ET Wealth Expo: US stocks epitomise anti-asset allocation; international debt better option: S Naren, ICICI Prudential MF

Market veteran S Naren of ICICI Prudential Mutual Fund considers US equities an example of anti-asset allocation, as investors are chasing an asset class that has already delivered strong returns. He said investors seeking international diversification should consider international debt, which has underperformed over the past five years, instead of following the growing enthusiasm for US stocks.

Speaking at the ET Wealth Expo in Mumbai on Friday, during a discussion on investor behaviour and asset allocation, Naren said buying an asset class after a sharp rally is a form of “anti-asset allocation”. In contrast, genuine asset allocation involves investing in asset classes that have corrected or fallen out of favour.

He said, “Avoid anti asset allocation which means picking asset classes when they have done too well.”


Naren pointed to the surge in investor interest in gold and silver ETFs in January as an example of this trend. Inflows into the two categories during the month even surpassed those into equity mutual funds, an unusual development, he said.

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The surge in silver investments followed a sharp rally that saw the metal deliver returns of around 216%. Naren said investors found it difficult to stay away from silver after its steep rise, justifying their purchases by citing its growing industrial use, particularly in areas such as artificial intelligence, and concerns over supply shortages.

He said, “Once silver gave a return of 216%, it was impossible for someone to say, ‘I won't buy silver.’”

Naren said he often compared silver to a smallcap stock, warning investors that it carried similar risks. He recalled making this point in his conversations with investors, but many dismissed his concerns, arguing that silver was different because of its growing use in artificial intelligence.

However, silver subsequently declined around 27%, behaving much like a smallcap stock, he said. Gold had also peaked around January after delivering returns of approximately 116%, although its subsequent correction was less severe than silver's.

According to Naren, these examples demonstrate how investors often chase recent performance and become comfortable investing in an asset class only after it has gained popularity.

He also pointed to the performance of Japanese and US bonds over the past decade. Japanese bonds were among the worst-performing international asset classes, with both bonds and the currency performing poorly. US bonds also delivered weak returns, although the US dollar did not decline to the same extent.

Naren said investors should distinguish between diversification and asset allocation. Simply adding international equities to a portfolio because they have performed well does not necessarily amount to genuine diversification or sound asset allocation.

Naren said Indian debt has remained an overlooked asset class despite outperforming the Nifty over the past three to five years.

He attributed the lack of investor interest to the perception that debt is boring compared with equities. However, he said investing in an unpopular asset class is an important part of asset allocation.

He also highlighted the behaviour of mutual fund investors in India. When the Nifty became cheaper relative to its historical averages, largecap funds witnessed outflows in July and August. In September, flows turned slightly positive, but outflows emerged again even as valuations remained attractive.

In contrast, small and midcap funds continued to attract record inflows despite their valuations being higher than their respective 10-year averages.

Naren said investors can use valuation indicators such as the market capitalisation-to-GDP ratio to assess equity markets. He believes such comparisons can provide useful signals of excessive valuations and potential market bubbles.

“To practise anti-asset allocation, you need to know how to look at it. And, for example, if you take equity, one of the simple ways to do it is market cap to GDP,” he said.

According to him, such indicators can help investors identify when an asset class has become excessively popular and expensive.

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Naren also discussed how investors can assess gold's relative valuation by comparing it with equities over longer periods. While gold has delivered exceptional returns, he does not expect its relative valuation to revert to earlier levels to the same extent as in previous cycles. He attributed this to a structural shift in central bank behaviour following the freezing of Russian dollar reserves after the Russia-Ukraine war.

As long as these concerns persist, gold is likely to continue attracting investor interest, Naren said. However, he cautioned against putting all investments into the metal, adding that some allocation to gold is warranted given the current global environment.

Turning to real estate, Naren said rental yields relative to home loan interest rates can help investors assess property valuations. He also cautioned against confusing asset allocation with repeatedly buying individual stocks simply because they have underperformed.

Naren said investors should avoid behaving like full-time market participants constantly looking for opportunities to make money. Instead, they should remain patient and be prepared to invest meaningfully when major market corrections create attractive opportunities.

His central message was to avoid anti-asset allocation: chasing asset classes after they have delivered exceptional returns. Instead, investors should focus on asset classes that have underperformed, invest patiently and avoid applying the same strategy to individual stocks.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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