In today’s volatile markets, investors with a moderately high risk appetite may consider investing in aggressive hybrid equity funds. This strategy provides opportunities for growth in equities by investing 65-80% while creating a safety net by purchasing low-risk (20-35%) debt securities.
Canara Robeco Equity Hybrid is a good candidate due to its better returns with lower volatility.
The fund actively shifts its allocation between equities and debt, which allows it to maintain a good balance despite its concentration on the equity market. The system is compared to CRISIL Hybrid 35 + 65 – Aggressive Index. Over the last one, three and five year periods the fund has produced 41%, 12.3% and 13.7% against benchmark returns of 43.1%, 12.1% and 13.4% respectively.
Although the fund slightly underperformed the benchmark over the one year period, it beat it over three and five year periods. The fund has been among the best quartiles in its category for the past three, five and ten years.
Performance and strategy
The fund adopts a static rebalancing process and maintains its asset allocations within the suggested limits. Rebalancing also allows profits to be recognized at higher levels.
It has kept its equity allocation below 70% for many years. The allocation fell to 66.5% in February 2020, when equity markets experienced some uncertainty. After the stock fell sharply in March 2020, the fund gradually started to increase the allocation and it increased to 74.8% in February 2021. At present, equity is 73.6% and the balance is in debt and cash.
After underperforming the aggressive hybrid category average in 2016 and 2017, the fund rebounded and managed to exceed the category average in subsequent years. In 2020, it posted gains of 19.6% over the category’s average return of 14.5%.
Among its peers, the fund has one of the lowest monthly standard deviations over three years, at 4.25, which indicates a comfort factor on volatility and risk.
In addition, Canara Robeco Equity Hybrid generates 0.18 unit of return (above the risk-free rate) for each unit of risk undertaken, compared to the category average of 0.13.
About 57 percent of the assets are in large-cap stocks, 15 percent in mid-cap companies, and around 1 percent in small-cap companies. The banking sector is the first choice of the sector (allocation of 16.8%), followed by software (10.3%) and finance (6%).
The fund had reduced its exposure to the banking sector to a low of 12.6% in May 2020, then started to increase the allocation as equity markets started to recover.
Its choices of private sector banks have generated good returns over the past year. The fund has increased the allocation to the banking and software sector over the past year. Recently, it added non-ferrous metals and insurance stocks.
The program had reduced exposure to the expensive non-durable consumer goods, petroleum products and carrier chemicals sectors since last May.
He owns 56 shares in the basket, and with the exception of the top five shares, the individual share allocation is less than 3 percent.
About 44.7 percent of the fund’s debt allocation is deployed in AAA and equivalent instrument and 43 percent in treasury / sovereign bills while the balance is in reverse repo and current net assets.