Large-cap funds' bets on small companies backfire

UTI Leadership , Reliance Equity, Bharti Axa Equity and Sundaram Select Focus funds led the under-performance of more than half the large-cap equity schemes in 2010 as fund managers stacked up small companies in their portfolio to outperform, a strategy that backfired and strengthened the case for investing in index funds.

Nearly 37 of the 61 funds run by Reliance Mutual Fund, UTI Asset Management and Sundaram Mutual Fund returned lesser than their benchmark indices as mid-cap and small-cap companies lost value faster towards the end of the year on the back of a series of scandals. The returns of these underperforming funds ranged from -0.8%% to 15.8% in 2010, when the Sensex rose 15.6% and the S&P CNX Nifty gained 16.09%, data from Value Research, a mutual fund tracking company, shows.

"Fund managers wanted to have a diversified portfolio with mid-cap stocks to give the return kicker," said A Balasubramaniam, CEO, Birla Sun Life Mutual Fund. "In most cases, however, the strategy of seeking alpha by investing in mid-cap stocks misfired. 2010 was a year of rapid market movements; such volatility required faster alignment to broader markets. Most fund managers failed to keep their portfolio in line with the markets," he said. Alpha refers to the risk-adjusted return on investments.

The underperformance has dealt the 6.65 lakh-crore mutual fund industry, which has been facing tough times ever since the 2008 meltdown, another blow. Due to the poor performance of equity schemes, Indian investors who keep more than half their savings in bank deposits, may increase their investments in fixed-income securities as interest rates climb.

Poor performance of some of the index constituents such as Reliance Industries and metals company Sterlite Industires also added to the woes of these schemes.

The dwindling optimism about Indian markets' prospects due to soaring commodity prices and the possibility of higher interest rates may make it difficult for funds to provide market-beating returns in the new year, too. "2011 may also not be a great year for equity mutual funds," said Dhruva Raj Chatterji, senior research analyst, Morningstar India, a fund research firm. "Equity funds are likely to generate just about 10% from the current market levels. Equity funds outperformed in 2009 only because of the lower performance base created in 2008. The course ahead will be difficult for fund managers. Risk-averse investors should start looking at balanced funds."

Foreign fund flows may also be lower than the record $29 billion this year as investors begin to buy equities in the US and other developed markets, where the prospects are looking up. Fixed-income returns have jumped more than 50% with the yield on the 10-year US treasury jumping to more than 3.5% from less than 2.5%.

Mid-cap and small-cap companies that provide higher returns fell off investors' radar in the last quarter after the Securities & Exchange Board of India revealed price rigging in companies such as Murli Industries and the Central Bureau of Investigation arrested some bank executives for taking bribes to sanction loans.

Among funds that have outperformed are Religare PSU Equity Fund, with over 11% return versus the benchmark return of -1.42%, Reliance Equity Opportunities at 29%, Magnum Emerging Business at 30% against the benchmark's 15%, and DSPBR Microcap Fund, which clocked 43% returns versus the 15% gain of the BSE Smallcap index.

Source: http://economictimes.indiatimes.com/markets/stocks/market-news/large-cap-funds-bets-on-small-cos-backfire/articleshow/7181937.cms

The seasoned five

They may or may not merit your investments, but they have established their own identity in the labyrinth of over 1,000 MF schemes. We take you through five such schemes.

Track record is an expensive commodity in the Rs. 7 trillion Indian mutual fund (MF) industry. And when an equity fund has accumulated it over the past 10 years, it usually makes for a good investment. About 26 years after the first equity fund was launched in 1986—aside from Unit Trust of India’s US-64, which technically wasn’t an MF scheme—we now have a sizeable number of equity schemes that are more than 10 years old. Of 400 equity funds in the MF industry, 82 schemes have completed 10 years. While most of these schemes have lost their relevance in the face of newer and nimble peers launched by their own fund houses, a few names are still spoken of with reverence. They may or may not merit your investments, but they have established their own identity in the labyrinth of over 1,000 MF schemes. We take you through five such schemes.

HDFC Top 200

Launched in November 1996, HDFC Top 200 (HT200) is the largest equity fund in the MF industry with assets of Rs. 9,424.8 crore. But this gentle giant hasn’t compromised its performance and is as nimble as the next fund. With a 10-year return of 31%, HT200 has done well in both the rising as well as falling markets. In 2008, when equity markets fell on the back of global credit crisis, HT200 fell by 45.35% against an average category loss of 51% and 56% by its own benchmark, BSE 200 index. Prashant Jain, its fund manager, has consistently managed this fund since its inception; a rare feat in the industry that has seen several fund managers come and go.

