Large cap fund yet to prove prowess in market downturn

A large cap fund is considered an ideal investment option for risk-averse investors. While these funds do not promise overwhelming returns like their midcap or multicap peers in rallies, they are known to offer better protection in downturns. However, this does not make a thumb-rule for the entire range of large-cap funds including Principal Large Cap Fund.

PERFORMANCE:

Launched in October 2005 in the middle of the bull run, Principal Large Cap managed to do well delivering decent returns in the first two years. For a new fund, it was a rather comfortable journey – beating the market and its benchmark BSE 100 by healthy margins both in 2006 as well as in 2007. Its returns of about 48% in 2006 and 73% in 2007 compared well against BSE 100’s 41% and 60%, respectively, given its large-cap investment mandate. Year 2007, which was an year of midcap stocks, saw the Sensex and Nifty deliver just about 47% and 55%, respectively.

The feat of the first two years of the launch could not, however, be repeated in 2008 and the fund slumped by about 59% against BSE 100’s fall of 55%. The sensex and the Nifty had lost about 52% each in that year. While this came as a surprise given the fund’s large cap mandate, the downfall could be given the benefit of doubt in light of the fund’s high beta of 1.05. Beta compares the risk imbedded in the fund’s portfolio vis-à-vis that of the market as a whole. Thus, a beta greater than 1 indicates the fund is expected to generate returns higher than that of the market and vice-versa.

However, what has indeed been fascinating about this fund is the kind of turnaround that the fund has made in calendar year 2009. Since January, the fund has delivered a whooping 102% returns against BSE 100’s 82%, smartly compensating the downfall it witnessed last year.

PORTFOLIO:

Adhering to its investment mandate, Principal Large Cap has built up its portfolio with some of the best large-cap stocks available in the market. But the same is not without a tint of midcap stocks. The fund has shown a tendency to invest on an average, about 10-12 % of its portfolio in midcap stocks with the average number of stock holdings restricted to about 40 giving the fund a reasonable diversification.

An analysis of the fund’s portfolio shows that the fund has indeed been prompt enough to pick some of the multi-baggers that are reaping yields in the current market. Its picks like Shree Cement in Sep ’08, at one third of the current market price, and Lupin in Aug ’08 – both of these it continue to hold – have seen a good runup . Again Bajaj Auto, which it had picked way back in Oct ’07 has also rewarded it handsomely. The fund has, however, now replaced this stock with Hero Honda. It was also quick to offload Mundra Port within a month of its IPO and before the markets snapped the bull run in early 2008.

However, some of the moves did not work for the fund — such as its investments in ICICI Bank and ABB at their peaks in Jan ’08, the levels they are still to breach. What may have also hit the fund was its early exit from stocks like Axis bank in Dec ’08. Had the fund continued to hold this multibagger stock today, it may have added on extensively to its returns.

VIEW: This four-year old fund has reasonably proved its ability to beat the market in an upturn. However, it is yet to prove the same in the reverse scenario. While its performance in the current calendar year has been highly impressive, it is now rather imperative to watch whether it can continue to maintain this trend in the coming months as well. But given its track record, it can be conveniently deciphered that Principal Large Cap is one of the better performing schemes from the Principal basket.

Source: http://economictimes.indiatimes.com/Features/Investors-Guide/Large-cap-fund-yet-to-prove-prowess-in-market-downturn/articleshow/5162018.cms

Pick a fund, not a portfolio

It goes without saying that choosing a mutual fund is the most critical aspect of fund investing. How well your investments perform is directly dependant on how you pick them. It is safe to say that picking the right fund is almost as good as ensuring good returns on your investments. But, despite the fact that choosing funds is such an important factor, most people often seem to falter at this very step.

There are a lot of different approaches used to choose a mutual fund. When it comes to equity funds, the approach that is most ineffective is the one based on the fund’s portfolio. Under this approach, an investor – and quite often even an analyst or expert – looks at the fund’s recent portfolio statement and decides for or against the fund on the basis of the stocks it holds. I can’t stress enough on why this method is a futile way of choosing a fund to invest in.

