{"id":2034831,"date":"2015-09-26T13:28:23","date_gmt":"2015-09-26T07:58:23","guid":{"rendered":"http:\/\/stockviz.biz\/index.php\/?p=2034831"},"modified":"2015-09-26T13:28:23","modified_gmt":"2015-09-26T07:58:23","slug":"the-problem-with-dynamic-pe-funds","status":"publish","type":"post","link":"https:\/\/stockviz.biz\/index.php\/2015\/09\/26\/the-problem-with-dynamic-pe-funds\/","title":{"rendered":"The Problem with Dynamic P\/E Funds"},"content":{"rendered":"

Executive Summary<\/h3>\n

Dynamic P\/E funds use the market Price-to-Equity ratio to decide on allocation. If the P\/E ratio is deemed too high, they allocate more to bonds or arbitrage strategies and if the P\/E ratio is low, they allocate more towards equities. This logic sounds good on paper. However,<\/p>\n

    \n
  1. The market always appears expensive around turnarounds – investors miss out on the recovery trade.<\/li>\n
  2. The market always appears cheap during downturns – investors end up being long equities when bonds tend to outperform.<\/li>\n
  3. It doesn’t protect against volatility as a pure-play bond fund would (bad fit if you are risk-averse.)<\/li>\n
  4. It doesn’t give you the returns of a pure-play equity fund (bad fit if you are risk-seeking.)<\/li>\n
  5. Since it dampens volatility, it doesn’t make sense to dollar-cost-average (bad fit if your looking for an SIP.)<\/li>\n<\/ol>\n

    It is a solution looking for a problem.<\/p>\n

    Analysis<\/h3>\n

    We thank Franklin Templeton for running the Dynamic PE Ratio Fund Of Funds to perform our analysis. This is probably the only fund where a true apples-to-apples comparison can be made between a pure-play equity fund, a pure-play bond fund and a dynamic PE fund. <\/p>\n

    The Dynamic PE fund invests x% in the Franklin India Short Term Income Plan and 100-x% in the Franklin India Bluechip Fund based on the P\/E ratio. All we have to do is look at how a buy-and-hold strategy of the components compare to the Dynamic PE fund to gauge the effectiveness of the strategy.<\/p>\n

    Dynamic PE vs. pure-play Equity<\/h3>\n

    Between 2007-01-02 and 2015-09-23, Franklin India Dynamic PE Ratio Fund of Funds-Growth’s IRR was 10.93%<\/strong> vs. Franklin India Bluechip Fund-Growth’s IRR of 11.53%<\/strong><\/a><\/sup><\/p>\n

    \"Franklin<\/a><\/p>\n

    \"drawdowns<\/p>\n

    Similar returns. Lesser drawdowns. Lump-sum investors will probably be fine with these returns.<\/p>\n

    Dynamic PE vs. pure-play Bonds<\/h3>\n

    First, let’s compare the Dynamic PE fund to the Short Term Income Plan.<\/p>\n

    Between 2007-01-02 and 2015-09-23, Dynamic PE Ratio had an IRR of 10.93%<\/strong> vs. Short-Term Income Plan’s IRR of 9.49%<\/strong><\/a><\/sup><\/p>\n

    \"drawdowns<\/p>\n

    For investors worried about drawdowns, just investing in the liquid fund would have given similar returns with a lot less risk. A 35% drawdown is a lot for a fund that gives bond-like returns.<\/p>\n

    A bond fund like the Birla Sun Life Dynamic Bond Fund, for example, had an IRR of 9.65%<\/strong> over the same time period<\/a><\/sup><\/p>\n

    Conclusion<\/h3>\n

    Using the P\/E ratio for asset allocation is a bad idea. Investors would have experienced similar returns but with smaller drawdowns if they had invested in a regular bond fund instead.<\/p>\n

    Related: Dynamic PE Funds<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

    Executive Summary Dynamic P\/E funds use the market Price-to-Equity ratio to decide on allocation. If the P\/E ratio is deemed too high, they allocate more to bonds or arbitrage strategies and if the P\/E ratio is low, they allocate more towards equities. This logic sounds good on paper. However, The market always appears expensive around … <\/p>\n","protected":false},"author":2,"featured_media":2034841,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3471,9],"tags":[17],"class_list":["post-2034831","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investing-insight","category-your-money","tag-mutual-funds","entry"],"_links":{"self":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/posts\/2034831","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/comments?post=2034831"}],"version-history":[{"count":0,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/posts\/2034831\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/media\/2034841"}],"wp:attachment":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/media?parent=2034831"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/categories?post=2034831"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/tags?post=2034831"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}