Upsets and surprises

Aarati Krishnan

IT WAS a trial by fire for equity fund managers in 2000.

On the one hand, the drastic downward revision in the valuations of technology stocks made most of them wary of increasing exposures to the sector. On the other, the renewed spectre of an economic and industrial slowdown contributed to the shaky fundamentals of most stocks outside of this sector, all but starving the equity market of good options.

The net result was that it was far more difficult to make the right calls on the equity market in 2000 than it was over the preceding years. So much so, that a few passively managed funds with an uncertain track record made it to the top of the performance charts.

Passive management has the edge

Close-end funds and those that did not receive much by way of fresh inflows, with passively managed portfolios, appear to have best weathered the year 2000. A range of Indian Bank Mutual Fund schemes -- Ind Navratna, Ind Ratna and Ind Sagar -- figure among the top performers of 2000. All three are close-end schemes. The schemes of Libra Leap also made it to the top ten.

Both funds profited from heavy exposures to a handful of speculative and highly-fancied technology and media stocks. However, in the absence of a consistent long-term track record and doubts about the sustainability of such returns, investors may be better off avoiding fresh exposures in such funds.

Dividend payouts preserve returns

Among the funds with actively managed portfolios, Kothari Pioneer Taxshield, Alliance Capital Tax Relief, Jardine Fleming Tax Saver, Templeton India Growth Fund and Zurich India Capital Builder Fund outdid the market in 2000. Here, again, funds that cashed in on the exceptional returns of 1999 to pay out dividends to unitholders turned out to be top performers; largely because the cash payouts helped preserve returns to unitholders in a falling market.

This apart, funds which retained a substantial portion of their assets in cash in the February/March 2000 period, just before the technology stock meltdown, survived the decline better. Templeton India Growth Fund and Zurich India Capital Builder Fund benefited from unconventional portfolios, which assigned greater weightages to cyclicals and non-technology stocks.

Major upsets

Several equity-oriented funds which turned in an impressive performance in the bull market of 1999, suffered heavy setbacks in 2000, losing more value than the market. Funds which overhauled portfolios in 1999 to increase exposures in a few technology stocks suffered serious setbacks. These include Canexpo, SBI Magnum Taxgain, and Tata Tax Saving Fund. Each of these funds had high exposures in the top five stocks.

Funds with high sectoral allocations to technology stocks (to the extent of 60-70 per cent of net assets) also performed indifferently. Birla Advantage Fund (which lost 40 per cent in 2000 after returning 309 per cent in 1999), Kothari Prima Plus (minus 32 per cent and 209 per cent), First India Taxgain (minus 40 per cent and 315 per cent) were some of the funds that delivered good returns in the three years to 1999, but suffered sharp reverses in 2000.

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Some of the funds invested in small and mid-cap stocks took a double-whammy -- from falling stock prices and from new valuation norms from SEBI, that required illiquid and infrequently traded stocks to be marked down to cost.

Sectoral funds

Sectoral funds, which turned in impressive returns in 1999, suffered major setbacks in 2000, with the majority underperforming the broad market. Technology-dedicated sectoral funds, especially those that made a debut in the first quarter of 2000, bore the brunt of the meltdown in equities thereafter, having started out with the handicap of a high-cost initial portfolio.

A few FMCG and pharma dedicated funds fared relatively better, shedding less value than the broad market.

The top performing sectoral funds of the year were UTI Services Sector Fund, JM Basic Fund and UTI Growth Sectors-Petro. While the UTI Services Sector Fund benefited from investments in frontline software stocks, both the JM Basic Fund and the UTI Petro Fund benefited from exposures to such stocks as Reliance Industries, IPCL and Reliance Petroleum, which fared better than the market over 2000.

Technology-oriented funds mirrored the sharp decline in tech-stock values, losing between 36 per cent (Kothari Pioneer Infotech Fund) and 50 per cent (Birla IT Fund) in value over the year. Even within the sectoral funds, there were wide divergences in returns. Funds such as Kothari Pioneer Infotech Fund, which invested in large frontline IT companies alone, fared far better than those such as Magnum IT Fund, Birla IT Fund, Tata IT Fund and Chola Freedom Technology, which took exposures in small and mid-sized companies too.

Within the universe of FMCG and pharma funds too, funds that restricted their exposures to frontline companies fared better than those that invested in smaller and mid sized companies. This is why Kothari Pioneer FMCG Fund, and Prudential ICICI FMCG Fund recorded better returns than Magnum FMCG Fund. With the top-rung pharma and FMCG stocks coming in for some defensive buying, MNC dedicated funds too staged a recovery of sorts.