Kothari Balanced Fund: Hold

Recommendation: Hold

Aarati Krishnan

THE universe of technology stocks outperformed the broad market over the past nine months.

The Kothari Pioneer Balanced Fund pursued a less aggressive strategy than competitors such as the Alliance 95 Fund or Birla Balance, maintaining a diversified portfolio, with a lower allocation to technology stocks.

But despite its conservative strategy, Kothari Balanced Fund's performance compares well both to peers and the market indices. The fund's NAV displayed greater resilience in a falling equity market than that of funds such as Birla Balance, K-Balance or the Prudential ICICI Balanced Fund. Therefore, investors in the fund can hold their investments for the present.

Suitability: The fund is suitable for investors seeking a balanced fund with a moderate risk profile. Investments can be expected to turn in reasonable returns over two-three years.

Balanced funds as a class have turned in an unimpressive performance over the past nine months. Like most other balanced funds with an equity tilt, the Kothari Pioneer Balanced Fund has turned in a negative return on its Net Asset Value (NAV) in the January-September period.

With a negative return of 15 per cent on the its NAV over this period (on a point-to-point basis), the fund's performance matches competitors such as K-Balance(Kotak Mahindra Mutual Fund), DSP Balanced Fund and Birla Balance. The fund underperformed the Alliance 95 Fund. Since launch (in December 1999), the fund lost less on its NAV than the BSE Sensitive Index and the BL 250 Index.

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Portfolio overview: The following points emerge from a study of the fund's portfolio over the past nine months:

*The fund has consistently favoured equities in its asset allocation pattern. Starting with an equity exposure of 70 per cent in February, the fund consistently shored up equity exposures to take the equity allocation to the 65 per cent mark, compensating for declines in stock prices. The broad market indices lost around 20 per cent in value since end-February. But the fund's allocation to equities hovered at the 65 per cent mark.

*For its equity portfolio, the fund adopted a diversified strategy. Though technology stocks figure prominently in the top holdings, the portfolio consistently featured a number of non-technology plays as well. Stocks such as Sundaram Clayton, Hindustan Lever, Cummins, Wartsila Diesel, VSNL and CRISIL consistently figured in the fund's portfolio since launch. In respect of these holdings, the fund followed a buy-and-hold strategy, with relatively little attempt to time the markets.

*The technology stocks in the portfolio saw some churning in recent times, with the fund migrating from small and mid-cap stocks in the sector to the large cap stocks. Though holdings such as Satyam Computers, Hughes Software, Zee Telefilms, Mastek figured consistently in the tech portfolio, this part of the portfolio appears to be more actively managed, with some attempt at market timing.

*Among non-technology stocks, the fund avoided commodity-oriented businesses and instead favoured sectors with relatively steady long-term prospects, such as consumer goods, finance and engineering. However, the investment approach seems to be stock-specific (bottom-up) rather than sector-based (top down).

*The fund's diversified strategy has worked in its favour during the sharp decline in the equity markets (led by technology stocks) during the February-May period. During this phase, the fund's NAV declined less than the other balanced funds and the markets.

Notable portfolio changes: The following changes in the fund's portfolio are noteworthy:

*Though the asset size remains largely unchanged, the fund used the falling equity market to build exposures in a number of non-technology stocks. In April-July, the fund added to positions in BHEL, Siemens, Cummins, CRISIL, ABB, ITW Signode. Select cyclical stocks witnessed a revival in market interest during this period, and the fund appears to have responded to this.

*In month August, the fund once again turned to technology stocks for impetus. It added substantially to its positions in Satyam Computer, NIIT, Sonata Software, HCL Technologies. The fund trimmed exposures in Hughes Software, Synergy Login Systems and Zee Telefilms. This is in keeping with the fund's stated objective of trimming exposures in mid-cap technology stocks and instead focussing on top-tier companies in the sector. The fund made few changes to its non-technology portfolio during this month.

*The past couple of months have seen considerable volatility in the debt market. To counter this, the fund stepped up its allocation to cash/current assets. The cash position was stepped up from 14 per cent in end-July to 24 per cent by end-August. This should have helped insulate the debt portfolio from interest rate risk.

Fund facts: The Kothari Pioneer Balanced Fund was launched in December 1999. It is a medium sized fund with a net asset size of Rs 146 crores by end August. The fund had an equity exposure of 60.32 per cent, debt exposure of 16.18 per cent and cash/current assets position of 23.5 per cent on August 31.

Technology stocks accounted for 24 per cent of the net assets, with other sectoral allocations spread more or evenly across sectors. The fund levies an entry load of 2 per cent on fresh investments, and its current NAV is Rs 8.55 per unit. The fund is managed by K. N. Sivasubramaniam.