Firstly, this approach is wrong because it takes away the basic advantage of investing in a fund. You invest in a fund because you don’t have either the time or the knowledge, or sometimes both, required to dabble in stocks. So you let the fund manager do it for you. But when you start decoding a fund’s portfolio, you are doing nothing but dabbling in stocks and worse, also assuming that you are a better judge of stocks than the fund manager. In general, stock investors who feel the need to venture into funds as well use this approach. Apart from them, this method is used by broking firms who have started selling funds. In such firms, the stock analyst analyses the funds as well. And hence, he looks at the fund’s portfolio. If he doesn’t like the stocks in it, he renders the fund unfit for investment.

This approach has been appearing in the media a lot too. Recently, a financial publication published a misdirected article that picked individual stocks in isolation from funds, followed the fund managers’ actions on those stocks through a couple of years and then declared those actions to be illogical. What amazed, and amused, me was that they didn’t realise that the funds that they had picked out were funds that had mostly outperformed their benchmarks and peers over the last few years.

This is just another example which shows why a fund shouldn’t be analysed on the basis of its portfolio. A fund buys or sells a stock for myriad reasons, many times for reasons that have nothing to do with the stock’s performance. At times, another stock from the industry could be more attractive. At times, there could be an internal limit on an industry, or to the company. And likewise.

Hence, a fund shouldn’t be analysed on the basis of its portfolio. For most funds, a look at its past returns-based performance is more than enough. A comparison of a fund’s returns, vis-à-vis its benchmark’s or peers’ returns, will give you a fair idea of whether the fund is worth investing in or not. The fund’s portfolio should be looked at after it has answered other basic questions. The portfolio should only be seen to know if the fund is concentrated, is it churned a lot, does it have exposure to emerging sectors, etc. The portfolio should be used to decide between two otherwise similar funds, not as a primary deciding factor....

Source: http://www.financialexpress.com/news/pick-a-fund-not-a-portfolio/533114/0

MF portfolio: Diversify and factor in risk appetite

The equity markets are at their volatile best and it is difficult to predict the direction of the markets amidst the ongoing results season. Robust industrial production numbers backed by strong global cues led to a major upsurge in the markets last week.

While the markets have been on a roll since March this year and are continuing to scale up, investing at the current levels has become risky for investors who did not enter earlier.

For an average investor, who does not have the time or the inclination to track the movements of the markets, investing in stocks directly could be risky. A direct equity portfolio requires constant attention, or else the opportunity to exit from losing investments in time or book profits on those performing well, may be missed.

For such investors, investing in equity markets through the mutual fund route may be a better strategy.

While the burden of managing the stocks is passed on to a fund manager in a mutual fund, the selection of the right funds for the portfolio remains the problem of the investor. Choosing the right funds based on your risk appetite, time horizon for investment and returns expectation is extremely important.

The method of investing in mutual funds also assumes importance depending on the nature of the markets. Investments in mutual funds can be made in lump sum or through the systematic investment route.

In the current market conditions, making lump sum investments may not be a good idea considering the fact that the markets have run up very fast and investors may encounter a correction. Hence, in these times, making investments using the systematic investment plan (SIP) or systematic transfer plan (STP) is advisable.

Here are some pointers for investors in mutual funds to build a robust portfolio:

Portfolio allocation:

As a thumb rule, 100 minus your age is the amount which should be invested in equity. However, risk appetite and resources are important factors to be considered also. Generally, it is seen that risk-taking ability goes down as you become older since capital preservation takes precedence over capital appreciation.

Portfolio size:

While building a mutual fund portfolio, it is important to remember that even five funds can give the desired level of diversification. So, there is no need to hold a large number of funds. In any case, an individual should not hold more than 10 funds, or else it becomes extremely difficult to monitor.

Designing the portfolio:

The base of a mutual fund portfolio should be built with diversified mutual funds. Allocation to the base should be around 50 percent in not more than 3-4 funds. Diversified funds can invest across sectors and hence can move swiftly across different stocks when the tide turns. For those with a medium risk appetite, balanced funds which invest in equity and debt can form the base of the portfolio.
Once the base is built, a high risk investor can add a good large-cap and mid-cap fund to the portfolio. Sector funds and theme funds are highest in risk and best avoided unless you can monitor these funds regularly to identify opportunities for profit-booking. Investors with a low risk appetite can invest in debt funds. In the current interest rate scenario, keep away from income funds and long-term debt funds since interest rates are expected to harden.

Selection of funds:

Risk-adjusted returns, comparison with benchmark, consistency of performance, fund manager's performance, costs and reputation of the fund house are some of the factors to be considered in selection of a fund. The selected fund should be in existence for at least five years to ensure that it has seen different market cycles. Avoid new fund offers since they have no history of performance.

