Financial Daily from THE HINDU group of publications
Sunday, Aug 22, 2004
Financial Daily from THE HINDU group of publications Sunday, Aug 22, 2004 |
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Investment World
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Insight Markets - Mutual Funds Preferred ten mutual funds — Unfazed by rapid asset expansion S. Vaidya Nathan
These funds have, however, handled their rapid asset expansion well, leaving investors with attractive returns. The funds mentioned above outperformed the Nifty, Sensex and broad-based CNX 500. This portfolio has delivered a return of 130 per cent during this period; when equities were at peak levels a few months ago, the returns were in excess of 175 per cent. The quantum of inflows into these funds indicates that investors have been performance-chasers; this segment of investors has not been taken in by the aggressive efforts of several fund houses to lure them with baits such as dividends, bonuses and new funds. This is an encouraging sign. If they can deliver an impressive performance consistently, an expansion in asset base is likely to follow without the need to expend too much effort or money. These funds accounted for Rs 71 out of every hundred rupees of inflow into equity funds as a class. The fund managers were able to make suitable changes to the investment style, sector and stock preferences, allocation and approach to portfolio churning to accommodate the rapid rise in the funds under management. We examine how these funds have managed the transition to a larger asset base: HSBC Equity: Rare is the fund that has enjoyed a fine start and built on it so well, despite a burgeoning asset base. It focussed on large-cap stocks in 2003, and yet had no problems figuring among the top performers last year. The returns it managed with a portfolio of large-cap stocks were unmatched, and were attributable to stock selection and well-timed entry and exit. Only funds with a mid-cap tilt matched the level of returns recorded by this fund with ease. Barring MphasiS BFL and Polaris Software, there were no mid-cap stocks in the portfolio early last year. As the asset base rose swiftly, the fund opted for a mix of large-cap and mid-cap stocks. This proved beneficial, as mid-cap stocks have regained market fancy after slipping in the early part of 2004. The fund is, however, yet to be tested across a complete bull-bear market cycle. Top holdings: Mahindra & Mahindra, ONGC, ACC, Grasim and Tata Motors, Recommendation: Hold Reliance Growth: The portfolio is now more diversified in terms of sectors and stocks. When funds grow in size, they tend to gravitate towards large-cap stocks. Reliance Growth has avoided this beaten track. It has become more aggressive in two respects: the dominant presence of mid-cap stocks, and a penchant to ride the momentum in the market. Barring Grasim, GlaxoSmithKline Pharma and a small holding in Tata Motors, several mid-cap and small-cap stocks account for about 75 per cent of assets. It has aggressively booked profits and cut exposures. This has helped it outperform the benchmark and most peer funds, despite maintaining a relatively higher level of cash. The fund has fared well across market cycles. Top holdings: Grasim, Crompton Greaves, Jaiprakash Associates, Jindal Steel and Hexaware; a few offbeat exposures are Radico Khaitan, Nagarjuna Construction, Sintex, Kirloskar Brothers and Kirloskar Ferrous. Recommendation: Buy in phased manner. PruICICI Power: It is the comeback and turnaround artist in our preferred list of 10. An impressive performance has, however, still not pepped up returns to the initial investors as it bears the scars of a poor performance in the early years after the launch in 1994. The fund has moved away from a bias to large-cap stocks and has a higher degree of reliance on mid-cap stocks, though the large-caps stocks still form the bedrock of the portfolio. The top five sectors continue to account for about 70 per cent of assets. Limits for individual stocks remain capped at a conservative 5 per cent. Top holdings: SBI, Infosys, HCL Technologies, Hughes Software and Reliance Industries. Recommendation: Invest in a phased manner Franklin Prima: The investment approach has remained unchanged despite a seven-fold jump in assets. It has the largest asset base for a fund that focuses on mid-cap stocks. The fund has managed to scale up its holdings in several stocks, which have been its core exposures. For close to two years, the sizeable number of stocks that have remained an integral part of the portfolio is significant. It reflects the quality of stock