Alliance Basic Industries Fund: Invest

Recommendation: Invest

S. Vaidya Nathan

THE performance of the Alliance Basic Industries Fund has been unimpressive, largely because of the high market levels at which the fund entered the fray and the speed with which the funds were deployed.

However, the fund managed the subsequent downtrend fairly well. From the present levels, the downside risk is minimal. Though the performance may not improve in a hurry, at the current valuation, the Alliance Basic Industries Fund may be a fairly good investment option. The small asset base provides room for a higher degree of flexibility in management.

The fund has a small portfolio of around 15 stocks and, barring one or two, its overall quality is fairly impressive. The consistency in stock selection and retention in the portfolio also appear appropriate for a fund of this genre which has just started out.

But the performance over the long term may improve only if a more active approach to profit-taking is evident, as stocks of the kind held in the portfolio do see sharp ups and downs depending on the underlying growth trends. Holding such stocks over a period was not a paying proposition in the 1990s.

Suitability: The Alliance Basic Industries Fund is appropriate for those seeking to diversify their portfolio. For investors with a sizeable exposure to the technology sector, the fund may be appropriate for spreading risks. But for those without such investments, exposure to well-managed technology funds, such as Kothari Pioneer Infotech and Alliance New Millennium (which is improving after a battering), may be given priority. Along with exposures to the tech sector, Alliance Basic Industries may be added for diversification.

Investors may be better off taking exposures in the dividend plan of the fund as the fund is eligible for tax breaks as an open-end scheme with more than 50 per cent exposure to equities. However, any changes in the tax laws in the Budget need to be tracked.

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Portfolio review: The portfolio shows a fairly focussed investment strategy. The stock selection has also been fairly good though the high entry levels in many of the stocks has acted as a dampener on performance. On a scrutiny of the portfolio, the following aspects stand out:

*The fund has taken a fairly heavy exposure in the finance sector, with big bets on companies seen as tech-savvy and well-placed to handle the emerging changes and challenges. The fund has focussed largely on three stocks _ HDFC Bank, ICICI Bank and HDFC. Collectively, the HDFC stable stocks have consistently accounted for around 25 per cent of net assets. The fund has pared its exposures in HDFC and ICICI Bank in the last few months.

*Close to 40 per cent of the net assets are invested in finance sector stocks, with diversified companies accounting for around 25 per cent of net assets.

*The fund has quit a few stocks almost completely. Mahindra & Mahindra, Hindalco and Indo Gulf fall in this category. The fund has partially cut exposures to stocks such as Larsen & Toubro, Sterlite Optical and Punjab Tractors.

*Stocks such as ABB, BHEL and Reliance Industries have been inducted in the portfolio. The entry of ABB and BHEL has enhanced the exposure to the capital goods sector. With the gradual slowing down of the economy, the exposures to this sector could weigh on performance in the short term.

*The fund has maintained a consistently high level of exposures to equities at around 95 per cent of net assets.

Fund facts: The Alliance Basic Industries Fund was launched as part of the Alliance Sector Select Series in December 1999. The fund has a dividend and a growth option. There is an entry load of 1.75 per cent of NAV while there is no exit load. The fund has an NAV of Rs 8.44 per unit.