The Hindu Business Line : Zurich Prudence Fund: Invest

FRESH investments in Zurich Prudence can be considered with a long-term perspective. The performance of the fund in the last five years has been impressive, especially in the down markets of 2000 and 2001 and during stock market rallies.

Suitability: A significant proportion of the gains registered have been through aggressive management of the equity portfolio. This is reflected in the swings in the NAV. Understandably, this has implications for the risk involved in the fund. The point, however, is that the fund has the performance to show for the risks borne. In this context, this fund can be part of the portfolio of even a conservative investor, though the horizon would need to be longer.

Review: The fund has witnessed a steady increase in the corpus under management last year. The NAV per unit rose 24 per cent, while the net asset value increased 48 per cent. The fund now has assets of Rs 109.1 crore.

The fund's performance since January 1999 has been superior to any passive mix of indices and bonds in the 60:40 proportions.

The fund has also steadfastly maintained a mix of equity and debt that does not change significantly. In other words, it appears that the fund is not in favour of aggressively timing the market — that is moving cash between equities and bonds in anticipation of better returns.

Equities declined to a low of 55 per cent at the end of November 2001 and rose to a high of 64 per cent at the end of December 2001. Otherwise, the range has been 57-60 per cent.

The fund also appears to favour holding cash as opposed to holding stocks whose valuations are stretched.

The value addition for the fund appears to flow from the management of the equity portfolio — particularly through stock selection. In the bond portfolio, value addition through aggressive rotation of holdings in the government and corporate sectors has been notably absent.

Equity moves: The following were some of the moves in the equity portfolio through which the fund sought to add value:

Increased exposure to large-cap companies in Sep 2001 to hedge against the sharp fall in stock prices then consequent to 9/11.

Increased exposures to Zee in Nov 2001. Zee subsequently rose in value.

Exposure to mid-caps and IT stocks in December 2000. Both segments performed well subsequently.

Exposure to HPCL and ONGC in 2002. The fund also held PSU stocks such as BPCL, Concor, BHEL and Bharat Electronics. PSUs have fared well since February 2001.

In terms of sectors, there is evidence of active sector rotation. The fund has however largely favoured the sectors of IT, construction and building materials, auto and healthcare. Concentrated investments in these sectors were preferred from June 2001 to May 2002.

The fund favoured the inclusion of mid-cap stocks, evidenced by investments in TVS Suzuki, Wockhardt, Mastek, Digital and Macmillan India.

Debt moves: The fund generally maintained exposures only to corporate sector credit. The strategy was to benefit from the higher yield offered by those instruments compared to government securities. However, in August and October 2001, the fund did dabble in government securities. In both these months the prices of government securities rose, contributing to the returns generated by the portfolio.

However, the fund came back to nil exposure to government securities in the months that followed. Importantly, by selling government securities in November 2001, the fund had to forego a significant opportunity to benefit from fall in interest rates.

This cannot be interpreted as a negative for the quality of fund management. In fact, this characterises the fund management style — conservative and passive in debt while aggressive in equity. Investors comfortable with such a style should include this fund in their portfolio.

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