In the current market conditions, investors would do well to stagger their investments or use the systematic investment facility to invest for the long term. You must review your portfolio performance at least twice a year to ensure that the investments are growing as desired and weed out non-performers after monitoring them for at least a year.

Source: http://economictimes.indiatimes.com/articleshow/5158705.cms?flstry=1

September MF outflows likely to reverse

The heavy redemption in debt schemes of mutual funds (MFs) in September should get reversed soon and MFs are expected to get back the entire outflow in the current month. Historical evidence suggests that debt funds face redemption pressure at the end of every quarter. This pressure is considerably higher at the end of the first as well as the second half of the financial year.

For example, MFs witnessed a net outflow of Rs 98,980 crore in March 2009 in debt schemes. In the following month, April, inflows were Rs 154,507 crore. A similar trend was seen at the end of all quarters, except in September 2008, when the redemption pressure on debt funds continued in October.
According to Sundeep Sikka, chief executive officer, Reliance MF, corporate houses withdrew a lot of money last month to meet advance tax liabilities, something they do at the end of every half year. A part of the money withdrawn is invested in other debt schemes and so money doesn’t flow out completely.
Banks invested Rs 180,000 crore in MFs between April and September. They withdrew a part of this last month to show profits in their books, which caused a lot of redemption pressure. However, a considerable part of this was reinvested in the first week of October, said Surajit Misra, national head (mutual funds), Bajaj Capital.
September 2008 was exceptionally bad for the MF industry as the entire financial sector faced redemption pressure after four US banks filed for bankruptcy. Indian banks faced cash withdrawals from account holders while the corporate sector faced a liquidity crunch. As a result, banks and the corporate sector withdrew money to remain liquid.
With MFs floating time-bound fixed maturity plans (FMPs) to attract investments from the corporate sector and banks, the maturity of such schemes also increases outflows. For example, data compiled by MutualFundsIndia.com show that in September 2009, FMPs worth Rs 11,648 crore went under compulsory redemption.
Companies also periodically withdraw large amounts to show cash in their balance sheets and for future investments. It was a normal trend and there was no need for investors to panic as there was ample liquidity with the industry, said Lakshmi Iyer head (fixed income and Products), Kotak Mutual Fund.

Source: http://www.business-standard.com/india/news/september-mf-outflows-likely-to-reverse/373927/

Cash level of equity funds lowest since Jan ’08 peak

After a swift rise in share prices since early March, cash available with equity mutual funds has fallen below 7 per cent of assets under management, a level last seen during the market peak in January 2008.
Even till April end, equity fund managers were cautious and held 14.35 per cent of their assets in cash. The scenario changed after the Congress-led alliance won a comfortable majority in general elections boosting investors’ confidence in political stability in the country.
Between April 30 and September 30, cash available with 297 open-ended equity schemes declined from Rs 14,637.18 crore to Rs 9,675.15 crore, data available from Delhi-based mutual fund tracking firm Value Research showed. During this period, cash as a percentage of total equity assets declined from 14.35 per cent to 6.25 per cent.
“Markets are buoyant, so obviously we have to invest,” said Satish Ramna­than, head of equities at Sundaram BNP Paribas Asset Management.
The benchmark Sensex of the Bombay Stock Exchange (BSE) has gained 108.61 per cent in this year so far since closing at a three-year low of 8,160.40 on March 9.
The market rally has forced many fund managers to cut their high cash levels and chase the returns, said head of equities of a mutual fund house, who wished not to be identified. “The conviction in the market is because of momentum and not valuations,” he said.
The low level of cash among Indian equity mutual funds also gives some indication of present domestic sentiment, believes Jyotivardhan Jaipuria, head of research at foreign brokerage Bank of America (BoA) Merrill Lynch.
“These low levels of cash were last seen at the peak of the markets in January 2008. While insurance companies are bigger buyers than mutual funds, it does indicate that buying from domestics will be lower going forward,” he said in a strategy note to clients.
Most market experts are also of the view that valuations are now running ah­ead of fundamentals and the rally is largely driven by liquidity. “Valuations are rich,” said Ramnathan of Sundaram BNP Paribas, who has a “neutral” stance on the market. At Wednesday’s close of 17,023.18, the 30-stock Sensex quoted at 19.89 times its expected earnings per share of Rs 856.04 for the financial year ending March 31, 2010, according to Bloomberg. This is higher than the benchmark’s long-term average price-to-earnings (P/E) multiple of about 15 times.

