Birla Equity Plan: Hold

Recommendation: Hold

Aarati Krishnan

WITH 80 per cent return since its inception, the Birla Equity Plan (BEP) comfortably outpaced the BSE Sensitive Index, which returned 45 per cent since the fund's launch. However, in 2000, BEP's performance witnessed a setback.

Over the year, the fund registered a value erosion of around 36 per cent. Compared to such schemes as Alliance Capital Tax Relief, Kothari Taxshield, Sundaram Taxsaver and a range of UTI's Master Equity Plans, the fund had underperformed.

High exposures to technology stocks and an exposure to mid-cap stocks within the tech sector appear to be responsible for the setback. As the lock-in period is yet to run out (the scheme opened in February 1999), investors can stay invested.

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Portfolio overview: On reviewing the changes in the fund's portfolio over 2000, the following factors emerge:

*The fund has consistently given much weightage to the technology sector. As on end-December 1999, the exposure to technology stocks accounted for around 75 per cent of the net assets. The fund had, thus, borne the brunt of the sharp decline in technology stocks since March 2000. While the BL Software Index declined by around 48 per cent from end-February 2000, the BL 250 Index and Sensex fell by 37 per cent and 30 per cent respectively.

*The exposure to technology stocks dropped to around 68 per cent of the net assets by April 2000. But additional investments in tech stocks took the weightage back to 74 per cent by June 2000.

*A high degree of concentration in the top holdings is also likely to have compounded the problems of the fund. Just two stocks, Infosys and Visualsoft, accounted for 43 per cent of the net assets in December 1999. Concentration in these two stocks -- at 35 per cent -- continued to be high in June 2000 as well. The fund subsequently trimmed its exposure in Visualsoft. By December 2000, Infosys and Visualsoft together accounted for 28 per cent of the assets.

*The fund's top holdings have featured a mix of top-of-the-line and mid-sized IT companies. In a falling market, the mid-sized and small IT companies offered lower levels of liquidity compared to those at the top rung. Moreover, the former has suffered a much sharper value erosion. BEP's portfolio in December 1999 assigned fairly heavy weightages to stocks such as Visualsoft, Subex Systems, SSI, Moser Baer and Polaris. Exposures in stocks such as Visualsoft, Mastek, SSI and Subex remained in the portfolio until September 2000.

*Unlike other tax-saving funds launched in end-1999 and early 2000 (Kothari Taxshield and Sundaram Taxsaver), BEP's cash position -- before the stock market tailspin in February 2000 -- was not healthy. Comfortable cash reserves helped its two competitors weather the falling market.

*Only few stocks outside the technology sector have consistently featured in the fund's portfolio. The second largest sectoral exposures appears to be in pharmaceuticals, with Sun Pharmaceuticals, Hindustan Lever, Cipla and Pfizer stocks being the main ones.

*Since October 2000, the fund appears to be in the process of diversifying its portfolio to include more exposures outside the technology sector. Holdings in SSI, Subex Systems and Satyam Computers have exited the top 10, and have been replaced by Punjab Tractors, Pfizer and Cipla.

*By end-October, the fund's exposure to technology stocks was at 53 per cent of net assets, with pharmaceuticals, dyes and chemicals, FMCG and other holdings accounting for 35 per cent. Twelve per cent of the assets were in cash equivalents.

*The concentration in individual stocks has also been reduced. Save Infosys, which accounted for 17 per cent of the net assets in November 2000, every other holding of BEP now accounts for 6 per cent or less of the net assets.

*Unlike the Birla Advantage Fund, BEP is not one of the early ones to invest in technology stocks. It now appears that downward revisions in tech stock valuation would become more common. Therefore, some amount of diversification away from this sector would probably help improve the fund's performance and change its high-risk profile.