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The company offers a new investment strategy under its discretionary portfolio management services which is said to deliver superior long-term returns using a proprietary back-tested strategy to curtail volatility and downside risk. However, it is pertinent to check the details of the scheme.
Edelweiss Personalized Managed Accounts (PMA) has launched a new product Beta Overlay Over Mutual Funds (BO.O.M). Scheme with fancy names have not quite succeeded in the past. The strategy is designed to enhance equity mutual fund portfolio returns by strategically hedging the long-only component of equity mutual funds with Nifty futures when the markets are weak. This portfolio will comprise futures, options and units of equity/debt/liquid mutual fund schemes.
Edelweiss AMC, a subsidiary of Edelweiss Financial Services, is the portfolio manager to Edelweiss PMA. For the new scheme, the AMC would be using a model to protect an existing equity mutual fund investor against a weak or falling market while still capturing gains during a rising market, thereby “curtailing volatility and downside risk.” “B.O.O.M follows a rigorously back-tested model, which has consistently delivered better returns over a 10-year period,” according Vikaas M Sachdeva, CEO, Edelweiss Asset Management.
Knowing the context in which a particular strategy has succeeded is essential for an investor. Therefore, even though the portfolio manager may be satisfied with the performance over the periods they have tested, it is crucial for an investor to know how the strategy has worked. Especially, considering the minimum investment amount is Rs25 lakh. If you want to invest in the product ask the following questions:
1. How has the strategy worked in the back testing in terms of benchmark related performance? For this, check the number of 10-year periods analysed, the returns over each period and the benchmark returns over the same period. If you are investing for the short term, check the performance over three to five years.
2. What are the fund management fees and entry charges and exit charges? The costs affect the overall performance of your investment. Remember, the portfolio consists of equity mutual fund schemes which charge an expense ratio as well. You would not want to pay for a PMS scheme which would eat away into your returns, investing only in equity mutual fund schemes would work out to be a better option then.
3. Which equity schemes would be eligible for BOOM? This is crucial. There are many performing mutual fund schemes and the portfolio manager should have a diverse portfolio of top performing equity schemes.
Though past performance is not an indicator of future returns, it does give some insight and a certain level of confidence before investing to know how the strategy has performed. There have been a few equity mutual fund schemes which have done better than the Nifty index in the last 10 years. Whether the PMS scheme has done better than these or worse, we do not know. No aggregate data of PMS performance is available.
Edelweiss mentions that the scheme is an ideal vehicle for an existing equity mutual fund investor who has a three to five years investment horizon. Experienced investors would know how volatile the market can be over the short-term, how the strategy has worked to negotiate the volatile movements of the market in three to five-year periods of the past is essential.
Performance details and management fees are essential for an investor to check and know whether to invest in a scheme or not.
Moneylife contacted the company in order to get the details of the performance during back testing, but no information was received at the time of writing this report.
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Ultimately, Edelweiss claims to employ moving averages and other ‘technical’ indicators to determine whether the market is in a downtrend and create a hedge between 0% and 100% of the long-only equity investment value. Essentially, Edelweiss will use technical analysis to take a short position in Nifty futures to buy put options when it thinks that the market is headed down. It is a risky strategy and we are extremely sceptical of Edelweiss being consistently right about market declines based on mechanical and lagging indicators like moving averages. And remember, being wrong would inflict a cost. Edelweiss could lose money on Nifty futures and puts bought could expire worthless. The performance of the scheme would be benchmarked to the S&P CNX Nifty Index.
Subsequent to the publication of the article, Edelweiss provided us with the details, which are mentioned below.
Performance: “B.O.O.M. has delivered excess returns of about 6%-8% per annum, over a passively held portfolio of mutual funds, at about 2/3rd the volatility”, pointed out Mr Sachdeva. The returns have been post investment management & trading costs but before any applicable entry/exit loads. This is impressive and it would be interesting to see how the portfolio manager actually performs. There’s only one 10-year period that has been considered, viz. starting 2003 to 2012 (till 31st May 2012) in the back-test model, says Mr Sachdeva. This is primarily because of paucity of all relevant data being available for earlier times.
Charges: Entry load for this scheme is 2% of the initial contribution and all fresh inflows. Exit load would be 2% for withdrawal before one year from the date of activation. Management fees would be 2% p.a. excluding other charges such as, transaction tax, service tax etc.
Eligible schemes: Edelweiss has shortlisted a list of 41 schemes based on their low tracking error with the Nifty index. This is done to ensure the model works efficiently to deliver the stated objective.