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S. Vaidya Nathan

IF YOU look at the performance card of Alliance Capital's equity and balanced funds, the returns still look fairly impressive, despite an indifferent performance over the last three years. The exceptions are Alliance New Millennium and Alliance Buy India Fund, which have fared poorly and not recovered. From 1995, the fund management of Alliance Capital's equity schemes has been the responsibility of Mr Samir Arora. A sizeable proportion of the returns from various equity-oriented schemes, even now, is due to the lumped-up returns generated in the 1996-1999 period.

Subsequently, the equity funds outperformed broad-based market indices in most quarters. But with the exception of Alliance Basic Industries over the past 15 months, the rest trailed many of their peer equity funds.

Zeroing in on IT: When Alliance started off in January 1995, it did so with a well-diversified portfolio in The Alliance'95 Fund. This did not pay off. But in late 1995, the fund changed tack. It was the first to unearth and place much store by the growth prospects of the still-nascent information technology sector. A few other funds, such as the then Kothari Pioneer (now part of Templeton) and Morgan Stanley, did have IT exposure. But this was confined to a modest portion of the net assets.

Stocks of pharmaceutical and fast moving consumer goods (FMCG) companies were rather unfancied in 1995 - 1996. Here, too, Alliance Capital picked up sizeable exposures. Between 1996 and 1999, the fund was on a roll.

Relying on earlier returns: Sample, for instance, the returns from Alliance 95, a balanced fund that invests up to 75 per cent in equities. Between 1996 and 1999, the returns were 308 per cent; but they slipped into negative territory in 2000 and 2001, with its NAV losing about 30 per cent in these two years.

It turned in modest returns of 11.8 per cent and 19.5 per cent in 2002 and 2003 respectively, despite buoyant equity and bond markets. The returns since launch of 16 per cent per annum draw heavily from the showing in the 1996-99 period. The story is no different with Alliance Equity and Alliance Capital Tax Relief.

The Arora link: During this period, the name of Mr Arora became linked with the performance of the equity schemes of Alliance Capital in a manner not seen to-date in any other fund. As the fund that made the most of the emerging fancy for IT stocks and select media stocks such as Zee Telefilms and Balaji Telefilms, the steady rise in Mr Arora's public profile was no surprise.

Increasingly, the success of the Alliance equity schemes — between 1996 and early 2000, Alliance schemes consistently figured as top performers — came to be associated with Mr Arora. It is quite possible that this did induce corporate and select high net-worth investors to follow the fund manager with their chequebooks when there was possibility that Mr Arora would leave Alliance.

This is a common phenomenon in markets such as the US. Fund managers tend to acquire a following; so much so that investors go with them when the managers switch funds. Performance, too, attracts fund flows. This is clear from recent trends as well.

The four-to-five-fold rise in the asset base of funds such as Prima, Bluechip, HDFC Tax Saver and HDFC Equity (the last two belonged to the Zurich stable earlier), to name a few, over the past 18 months provide good examples of inflows driven by performance.

Quality goes astray: Between 1996 and the third quarter of 1999, Alliance Capital stayed with frontline IT stocks. The quality of stocks in the portfolio ensured that the risks were not high, despite the aggressive management style.

When the boom in the tech/media/telecom stocks started in late 1999, the investment management style had become more aggressive. Second and third-rung tech and telecom stocks started to figure prominently in the portfolio. In particular, stocks such as Himachal Futuristic, Global Tele-Systems and Shyam Telecom, which accounted for 20 per cent of the assets in equity schemes for a period of time in 1999-2000, enhanced the scheme's risk profile. There were others of a similar genre in the portfolio.

Stocks that figured prominently in the list favoured by Ketan Parekh, also started to make an appearance. This was the case with most funds; only Zurich and Pioneer ITI, to a lesser extent, were the exceptions. But due to an early entry into the likes of Himachal, Global and Shyam Telecom, Alliance managed to avoid most of the 80-90 per cent decline in prices of these stocks.

The fund's performance took a knock when stock prices crashed in 2000. Subsequently, it has not lived up to its showing of the first five years. But it still continues to adopt a fairly aggressive approach. Until recently, its IT exposure remained the top sector holding and this is largely to blame for dragging performance.

Its stock selection, especially in IT, continues to stay off the beaten track. Stocks such as Digital GlobalSoft, Mastek, Mphasis BFL and E-Serve were preferred in 2001-02, ahead of the frontline stocks. This strategy did pay as these stocks appreciated sharply.

Not surprisingly, Mr Arora's touch was perceived in such stock selection. The linkage has become so strong that it is no surprise that he decided to bid for the company when Alliance Capital, US, decided to sell out (see accompanying story).

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