Alliance New Millennium: Hold/Avoid fresh Exposures

Recommendation: Hold/Avoid fresh Exposures

Suresh Krishnamurthy

INVESTORS in Alliance New Millennium can stay with the fund for now.

However, fresh investments need not be considered. The per unit net asset values of the growth and dividend option are, respectively, Rs 2.84 and Rs 2.83.

Suitability: The recommendation is suitable for investors who do not have a significant exposure to the technology sector. The weight of the technology sector in indices such as Nifty is now at 8.5 per cent.

A weight higher than this in an investor's portfolio may enhance its risk profile. Importantly, considering the uncertainty surrounding the earnings prospects of companies in this sector, a higher weight does not appear prudent.

Investors with a higher exposure to this sector may consider pruning their exposures by taking advantage of the recent uptrend in the price of software stocks.

As regards Alliance New Millennium, the aggressive stock selection policy of the fund enhances its risk profile. The exposure to the media sector does provide diversification benefits.

However, the quality of the stocks in the media universe leaves a lot to be desired. In this backdrop, the risk involved in the portfolio can be considered relatively high and only investors comfortable with such risks should stay invested.

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Portfolio: At the end of September 2001, Alliance New Millennium had 25.4 per cent of the net assets in cash and equivalents. Just above 50 per cent was invested in stocks in the IT sector with 39 per cent of the net assets invested in Infosys, Satyam and Digital Equipment. Reliance Industries accounted for 10.4 per cent of the portfolio while 4.5 per cent was invested in Sterlite Optical. Media stocks accounted for 9.3 per cent.

The portfolio of the fund at the end of September 2001 indicates that the aggressive trait of the fund continues. Stocks such as Balaji Telefilms, Sterlite Optical, Zee Telefilms and Creative Eye are part of the portfolio.

Performance: The performance of the fund since inception has been disappointing relative to its peers. In the past year, too, the fund underperformed many of its peers.

This is partly a reflection of the fund's lower cash component compared to its peers. While the cash position was more than 25 per cent at the end of September, it still had only around 10 per cent in cash at the end of March 2001.

Another reason for the poor performance of the fund in the past year is its investments in the telecom sector. Intended to provide diversification benefits, the investments in stocks such as HFCL, Shyam Telecom, Sterlite Optical, and Valiant Communications pulled down performance.

In the past month, Alliance New Millennium was among the top performers among technology sector funds. In terms of future performance, the cash position in the fund and its exposure to Reliance Industries may provide a degree of protection against downside risk.

However, exposures to media stocks may, instead of providing diversification benefits, have the potential to affect performance. Investors need to consider this factor before staying invested.