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Suresh Krishnamurthy

INVESTORS in Kotak K-30 can consider switching out of the scheme. The fund is morphing into an asset allocation fund rather than a strict diversified equity fund. The change in strategy is in tune with the change in fundamental attributes of the scheme that allows investments of up to 30 per cent in cash and debt.

The fund is now changing the allocation to cash and equity actively each month. In this backdrop, it may be better for new investors to wait out and see the performance of the fund before considering exposures to it.

Suitability: In funds that follow an active tactical asset allocation strategy, the gain for the investor is in the form of relatively better downside protection.

Since the cash component would be higher, the performance during a market downturn would be better than a fund that is fully invested.

However, the risk of opportunity loss during market upswing is substantially higher. If entry and exits are not timed properly, the overall return generated could be substantially lower than that from other diversified equity funds.

In this backdrop, this fund may not be suitable for conservative investors seeking exposure to equities. If such investors are looking to hedge their risks, a balanced fund may be a more ideal investment vehicle.

Review: The striking aspect of the K-30's asset allocation since December 2001 is the net payables position. The fund has, on an average, mobilised 5 per cent of the net assets from other sources to invest in the call money market.

Under the Regulations, borrowings are allowed to meet redemption pressures. However, this fund has had a consistent net payables position month after month, without much evidence of redemption pressure. This net payables position emerges as a surprise, especially when the fund has a substantial portion invested in call and money market instruments.

In the sector-wise exposures, there is a distinct shift to reduce portfolio concentration. Consider this. The top five sectors accounted for 74 per cent of the net assets at the end of December 2001. By end-June, the exposure had come down to 63 per cent. At the end of October, the exposure had come down further to a level of 43.6 per cent. Evidently, the accent has been on reducing sector concentration.

This has ensured that the fund is significantly underweight now in the major sectors — IT and FMCG — compared to their proportion in indices such as Sensex. It is, however, marginally overweight in healthcare and banking and finance. The fund is significantly overweight in automobiles and oil and gas. These are contrary to the positions that prevailed a few months ago.

In terms of stocks, the fund has remained consistently underweight on the majors — Infosys, HLL and Reliance Industries. And though the fund had exposures to PSU stocks, it was never significantly loaded with them. Even at the end of August, exposure to BPCL and HPCL, put together, was less than 6 per cent.

The strategy has been heavily tilted towards growth stocks, though buying into mid-cap stocks is also part of the strategy. For example, Essel Propack, Thermax, Balrampur Chini, Adlabs Films, Hindustan Inks & Resins, LIC Housing Finance, and I-Flex Solutions have all been part of the portfolio at one time or the other.

In terms of their exposure to the call and term deposits segment, the exposure has been more than 20 per cent from July. This significant exposure to non-equity investments has had a predictable impact on its performance. The fund outperforms the market when stock prices decline and underperforms when prices rise.

This behaviour is typical of most funds with large cash positions. If it outperforms even when markets rise, its investment strategy can be called a success. As it stands, it is only a poor substitute for a balanced fund. In fact, in the future, the Sensex cannot be the benchmark for evaluating the fund's performance.

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