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Rajesh Cheruvu

Chief Investment Officer, Validus Wealth

Cheruvu has nearly two decades of experience in the financial services industry. His strengths include portfolio management, investment management, derivatives and equities. Prior to joining Validus Wealth, the author had a brief stint with Aditya Birla Capital as Head of Research & Advisory. Earlier, Cheruvu has worked with Coutts, HSBC Private Banking, Axis Bank and Kotak Mahindra Bank. He is a graduate of the GITAM University, Vishakhapatnam with a Master’s in Economics and holds a Post Graduate Diploma in Financial Management from the Central University.

Ideally, investments should be made in a systematic process-driven fashion. The process should start with identifying the strategic asset allocation (SAA) – which can be received via multiple means such as looking only at assets as in, Mean-Variance Optimization (MVO) or a Liability Driven Investment (LDI) approach that focuses on liabilities as well or a Goals-Based Investing (GBI) style or even an integrated approach that looks at both assets and liabilities to name a few.

Typically, GBI is the most widely adopted wherein investor constraints can also be incorporated. Accordingly, one should start with identifying future goals and categorise them on the basis of priority and time horizon for starters.

On the basis of this, one should then back out the required returns to be achieved for satisfying these goals. Accordingly, asset classes and weights should then be decided in accordance with the risks of these assets as well.

As per an individual’s risk appetite as well as any constraints, then one could also look to maximize Sharpe Ratio if feasible.

Having decided on the SAA, one should then identify individual securities in each asset class on a purely bottom-up basis using fundamental analysis.

The right price to enter would then be a second exercise as investments should be purchased at a justified fair value.

Valuation could be performed using a host of methods like DCF analysis or peer valuation among many other techniques such as real option-based valuation. Hence, staggered deployment would generally be the path that would ensue.

The SAA could then be rebalanced back either using a fixed calendar approach (on fixed dates, irrespective of weights) or using a band approach (wherein the SAA is mean reverted back once asset weights cross certain band thresholds).

Apart from SAA, one should also look to develop a TAA (Tactical Asset Allocation) wherein routinely (in addition to the initial phase of staggered SAA build-up) one could endeavour to time the markets and purchase undervalued securities at the expense of selling off overvalued ones. However, taxation should be kept in mind if TAA is done too frequently.

Net-net, one should ideally not time investments or the market, but rather spend time in both as compounding returns over time yields maximum return contribution over the long term.

There have been several studies that corroborate this fact stating that SAA is the major determinant of both portfolio return as well as its variability.


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