggressive PruICICI Dynamic Plan also fared poorly.

There was a reversal in stock price trends in the April-June quarter. Sensex and Nifty gained 15-18 per cent. During this period, UTI-VIS and Nifty P/E ratio gained less than Sensex and Nifty. PruICICI Dynamic Plan did well.

However, it once again underperformed S&P CNX 500. Overall, the performance of the three funds in the January-June period was disappointing.

Passive investing, the culprit: The January-June quarter may be a short period. However, it still provides interesting insight into the performances of the three tactical plans. Some dominant features that have emerged are:

UTI-VIS performs well in a down market; trails in a rising market

Nifty PE Ratio Fund performance mirrors that of Nifty Index

PruICICI Dynamic Plan out performs in a rising market; Struggles in a down market

UTI-VIS does well in reducing risks during periods of falling prices. However, it fails to generate returns during a bull market. Normal balanced funds have generated much better returns during the same period.

Most have gained more than 15 per cent when UTI-VIS gained only 5.4 per cent. The performance of Nifty PE Ratio Fund essentially mirrors that of the Nifty Index. The Index fund would provide similar exposure at much lower costs. PE Ratio Fund charges about 2.5 per cent in costs annually. In Index fund, the costs would typically be much lower.

The Nifty PE Ratio Fund also appears to suffer from drawbacks in its structure. The level of Nifty was between 935 and 1094 between January and June. However, allocation to equity remained more or less unchanged at 80-90 per cent. In addition, the debt component is also passively managed with just a couple of investments in corporate securities.

The small size of the PE ratio fund appears to be an impediment in managing the debt portion. The larger UTI-VIS in comparison had made investments in government securities as well as few AAA corporate securities.

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