According to the scheme’s mandate, the common holding between its own holdings and that of its benchmark index should be at least 6%. For instance, if Infosys Technologies Ltd constitutes 5% of BSE 200 and 7% of the fund, the common holding is 5%. It’s a mandate that doesn’t hug the benchmark index, but also restricts the risks a typical equity fund can take. Jain tells us that he usually keeps the common holding at a minimum of 60% of the scheme’s total corpus. “Since it doesn’t go too far from the index, it is meant for low risk investors,” adds Jain.

Jain also avoids sitting on cash as he firmly believes that investors give money to fund managers to invest in equity markets and not to sit on cash. It had only between 3% and 5% of its corpus in cash between October 2008 and February 2009 when equity markets hit rock-bottom. Jain likes banking, consumer non-durables and software sectors; in each of these he has increased his exposure throughout 2010. HT200 is a part of Mint50—Mint’s chosen set of 50 schemes that we recommend for fresh investments.

UTI Mastershare

The oldest diversified fund in the industry after US-64, UTI Mastershare was launched in October 1986, when unit-holders used to get its physical certificates, like the old time physical share certificates. But Mastershare is more famous for its annual dividends that the fund has diligently paid, during the Diwali festival. It’s an illusion though; dividends come out of the pockets of investors and your fund’s net asset value (NAV) reduces by a similar margin.

However, that has not deterred much of its 680,000 loyal unitholders who still hold their physical unit certificates. “Even if the fund doesn’t pay dividends, an investor can still withdraw a portion of his investments and use it as dividend. But usually, investors don’t withdraw regularly to substitute for dividends,” says fund manager Swati Kulkarni. She says that though dividends are not guaranteed, they endeavour to pay regular dividends.

Mastershare is a large-cap-oriented fund that invests about 80% of its corpus in large-sized companies. The rest goes to mid-cap companies. In the early days, Mastershare invested in scrips across market capitalization. After the fund house got restructured in 2003, the scheme became focused. Additionally, too many fund managers came and quit. Between 2000 and 2006, four managers were at the helm of this scheme. When Kulkarni took over in December 2006, she trimmed the number of stocks to a more manageable level (presently about 49 scrips against about 80 scrips before) and cut down its exposure to mid-cap companies (about 20% presently against 28% average between 2005 and 2007). According to the fund’s November portfolio, it has 15.6% exposure in mid-cap companies and almost nil in small-sized companies. Its subsequent investments in capital goods space also helped the fund beat the markets in 2007, after Kulkarni took over.

Mastershare’s performance has mostly been subdued. Its 10-year returns stands at 17.83%. However the fund has picked up after Kulkarni has taken charge; in two of the past three years, it outperformed the category average. The fund took a momentary hit in 2009 because Kulkarni misread election results; equity markets shot up by 85% between 9 March 2009 (Sensex level of 8,160) and 5 June 2009 (Sensex level of 15,104). Like many schemes, Mastershare was caught sitting on too much cash (20.48% as of April-end 2009). Once the markets settled on an upswing, the scheme increased its exposure to the banking and information technology (software) sectors, which boded well. The scheme is not built for chart-busting returns, but Kulkarni aims for consistency.

Franklin India Bluechip

After suffering a painful dip in 2007 when it underperformed equity markets as well as a sizeable number of equity funds, Franklin India Bluechip Fund (FIBF) is back. At a corpus size of Rs. 3,326.7 crore, FIBF is one the largest schemes in the large-cap space. What separates FIBF from the rest of the market is its aim to stay true to its label. A large-cap scheme by nature, the fund refuses to stray away from its mandate. According to data available from Value Research, a mutual fund tracking firm, FIBF has consistently invested over 75% in large-cap companies and the rest in large to very large-sized mid-cap companies.

The other thing that FIBF avoids doing is hold cash. Between September 2008, when markets crashed, and March 2009, when it hit a low, FIBF had only 7% of its corpus in cash. Says fund manager Anand Radhakrishnan, senior vice-president and portfolio manager-equity, Franklin Templeton (India) Asset Management Co. Pvt. Ltd: “We don’t try to time the market through cash calls and typically are fully invested as we believe investors coming into equity funds are looking for equity exposure and not for an asset allocation product.”

Since November 2008, the fund’s corpus has grown to Rs. 3,326.76 crore, up from Rs. 1,435.55 crore, a jump of Rs. 1,891.21 crore or 52% compounded annualized. The fund is well diversified; its top 10 holdings consistently account for about 48-50% of its total portfolio. Like most other schemes, FIBF’s top three sectoral allocation includes banking with 19.20% of its total portfolio, chiefly through ICICI Bank Ltd and Kotak Mahindra Bank Ltd; the fund booked profits in HDFC Bank Ltd throughout 2010. It also made money through its investments in Infosys Technologies Ltd, Cummins India Ltd and Crompton Greaves Ltd.

