Tracking IT funds

Suresh Krishnamurthy

IN THE past year, IT sector funds that performed quite poorly relative to peers are Alliance New Millennium and Pioneer ITI Infotech Fund.

That these two funds were remarkably successful in their stock selection between mid-1999 and early 2000 compared to their peers makes the turnabout in their performance equally puzzling.

One reason behind their relative underperformance is their stock selection, which let them down in a big way. In Alliance New Millennium, the penchant for speculative stocks has been its bugbear. In Pioneer ITI Infotech Fund, remaining invested in stocks that the fund itself considered relatively overvalued was partly responsible for the problem.

Another reason is both these funds were relatively fully invested compared to their peers. Some of their peers thought it fit to move into cash in a big way and, therefore, turned in a significantly better performance. For example, funds such as Birla IT Fund, Chola Freedom Technology and SBI Magnum IT have more than 50 per cent in cash.

Funds with a lower degree of cash, such as Tata Select Sector Fund, Sun F&C Emerging Technologies and Prudential ICICI Technology funds have also performed better. However, this is not because of their superior stock-picking skills in the tech sector but because they hold a diversified portfolio that includes stocks from a range of sectors such as consumer goods, healthcare and diversified stocks.

In a way, only the strategy of funds that moved into cash appears reasonable. In Alliance New Millennium, the stock-picking strategy will always remain a cause for concern. In funds such as Prudential ICICI Technology Fund, diversification of their portfolio was unfair. If they were not convinced about IT sector stocks they should have moved into cash and not opted for stocks that investors did not expect them to invest in.

For investors, the large cash position in some of the funds and the diversified portfolios in a few others have to be taken into account in maintaining their portfolios. If investors have more than one fund the exposure to various sectors and cash would now be quite different from what they expected when they invested in a technology fund. The allocations may, therefore, need to be tinkered with.