Source: http://www.mydigitalfc.com/mutual-funds/cash-level-equity-funds-lowest-jan-’08-peak-641

Markets to consolidate around current levels: JM Financial

JM Financial Mutual Fund, a part of JM Financial Group while commenting on recent happenings in the Indian economy and equity market scenario said that GDP quarterly numbers improved in Q1 FY10 over the previous quarter mainly on account of a good growth of industry.
This growth was mainly the resultant of a huge rise in manufacturing YoY growth. But both services and agri GDP growth fell in Q1 FY2010 compared from Q4 FY2009, the AMC expects the GDP growth to accelerate over the next 2 years.
July 2009 IIP (index of industrial production) showed exceptional growth of 6.8% YoY due to high growth in mining, intermediate, manufacturing and consumer non-durables goods.
Manufacturing (highest weighted in Sectoral IIP) growth continued to remain optimistic. It grew at 6.8% YoY in July 2009 vs 7.8% in June 2009 and 6.9% in July 2008. Continuation of this trend ahead will signal a revival in demand.
Advance tax collections for the second quarter of the current financial year (2009-10) have shown robust growth of 35 to 40% across industries, reinforcing the hopes of a sooner-than-expected recovery. The second quarter is significant, since companies for banks pay almost 45% of the total annual tax payable. The first quarter accounts for 15%. The target for direct tax collections for 2009-10 has been fixed at Rs 3,700 billion, roughly 10% higher than Rs 3,382.12 billion last year.
However, among all the good news, monsoon continued to be the spoilsport and the season has ended with a 23% deficit. How much impact would it have on the agri production and its consequent impact on the GDP is yet to be seen.
Globally too, like India, optimism ruled and hopes of a early recovery in the global GDP strengthened.
Commenting about the stock markets, the fund house said that markets awash with liquidity remained stable during the entire month and displayed strong sectoral rotations as the Nifty ended above 5,000 for the first time in 2009. FII flows were at USD 3.8 billion which took the annual FII inflow to over USD 12 billion.
Sectors like pharma, tech and financials outperformed rest of the market. Midcaps also played strong till the last week when they displayed fatigue. Sensex which began the month at 15,555 ended Sep. 2009 at 17,127 crossing the physcologically important 17,000 mark for the first time in 2009. Overall markets in India remained tremendously resilient than the rest of the Asian peers.
Large fund raising through the QIP route has absorbed most of the FII flow this month thus preventing volatility. Among the corporates Reliance, Axis Bank and Jaiprakash Associates are some of the corporates who raised money.
Giving its outlook about the market the fund house said that Sensex is now over 17,000 and at current levels trades at over 16x FY11 which now puts it in a historically traded average band. India has been a beneficiary of strong flows like the rest of the Asian peers and there is a strong likelyhood of the continuation of the flows in the near future. On the other hand, there are several large offerings lined up through the IPO, QIP routes etc as a consequence of corporates trying to use the optimism in the environment to raise equity capital.
Although JM Financial is reasonably optimistic about the prospects of the Indian economy in the medium to long term; it remains slightly cautious in the short term. It believes markets are likely to consolidate around the current levels and keenly await the Q2 FY10 results to show further direction to markets in the near term.
Any correction, if at all, would be healthy for the markets and should not be source of any anguish to long term investors thus the fund house advices disciplined and systematic manner of investment to capture the Indian growth story.

Source: http://www.myiris.com/newsCentre/storyShow.php?fileR=20091020171340707&dir=2009/10/20&secID=livenews

'Pharma, infra & banking look very attractive'

A steep correction looks unlikely, given that there has been no reckless build-up of positions this time, says Sunil Singhania , executive vice-president (equities), Reliance Mutual Fund. At the same time, investors should be extremely choosy about the new issues they are investing in since many overpriced offerings have been hitting the market, says Mr Singhania. In an interview with ET , he says pharma, banking and infrastructure are the sectors to watch out for. Excerpts:

You are known for your aggressive cash calls, sometimes as high as 35% of the portfolio value in a few schemes. Isn’t that a risky bet in a rising market?
Past 2-3 months have been very challenging in terms of identifying the right stocks. And it looks as like it will remain that way for some time. We have to deploy money knowing fully that near-term valuations are stretched, and that risk on the downside is higher. We have cut down our cash positions significantly, though they differ across schemes. In diversified schemes, we are sitting on cash of between 4-14%. In banking and pharma funds, it is 3-4%, in the power fund it is 16-17%, while in the infrastructure fund, it is 2-3%. But the cash component should not be viewed in isolation. We deploy a fair bit of it in (stock/index)options, which helps us ride the volatile phase of the market, and even beat the market.