“India remains underserved in terms of financial services, but the strong growth in personal incomes has led to increased demand. Given the low penetration of banking and financial services in India, we believe companies in this sector have good growth potential,” says Radhakrishnan. Large outperformance of banks in 2010 and present valuations—which Radhakrishnan feels are “still reasonable”—do not seem to dither him.

Reliance Vision

A star performer for a good part of the past decade, Reliance Vision Fund (RVF) is one of Reliance Capital Asset Management Ltd’s largest diversified equity funds. Though RVF is a large-cap-oriented fund, it doesn’t hesitate in taking exposure to small and medium-sized companies. In 2010, it has invested approximately 30% of its corpus in small- and medium-sized companies. In 2007, this figure was 38%. “We invest in mid-cap companies with a time horizon of at least two to three years,” says fund manager Ashwani Kumar who has managed this fund since June 2003.

Kumar likes to hold a tight portfolio and hence it’s not hard to spot a bit of sectoral concentration in RVF. With a corpus size of Rs. 3,543.2 crore, the scheme consistently holds about 33-35 stocks in its portfolio. RVF is opportunistic and doesn’t hesitate in frequent churning. It follows in growth style of fund management and holds around 10% on an average in cash. Some of the scheme’s biggest stories in recent times have come from investments in Siemens Ltd, ICICI Bank Ltd and State Bank of India.

Despite being oriented towards growth style, the fund also goes for value picks such as oil refining and marketing companies. The scheme aims to invest in companies within the BSE 100 index to the extent of 80% of its portfolio. For the rest it looks outside BSE 100, such as Coal India Ltd, which recently concluded India’s biggest initial public offering. “Despite venturing BSE 100, we do not diminish the portfolio quality,” says Kumar.

However, after years of outperforming the market, RVF’s recent performance has been subdued. It has managed to return a mere 13.08% so far this year (as on 24 December) against 15% by the category average. Its performance was almost just as much as its benchmark index BSE 100 which returned 12.88% so far. In 2009, around March and April, it got a bit late in deploying cash back in the markets; by the time it reduced its cash levels between May 2009 and August 2009, markets already appreciated.

Templeton India Growth Fund

With a corpus of Rs. 822 crore, this is the smallest of the five schemes we’ve picked. But Templeton India Growth Fund (TIGF) is one of the best and oldest equity funds that practice the “value” philosophy of investing. As against “growth” style of investing that hunts for fast-paced stocks whose share prices continue to rise even in overheated markets, a value stock’s share price grows only after certain events previously anticipated for the company occurs. These stocks typically trade below their true value, and against growth stocks, do not experience above-average growth. Hence, value stocks are typically not chased by a majority of buyers in the stock market; one of the main reasons why a well-managed value fund, such as TIGF, outperforms its peers during falling markets. In 2008 when the multi-cap equity funds on average lost 54%, TIGF lost 51%. Way back in 2000 and 2001 when the category lost 24% and 23%, respectively, TIGF lost just 3% and 7%, respectively, in those years.

“Majority of the investors might blindly shun beaten down or an ignored stock as they don’t expect growth from them and this exacerbates the decline. Investors, who are invested in beaten-down stocks of companies with good medium- to long-term potential, tend to do relatively well than those who had invested in growth stocks, when the markets turn, as they are under owned in the first place,” says Chetan Sehgal, chief investment officer-India, Templeton Emerging Markets Group, Franklin Templeton Asset Management (India) Pvt. Ltd. He’s quick to add, though, that value philosophy doesn’t just mean picking up stocks that are fallen. “They have to be fundamentally valuable; that distinction is crucial”, he says.

That doesn’t mean TIGF is a sitting duck in rising markets. Backed by beaten-down scrips such as Tata Chemicals Ltd, Bharti Airtel Ltd, Reliance Industries Ltd and others, which it accumulated in 2008, TIGF gave 104.7% returns in 2009 once markets started to rise, against the category average of 84.9%. While the Templeton group manages value-oriented schemes, the Franklin group manages growth-oriented schemes. Both groups have a distinct set of fund managers and analysts. The fund house claims that neither knows what the other does—the main reason, as it claims, why their schemes consistently manage to stick to their individual philosophies.

Source: http://www.livemint.com/2010/12/28212102/The-seasoned-five.html