The Hindu Business Line : Funds adopt active strategy to beat bear market

Mumbai, July 17 Even in the volatile equity markets, some equity schemes of mutual funds are outperforming their benchmark indices. Fund managers say this has been achieved by proactive churning of portfolios.

This mitigates the downside risks associated with sectors that are getting affected by higher interest rates, commodity prices and inflation. Thus the exposure constantly shifts to safer quarters. Equity funds are increasing their exposure to healthcare, telecom services or consumer non-durables, as they see them as safe bet.

Varying conditions

“We have managed to outperform our benchmark indices by changing the sector and stock holdings to adapt to varying market conditions without changing our core positioning,” said Mr Mihir Vora, Head of Fund Management (Equities), HSBC Asset Management (India).

HSBC Equity Fund (HEF) has given a CAGR of 56.25 per cent compared to 43.40 per cent for BSE 200, for the last five years, according to a company statement. HEF manages assets worth Rs 1,200 crore; the fund has exposure to 35 to 40 stocks. Explaining the fund’s investment strategy, Mr Vora said HEF has reduced exposure to certain sectors like automobile to insignificant levels (3.94 per cent to zero per cent), cement (5.62 per cent to zero per cent), media & entertainment (1.54 per cent to 0 per cent) in June 2008 compared with December 2007.

At the same time, HEF raised exposure to pharmaceuticals (to 3.45 per cent from 1.16 per cent) consumer non-durables (to 9.02 per cent from 7.34 per cent), petroleum products (to 9.35 per cent from 6.13 per cent) and telecom services (to 8.94 per cent from 8.42 per cent) during the past six months.

“In the software sector, where the exposure was cut to in December 2007 to just 2.35 per cent compared with 6.24 per cent in September 2007 after rupee gained; it was again raised to 7.54 per cent in June 2008, as the rupee weakened,” said Mr Vora.

According to areport by Sharekhan, Bharti Airtel, Reliance Petroleum, Suzlon Energy, Tata Power Company, and Dr Reddy’s Laboratories figure among the top-five additions to the existing holdings of equity funds. Among the other top picks were IDFC, Piramal Healthcare, Bajaj Electricals, Punj Lloyd, and Reliance Communications. HEF is also making use of futures and options (F&O) trade to leverage the volatility in the equity market.

“We have a few percentage points’ exposure in F&O trade on a daily basis,” said Mr Vora. HEF has, of late, been maintaining higher cash levels of around 15 per cent as of June 2008, against just 2.66 per cent in December 2007 and 12 per cent in March 2008.

In fact HEF’s exposure to fixed deposits has also gone up to above 5 per cent compared with just 1.49 per cent in December 2007 and 3.12 per cent in March 2008.

Investment universe

But the investment style varies to some degree for different fund houses and even the type of equity fund, according to whether it is just an equity fund or a focused mid-cap or small-cap equities fund.

Mr Sandip Sabharwal, CIO-Equity, JM Financial Asset Management Private Ltd, said, “Our broad strategy remains the same. We are focused on increased monitoring of our investment universe so as to make sure that the companies that we hold are reasonably insulated in their business model from the global market turmoil as well as from the domestic slowdown.”