‘Drawdowns are not losses; they are strategic clues that guide smarter investment moves’: Valtrust’s Arihant Bardia

In the current financial environment, investors are scouting for more than just returns. They need clarity, strategy, and discipline. In an interview with Fortune India, Arihant Bardia, founder and chief investment officer at Valtrust, a Chennai based Bespoke Multi Family office, shares his approach to identifying the right asset classes, using drawdowns as strategic entry signals, and ensuring the best way to diversify through the equity fund of funds (FoF).

He also highlights how pairing uncorrelated strategies, and disciplined rebalancing can help investors navigate volatility while keeping portfolios aligned with their long-term goals.

Edited excerpts:

What are the various parameters you take into consideration while deciding to invest in an asset class?

While investing specifically through our equity FOF offering, the most important criterion is true diversification. Our curated set of funds under the FOF offer ensures that they are complementary to each other. This is done by considering the following steps:

a) Diversification and overlapping

Simply adding more funds doesn’t help. This is more evident in the large-cap space where the universe is small. Here, the large-cap funds appear to be hugging the index.

b) Funds’ deficiency in active share

Active share measures the level of differentiation between a mutual fund’s portfolio and its benchmark index. In case of a deficiency in the level of active share, the funds would mimic the index it is supposed to outperform. In such a scenario, the active fund is like the passive index fund with a high expense ratio. All our funds under the equity FOF offering are extremely high on active share.

c) Market space correlations 

At times, certain events bring down the diversification benefits. In such a case, the investment in assets and securities tends to show correlations and move in sync with each other, and hence, could be detrimental to the portfolio’s health. Our periodic rebalancing exercise ensures that the Equity FoF offering has correlations at its minimal levels.

d) No compromise on discipline to rebalance the portfolio

Sometimes the inclination of investment is towards an asset class that has outperformed. In such a case, there is a compromise on rebalancing. Ideally, one should have such an asset class in a tactical portion of the portfolio.

Drawdown of an asset class can vary with various market phases. Can it be used to shortlist an asset class to invest in?

Drawdowns are not losses; they are strategic clues that can guide investors in making smarter moves while entering and exiting an asset class. If used cleverly, drawdowns can help in portfolio construction.

For example, equity markets typically experience 10-15% corrections annually, with recovery periods averaging 4-6 months. High-yield bonds might see 5-8% drawdowns during credit stress, while emerging market equities can plunge 20-30% during crisis periods, sometimes requiring 12-18 months for full recovery. These predictable navigation signals can help guide strategic entry points, position sizing, and holding periods.

Additionally, in a portfolio, various risk elements play a role. Small-cap indices often experience higher drawdowns but recover faster, while large-cap or equity savings schemes have more moderate declines and steadier recoveries. Understanding the nature of an asset class can help its allocation in a core or tactical portion of a portfolio.

Can investors design an entry or exit strategy from an asset class based on the drawdown? How can it be most effective while taking a tactical call in a portfolio?

Consider exercising an entry strategy based on predefined drawdown levels. For instance, a 15% drawdown can become an entry signal. If one is comfortable with the underlying positive bias of an economy like India, s/he can take a staggered investment route to building a portfolio and use drawdowns to accelerate their investments. The idea is to cleverly use the drawdown with short recovery periods. 

This disciplined approach offers redeployment, as a drawdown can be viewed as an opportunity that emerges during market dislocations.

Our Equity FoF offering has a complementary drawdown characteristic. We pair assets with different stress patterns, such as combining equity momentum strategies (quick drawdowns, quick recovery) with trend-following approaches (smaller drawdowns, steadier performance), and uncorrelated alternatives. This can even help in designing an exit strategy when the desired objective is achieved.