selection and confidence in the themes invested in. If the asset size increase has not had an adverse effect, it is also attributable to the three bouts of re-rating that mid-cap stocks enjoyed between Jan 2003 and July 2004. That annual returns over five years and ten years have risen by eight percentage points each over the past 21 months tells the tale. A focussed approach has paid rich dividends. Top holdings: Indian Rayon, MICO, LIC Housing Finance, GE Shipping and IPCA Labs. Recommendation: Invest in a phased manner Reliance Vision: It has now shifted to a trimmer portfolio with a bias towards large-cap stocks. In early 2003, the focus was on stocks in the mid-cap space, especially from the banking and pharmaceutical sectors. The focus is more on the old-economy stocks now. The fund continues to maintain a conservative approach when it comes allocation for sectors and stocks, and also has a substantial cash position. It has exhibited a tendency to ride the momentum in the broad market. Top holdings: Relaince Industries, Tata Motors, Siemens, Tata Steel and Maruti. It no longer has exposures to stocks such as Zicom Electronic, Geodesic Information, Melstar Info, Garden Silk and Mukta Arts. Recommendation: Invest in a phased manner HDFC Prudence: The only balanced fund in our list runs equity funds close in terms of risk-adjusted returns. The approach is more aggressive than the strategy used for HDFC Equity. It has invested more in emerging growth and restructuring stories, which has subsequently paid off. There is no dogmatic preference for any theme. It has a greater proportion of assets in mid-cap stocks now. Top holdings: BHEL, Satyam, SBI, Grasim and Shree Cement. Recommendation: Buy HDFC Taxplan 2000: Despite a four-fold rise, the fund has an asset base of just Rs 34 crore. The investment approach remains unaltered with a focus on mid-cap stocks and a few small cap stocks. The fund continues to exhibit the ability to spot winning themes ahead of its peers. As early as January 2003, it was long on stocks from the engineering, auto, banking and chemical sectors. It has been active in churning the portfolio; the small asset base has ensured that this process is not expensive. Top holdings: Goodlass Nerolac, Shanthi Gears, Carborundum Universal, Blue Star and Orient Abrasives. Offbeat picks are Vimta Labs, Balkrishna Industries and Orient Abrasives. Recommendation: Invest Franklin Bluechip: As is the case with Prima, Franklin Bluechip — the largest equity fund — has also stuck to the knitting by consistently focussing on large-cap stocks. As its asset base moved closer to the Rs 2,000 crore level, it has had to enhance the number of exposures from about 20 stocks to 30 stocks now. The expansion in the universe of large-cap stocks due to several IPOs and rejuvenation in banking and other PSU stocks has made for a better choice. There has been a decline in the extent to which the portfolio is churned; this is partly explained by the larger asset base. This fund has, so far, outperformed benchmarks comfortably. To maintain this pace and beat the indices, an even more active approach may be needed. Top holdings: Infosys, Grasim, Reliance Industries, SBI and BPCL. Recommendation: Buy in a phased manner HDFC Equity: The fund's strategy of focussing on a few sectors remains unaltered. This has ensured that it has to make fewer calls in terms of identifying sectors and stocks and in timing the buying and selling. The fund continues to show adeptness in latching on at an early stage to emerging sector preferences. It has, however, taken exposures to more mid-cap stocks than was the case a couple of years ago. Top holdings: Satyam Computer, BHEL, SBI, Grasim and Relaince Industries. Recommendation: Hold UTI Petro Fund: It remains the only sector-specific fund that has delivered attractive returns. As its base more than quintupled, large-cap stocks such as ONGC, Reliance Industries, Indian Oil, GAIL and HPCL are the prominent holdings. Earlier, the fund had tailored its top picks in line with the potential for gains from specific developments. For instance, it had close to 20 per cent of assets in IBP ahead of Indian Oil's open offer at Rs 1551. Now it also owns every listed stock from the oil and gas industry. With crude prices at record levels, a windfall for ONGC may cancelled out by lower earnings growth in most other stocks in the portfolio. Despite the hammering that oil-sector PSUs took a couple of months ago, the fund has generated annual returns of about 35 per cent over a five-year period. Recommendation: Hold.
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