Monday, September 08, 2008

GEM GAZE - September 2008

Gem gaze

The glittering gems in the diversified equity space have undergone a radical change in the past one year. HDFC Equity, Magnum Contra and ICICI Prudential Dynamic have stood the test (highly volatile market) and have retained the status of a gem. The new entrants that have achieved the pre eminent status of ‘gem’ are DSPML Equity and Birla Frontline Equity. DSPML Opportunities and Franklin Flexicap have been shown the exit door.

HDFC Equity Fund Gem

The perpetual champion fund, HDFC Equity has been the first choice of investors and rightly so. The reason behind the fund's exemplary performance year after year is not far to seek. Its ability to identify opportunities at the right time is the key factor contributing to its success. Though the fund maintains a large-cap bias, it does not hesitate to invest substantially in stocks of smaller companies, as and when there are opportunities to exploit. The fund remains fully invested at all times. Historically, the portfolio has been a focused 25-30 stocks. The number of stocks has now increased to over 45. In addition, the concentration in the top five holdings has been moderated from 35-40 per cent about a year ago, to just around 25 per cent now. This is probably not reflective of the fund’s stance but rather an adjustment to the size. Investors have flocked to this fund in droves making it the largest diversified equity offering of Rs 5,000 crore. And this very factor may be detrimental to the strategy of the fund. The fund's ability to identify opportunities and take meaningful exposure in them will be neutralised by its increasing size. The fund has displayed ample strength till date, but it remains to be seen how it fares from here on.

Magnum Contra Gem

When the going is great, the fund performs exceptionally and even when the going is not so smooth, Magnum Contra still manages to save face. Magnum Contra has consistently managed to stay ahead of the curve. The Fund has outperformed its benchmark index i.e. BSE 100 over the 3-year and 5-year time frames. Rs 100 invested in the fund at inception (July 1999) would have grown to approximately Rs 985 at present. The same amount invested in the benchmark index would have appreciated to Rs 346. The fund outperformed the category in every quarter since 2003. It has the third highest risk adjusted return in its category, i.e. for every unit of risk undertaken, the fund gives you more bang for your buck. When the market slips, it tends to fall much less than the category average as well. Magnum Contra has lost close to 9.5 per cent of its NAV per unit over the last year. The decline, nevertheless, is less than the diversified fund category average of -11 per cent. Magnum Contra has beaten its benchmark 63 per cent of the times on a monthly return basis over the last 36 months, suggesting its consistency in performance. For the performance chasers looking at the top returning funds, Magnum Contra’s performance over a shorter time frame of 1-2 years may appear to be mediocre. However, the consistency with which it has beaten its benchmark BSE-100 over the last three years makes it a good investment case for a core portfolio. The fund would fit well into a portfolio of an investor with average risk appetite. However, it may no longer fit the bill of a true contrarian investor as, over the last few years, a good number of its stock and sector calls have moved with the market crowd. At present, the fund appears to follow an aggressive growth strategy with an occasional contrarian sector stand.

ICICI Prudential Dynamic Plan Gem

The Fund has been one of the star performers of Indian mutual fund industry and has delivered a commendable 52 per cent return since inception as compared to 38 per cent return given by the benchmark index, S&P CNX Nifty. The fund recently received top rating of “Platinum” among the equity diversified funds. This is based on risk- adjusted return analysis that was done by ET Quarterly survey. In fact ICICI Prudential Dynamic Plan is one of the only two equity schemes that managed to beat BSE 500 returns on all the past 12 quarters. ICICI Prudential Dynamic Plan is a blend of aggression and defense in the current equity market scenario. As the name suggests, the ICICI Prudential Dynamic Plan is flexible in nature. Its focus is to generate capital appreciation by managing a diversified equity portfolio which is dynamic across market caps (large and mid cap) and across investment styles (Growth & Value). Depending on the market conditions, valuations and the fund houses’ view going forward, the fund manager also has the flexibility to invest in cash and debt by changing the equity allocation to meet the long term objectives of the fund. Given the mandate to protect the downside for investors, the fund uses derivative techniques like hedging to deliver range bound returns. The portfolio is currently spread over 38 scrips encompassing 18 different sectors to reduce any industry specific risk. Thus the fund seeks to provide the agile combination of stock selection, market timing, diversification and cash management aimed at harnessing market opportunities. Due to its consistent performance, investors’ confidence in the fund has been multiplying. The fund size has seen a sharp rise on the back of the scheme’s enviable track record and the corpus currently is over Rs 2218 crores.

DSPML Equity In

A strong pedigree and track record across market cycles, ability to weather short-term market reversals and the flexibility to invest in both large and mid-cap stocks may be key attributes to look for in a diversified equity fund, under current circumstances. The DSP ML Equity Fund is a diversified fund that fits the bill well, on all these parameters. One, launched in April 1997, DSP ML Equity has over a ten-year track record of beating its benchmarks through various market cycles. The fund is among a handful in the diversified category to manage a top quartile performance, over one-, three-, five- as well as 10-year time frame. The fund has also stayed well ahead of the category average over each of these periods. Two, the fund’s return generation has also been fairly consistent over the past five years. It has figured within the top quartile in return rankings in each of the five years. Further, it has managed to contain the erosion in its NAV to levels less than the broad markets in several of the recent corrective episodes. Whether it was the short corrective episodes in October and August 2007 or the more severe one in May 2006, the NAV of the DSP ML Equity Fund has declined less than the Sensex on each occasion. Three, in terms of portfolio strategy, the fund invests in a mix of mid and large-cap stocks and has a well-diversified portfolio of about 78 stocks. This may make it a good option for an investor who does not wish to actively manage his Mutual Fund portfolio between those oriented towards large-caps and those funds with a mid-cap bias. Over the past year, about 40-45 per cent of the assets of DSP ML Equity Fund have been consistently invested in mid-cap stocks (market capitalisation of Rs 7,500 crore or less). The fund has generated a return of 75 per cent over a one-year period, beating its benchmark, the Nifty, by 20 percentage points. DSPML Equity has also outpaced the category average by a huge margin. Over the October 2007-April 2008 period, the NAV has fallen 7.1 per cent while the assets managed rose 6.4 per cent, despite a dividend payout of Rs 7 per unit in January. This may indicate that the fund received substantial inflows in this period. It is difficult not to like this fund. With no market-capitalisation or sector bias, this diversified equity offering goes about generating returns in a very consistent fashion. Its versatility and consistency make it a suitable core holding for conservative as well as aggressive investors. Little wonder that its asset size has grown to cross Rs 1,000 crore.

Birla Frontline Equity Fund In

A fund for all seasons, Birla Sun Life Frontline Equity has consistently outperformed its benchmark, BSE 200, year after year since its launch in August 2002. In the past five years, the fund has turned in 33 per cent annually, which is almost equal to its category’s returns. And in the past three years, the fund has significantly outperformed its category, delivering 26 per cent returns as against the category’s 19 per cent. But probably the best part about Birla Sun Life Frontline Equity is that it has managed to beat its category even during the bad times. Since the fund’s launch, its category has given negative returns in seven quarters but the fund has been in the red in only six of these seven quarters. