DSP Merrill Lynch Opportunities Fund: Hold

Recommendation: Hold

Suresh Krishnamurthy

FRESH investments need not be contemplated in DSP Merrill Lynch Opportunities Fund. While the fund's objective is to practice sector rotation and produce long-term capital appreciation, and it has done better than the other equity schemes from the DSP stable, the performance has not been too impressive in comparison with other diversified funds in the peer group.

Despite restricting exposure to technology stocks to about 50 per cent, the performance has been as poor as that of technology sector funds -- an indication that stock selection in other sectors is quite poor. Still, investors can retain their holdings, considering that it may be too early to judge the fund, which was launched in April.

Suitability: Risks associated with investing in the Opportunities Fund are high. Sector rotation involves trading on the momentum, which carries a high degree of risk. As such, only investors comfortable with such high risk can opt to stay invested.

Investment strategy: The fund's focus is to respond to the dynamically changing economy by moving its investments among different sectors. For a fund manager, the advantages of sector rotation cannot be understated. The sharp decline in values of the IT sector since March clearly underlines the gains that sector rotation offer.

However, it may be beyond the means of even the best fund manager to consistently anticipate changing trends and make changes accordingly. This fund, launched in April when the downtrend in IT stocks was well underway, continued to invest heavily in IT stocks, perhaps anticipating a reversal in stock price trends in favour of the IT sector. While this does not suggest that DSP Merrill Lynch may not be successful in future trend anticipation, it does underline the kind of risks involved.

Portfolio allocation: As at end-September, the fund had invested close to 22 per cent in cyclicals, 17 per cent in consumer good sector and 54 per cent in technology sector. The fund has maintained a higher exposure to IT and cyclicals since inception.

The top holdings are ITC, Reliance Industries, Infosys, Satyam and SSI. The fund has followed a degree of focussed investing, with the top five stocks accounting for close to 53 per cent of the net assets at end-September. In cyclicals, the major exposure is Reliance, while in consumer goods, the bulk of the exposure is in ITC.

In the technology sector, the company banks on mid-sized companies, with SSI, Digital Equipment, DSQ Software, HCL Infosystems accounting for close to 30 per cent of the fund's net assets. The higher allocation to mid-sized companies is reasonable considering that, over the medium term, their revenues are expected to outpace the majors. However, once again, the risks are higher and there is a possibility that the existing set of listed mid-sized companies may actually fare quite poorly compared to the large companies.