Alliance Capital Tax Relief '96 -- Dominant stock market themes

Suresh Krishnamurthy

BARRING the last month, Alliance Capital Tax Relief '96 (ACTR) has consistently been one of the top performing equity schemes in the country.

Between September 1999 and March 1999, its net asset value has increased by a little more than 140 per cent. The impressive performance of the fund can be directly attributed to the changes in the portfolio that have been in tune with the changing stock market themes.

The following characteristics also emerge on a review of the quarterly portfolios of ACTR, since March 1998:

Since the fund went open-ended, inflows into the fund have increased. However, the fund still continues to remain a small fund with total net assets of Rs. 14.20 crores. When the lock-in-period ended on March 1999, the fund's total net assets were around Rs. 4.75 crores. This dipped to Rs. 2.98 crores, possibly due to redemption, at the end of June 1999 when the fund ended open, and since then has risen partly due to investment inflows.

Changes in the fund's sectoral allocation appear to have coincided with the changes in market moods. In March 1998, the fund had invested 40 per cent in FMCG, 23 per cent in IT/Media/Telecom and 10 per cent in pharmaceutical stocks. Over the next few quarters, however, exposures to FMCG sector were reduced considerably.

By September 1999, weightage of FMCG decreased to 9 per cent while weightage to pharmaceutical stocks increased to 13 per cent. This coincided with the market apathy to FMCG stocks. Exposure in IT/Media/Telecom however increased sharply to around 49 per cent. Exposures to this sector further increased to 65 per cent in December-end, 1999.

By end-March, IT/Media/Telecom accounted for 56 per cent. The changes in the portfolio during the period June-September 1999 were crucial. The increased exposure to IT/Media/Telecom maintained during that period, mainly explains the superior performance of ACTR between September 1999 and March 2000.

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The termination of the lock-in-period appears to have had a bearing on the extent to which fund would remain invested. From end-December 1998 to end-June 1999, the fund remained invested only around 75 per cent. Thereafter, the fund stepped up investments to around 90 per cent. At the end of March, the fund is invested only upto 70 per cent. This is partly because of non-investment of fresh inflows and paring down of exposures of software stocks - BFL Software, Digital Equipment, Orient Information and PentaMedia Graphics.

In terms of specific stocks, the following features emerged:

From March 1998 to March 2000, only the stocks of Infosys, Pfizer, Vesuvius and Indian Shaving Products have lasted in the portfolio. Barring Vesuvius, holdings in other stocks have also been reduced. Stocks that formed part of the portfolio in March 1998 and which were since sold-off are Bata India, Britannia, Hindustan Lever, Nestle, Carrier Aircon, Hoechst Marion Roussel, Knoll Pharma, BFL Software, Tata Infotech, Zee Telefilms, Corporation Bank and Swaraj Mazda.

Stocks that have stepped in to the portfolio since March 1998 and have since exited, include Aptech, Cybertech Systems, Digital Equipment, Orient Information and Pentafour Software.

Entrants into the portfolio prior to end-June 1999 and have since remained in the portfolio are HDFC Bank, SSI, Satyam Computers. Entrants into the portfolio in the period June September 1999 are Archies Greetings, Ashok Leyland, Cipla, Citicorp Securities, Dr. Reddy's Labs, Excel Industries, Global Telesystems, Godfrey Phillips, Hero Honda, L and T, NELCO, NIIT, PSI Data Systems. The performance of this set of stocks has in particular helped the performance of the fund. More recent entrants are TV18, HCL Technologies and Leading Edge Systems.

Since end-March, the fund's net asset value has declined by around 20 per cent. From the highs of March, the decline is even sharper at around one-third mainly due to weightage to the IT/Telecom/Media sector. In terms of future performance, the key issue for investors is the sharp changes in portfolio allocation of the fund in tune with the changing stock market fancy. It appears unlikely that such a trend would continue and it may have been a coincidence in 1999.

However if such a trend were to continue, it may sharply increase the risk-profile of the fund. For the present, the fund has to be viewed as an exposure to the IT/Media/Telecom sector. Given the bright prospects for the sector, quality of stocks in the portfolio and the performance track-record of the fund, ACTR is a decent proposition for investors seeking an exposure to this sector. The fund has a lock-in-period of three years and redemptions are permitted only after three years. It also provides investors tax-relief under Section 88 of the IT Act.