Which are the sectors that you are bullish on?
We are very bullish on infrastructure. There is huge latent demand for infrastructure. Also, the government is realising that good infrastructure is becoming an election issue. From a foreign investor’s perspective, this is a sector where one can investment a sizeable sum and get decent double-digit returns. We are also positive on banking. Notwithstanding short-term concerns over rising g-sec yields (and therefore falling bond prices), banking services are underpenetrated, and valuations of bank stocks are cheap compared with allied financial services players. Within the sector, we like PSU banks. We are positive on the pharma sector, and see huge opportunities locally as well as globally. Total pharma sales in India are about Rs 30,000 crore, while sales of Pfizer’s drug Lipitor alone are around Rs 50,000 crore.

What is your outlook on the market from a 3-6 month perspective?
We are cautiously positive on the market. Valuations are not cheap any longer, and big gains look unlikely near term. At the same time, we do not expect any drastic correction either. Investors have been very cautious this time around. Most mutual funds have used the recent rally to book profits. There has been no reckless build-up of positions by traders, as was the case in the previous bull run. Also, traditionally, the October-December period has been good for the Indian stock market.

What should the investor be cautious of? Any factor(s) that could trigger a deeper-than-expected correction?
There are some worrying signs, especially on the capital raising front (qualified institutional placements/ initial public offerings). Lot of poor quality paper is finding its way into the market. Also, many IPOs are being mispriced at the upper end.
The global economy is still not out of the woods. There is a lot of liquidity sloshing around at the moment, which makes everything appear good. But what happens once central banks across the world start pulling out the stimulus money? That is the key question. Some people may argue that a weak recovery in the global economy is good for India, since it will also keep oil prices low. Yet, one must remember that the Indian market had its best phase when oil was climbing from $27 to $150 a barrel.

Source: http://economictimes.indiatimes.com/opinion/interviews/Pharma-infra-banking-look-very-attractive/articleshow/5140189.cms

SIP investment: Better than one-go

Systematic investment plan (SIP) investors have reason to cheer. The ongoing rally in equity market has pushed up the one-year return on such investments sizeably, compared to lump-sum investments.
The comeback has even pushed up annualised returns on SIPs over a three-year period. Those SIP investors who opted for mid-cap-oriented funds have reaped a richer harvest then their large-cap peers.
Business Line picked up the top five large- and mid-cap schemes that have a long-term track record and analysed performance over one- and three-year periods. Among the large-cap schemes either through lump-sum or SIPs, the HDFC Top 200 Fund tops the return charts over one- and three-year periods.
Those who stayed invested in SIPs over the past year notched up absolute returns of 140 per cent while those who preferred lump-sum investment could have earned 90 per cent, substantially lower than those who bought SIPs.
The other top performers for the one-year period are Birla Sun Life Frontline Equity, which clocked an absolute return of 130 per cent, and Magnum Contra with 123 per cent. Both the schemes returned 40-50 percentage points more on SIPs compared to lump-sum investments.
In the mid-cap space the return generated by Birla Sun Life MidCap and Sundaram BNP Paribas Select MidCap were at 173 per cent, while those who made lump-sum investments a year ago, would have got returns of 108 per cent and 101 per cent respectively.
The SIP return of Franklin India Prima Fund and Magnum Midcap were identical at 147 per cent. Returns on lump-sums too were identical over a one-year period, at 86 per cent.

Timing makes difference
The returns generated by Franklin India Prima Fund, Magnum Midcap and HSBC Mid cap over a three-year period still look low despite their stellar one-year performance. The three-year annualised return of the all the three schemes is 6-14 per cent on SIPs and 0.5-4.0 per cent for lump-sum investment.
The returns from SIPs buttresses the point that timing of entry and continuing with investments in a falling market made a big difference to returns.

Source: http://www.thehindubusinessline.com/iw/2009/10/19/stories/2009101950300600.htm