Prabhudas Lilladher trims gold allocation in PMS scheme to half

MADP is Prabhudas’ Quant-based Tactical Asset Allocation PMS Strategy that dynamically invests in passive instruments across domestic equities, fixed income, commodities, alternates, and international equities.

Siddharth Vora – Head of Investment Strategy and Fund Manager – PMS, Prabhudas Lilladher said, “In volatile times like these, it has become extremely important to be able to find value across asset classes to generate returns.”

He revealed that in November last year, Prabhudas started adding Gold in its multi-asset portfolio, MADP, at an average price of Rs. 53,500.

By the end of December 2022, the brokerage’s portfolio recorded about 20% allocation to Gold.

Vora added, “Gold ended 2022 on a strong note and continued its strong performance till the 1st week of February this year, driven by a rally in international Gold prices, depreciating INR against USD, and higher import duty on Gold articles announced in this year’s budget.”

However, Vora pointed out “while we have been proponents of having Gold in the portfolio, its performance has been very volatile since last year. Hence, agile position sizing is required as and when macro events unfold.”

Giving an example, he said, “our quant model signaled us to cut positions in Gold due to heavy profit booking by speculative traders in the U.S. futures markets, and renewed concerns on the US inflation being sticky.”

Accordingly, he said, ” we trimmed our Gold allocation in the 2nd week of February by half from 20% to 10%, at Rs. 57,300.”

Since then, as per the Prabhudas fund manager, gold has seen further correction from Rs. 57300 levels and is currently trading at Rs. 56,100.

“We are still holding 10% Gold in our portfolio as we continue to believe it is a great diversifier and adds value during uncertain times,” Vora said.

But as an asset allocator, Vora said, “our job is to find asset classes that can add value to the portfolio and one such asset class that promises value is Emerging Market (EM) equities.”

There are several reasons for looking at global equities beyond the US and Europe, as per Vora. These are:

– EMs have relatively better growth differentials than Developed Markets (DMs) from 1.3% in 2022 to 2.6% in 2023

– With front-loading of interest rate hikes and controlled inflation, EMs have either positive real interest rates or less negative interest rates than DMs, and hence better monetary dynamics

– EM equities are trading at decade-low valuations despite the recent rally and given the tailwinds, EMs are expected to catch up with DMs and

– The trade-weighted broad US Dollar Index has tended to correlate negatively with emerging markets’ real activity. USD will peak once the Fed has hit its target rate and once investors start to anticipate a trough in global economic activity.”

Market participants are expecting that these conditions will be met in the first half of 2023. He said, “once DXY starts to roll over decisively, it will be a positive for EM currencies, thus improving macro and trade dynamics for emerging economies . DXY Index has already fallen by 9% from a high of 114 in October 2022 to 104 currently. We are slowly adding exposure to EM equities as a part of our international allocation in the portfolio.”

Lastly, Vora concluded, “We continue to emphasize that 2023 is going to be the year of multi asset investing. The best approach for the year is to have a well-balanced portfolio of equities, debt, precious metals, and global equities . Maintaining a well-diversified portfolio of each asset class will go a long way in sustainable wealth creation.”