Sun F&C Value Fund: Switch

Recommendation: Switch

Aarati Krishnan

THE Sun F&C Value Fund is a moderate performer among the diversified funds, marginally underperforming the Sensex over the past year. Its portfolio strategy appears tilted towards momentum rather than value-investing, in the traditional sense of the term.

The fund's investments in small and mid-cap stocks and its large number of marginal holdings has made for a sub-optimal performance relative to some of the top performing diversified funds (such as Kothari Pioneer Bluechip Fund and Zurich India Equity Fund), which follow a more concentrated strategy. Investors can pare down exposures in this fund, as a fund with focussed investments in large-cap liquid stocks may be better able to capitalise on a market uptrend in its initial stages.

Click here for Table

An evaluation of the changes in this fund's portfolio over the past year reveals the following features:

*In contrast to the concentrated strategy of taking large bets on a few stocks, this fund divides its assets among a large number of stocks, each accounting for a small proportion of the overall net assets.

*While this strategy does result in lower vulnerability to movements in individual stock prices, it also prevents exceptional performances by a few of its holdings from showing up in the overall returns. This implies that a majority of the picks in the fund's portfolio have to pay off for this to show up in the fund's NAV performance.

*Sectoral exposures are also spread across a range of businesses. However, software has consistently remained the largest sectoral exposure, accounting for between 27 per cent and 42 per cent of net assets. The fund has consistently maintained small exposures in cyclicals such as cement, steel, engineering, oil and gas and automobiles.

*Sectoral allocations appear to have moved in line with the broad market preferences, indicating a preference for momentum-investing. For instance, between January and March 2000, as technology stocks moved up from their already high valuations, this fund also stepped up exposures to the sector, from 32 per cent to 40 per cent.

Instead of rebalancing its portfolio in favour of non-technology stocks, the fund actually cut back exposures to cyclicals such as automobiles, steel, engineering and oils and gas to make room for a higher technology exposure.

*The fund's portfolio features quite a few small and mid-cap stocks, especially in the technology and pharmaceutical sectors. Several of these were acquired during the bull run in the first quarter of 2000.

Trading volumes in a few stocks have dwindled considerably during the tailspin in equities after March 2000 (Avon Organics and Compudyne Winfosys are two instances). These stocks now have very low liquidity levels, though they still feature in the portfolio.

*Between March and June 2000, the fund held on to the majority of its technology exposures as the downtrend in these stocks continued. The few stocks where the fund booked profits were those of top-rung companies, such as Hughes Software, HCL Technologies, Sun Pharma, Wyeth Lederle, Bata and ITC.

Exposures in stocks such as Cerebra Integrated, Virtual Dynamics, Mascon Global and Avon Organics remain largely unchanged. The fund's performance could have been impacted partially by SEBI's new valuation norms for write-down of thinly traded securities.

*Between June and September 2000, the fund pared investments in a range of pharmaceutical and banking stocks, while adding to some frontline infotech stocks, such as Hughes Software, Infosys and Wipro. Exposure to the software sector was up at 48 per cent of assets by September 2000.

This trend was, however, reversed in the fourth quarter, as the fund booked profits in several large-cap, liquid stocks. Infosys, Wipro, Ranbaxy, ACC and Reliance are stocks where the fund pared exposures over the quarter. As a result, exposure to the software sector had fallen from 48 per cent to 27 per cent by end of December 2000.

The fund does not appear to have reinvested the proceeds in equities. The cash position climbed from 4 per cent by end September 2000 to 32 per cent of the net assets by end of December 2000.