Sectoral funds: Mixed show

S. Vaidya Nathan

THE year 2000 has been a sharp contrast to 1999, as far as sectoral funds are concerned.

Till around the time when the market started declining in February 2000, it seemed that sectoral funds could not go wrong. But since then, in the first six months of fiscal 2000, quite a few took a battering .

Given the overall market trends in the July-September quarter, it is no surprise that all sector-specific funds posted negative returns. But the divergence within the universe is stark. Clearly, an important message that comes out of the performance in this quarter (see Table) is that funds which opted for reasonably good selection and had a consistent strategy did better than the rest.

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Nowhere is this clearer than within the universe of IT funds. The fund with the one of the better portfolios -- Kothari Pioneer Infotech -- emerged out of the quarter with the least NAV decline. Clearly, the fund continues to be the superior option in this segment.

Helped by the improved stock prices of Himachal Futuristic and Global Tele-Systems, in which it has heavy exposures, Alliance New Millennium staged a comeback of sorts, posting a lower decline in NAV than the broad market and such technology sector-specific indices as BL Technology and BL Computer Software. SBI Mutual Fund's Magnum IT Fund also weathered the storm well, helped by the heavy weightage in Infosys and portfolio improvement over the last six-nine months.

Funds that were more aggressive in stock selection, trading strategy and range, such as DSP Merrill Lynch Technologies.com Fund, IL&FS eCom Fund and Sun F&C Emerging Technologies Fund, were at the receiving end. Some of these, as also Prudential ICICI Technology Fund and Alliance New Millennium, were caught out by the high entry levels which led to the NAVs being well below the offer price of Rs 10 per unit. Of these, only Alliance New Millennium seems to be making a recovery of sorts, though it has a long way to go before it can deliver returns.

Birla Mutual Fund continued to do poorly in this quarter too. The heavy exposure in stocks such as SSI and VisualSoft as well quite a few small IT companies at high entry levels, appears to be taking a toll on its performance. But given its long track record, the Fund's technology-oriented schemes, such as Birla IT, Birla Advantage and Birla Equity Plan, could merit a close watch.

Not surprisingly, some of the sectoral funds focussed on the fast moving consumer goods (FMCG) and pharmaceutical sectors performed well. K-MNC (of Kotak Mahindra Mutual Fund), the FMCG focussed funds of Kothari Pioneer and the SBI Mutual Fund (where a move towards quality stocks is underway a la the Magnum IT Fund) were the better performers, with lower declines in NAV than the rest of the equity funds and the broad market.

Using sectoral funds: Interestingly, in this quarter, 24 of the 40 sectoral funds outperformed the broad market; 16 sectoral schemes figured among the top 30 in terms of performance, across all equity-oriented schemes; quite a few sectoral funds -- especially those focussed on the technology sector -- outperformed the sector-specific indices. In this backdrop, investors need to consider carefully using sectoral funds to derive benefits over the medium to long term.

For instance, an investor who had a 30 per cent weightage to Kothari Pioneer Infotech Fund, 10 per cent to Alliance New Millennium, 20 per cent to Kothari Pioneer FMCG, 20 per cent to a fund with quality non-tech and non-FMCG exposures, such as Alliance Basic Industries, and 20 per cent to an index fund, such as Franklin India Index Fund, would have a suffered a portfolio loss of around 6 per cent. This portfolio may outdo the market in the future too.

This is better than some of the more diversified funds. For instance, one of the better diversified portfolios -- Morgan Stanley Growth Fund -- suffered an NAV decline of close to 15 per cent, while the conservatively structured diversified portfolio (in level of exposure to each stock) of Sundaram Growth Fund suffered a value erosion of around 12 per cent.

It is evident that in a clearly focussed sectoral fund, the fund managers appear to be making better decisions than in diversified funds. Rare is the diversified fund that has delivered good returns over a long period. Morgan Stanley Growth Fund returned less than 10 per cent per annum despite quite a spectacular comeback in the last four years.

A combination of sectoral funds and an index can give investors the desired level of diversification. The key would be to pick sectoral funds that stick to frontline stocks consistently and do not trade actively. Sectoral funds with a diffused focus, such as Alliance Buy India, Tata Life Sciences and Prudential ICICI Technology, tend to have stocks from two or three sectors whose performances neutralise one another.

That such funds can be avoided is clear from their performance in the latest quarter. Needless to add, it may better to invest when the market has suffered a steep decline and also to use the systematic investment plans (where small amounts can be invested at regular intervals) to neutralise to some extent the timing effect. In funds with a good track record, over time, the returns from such a strategy could be attractive.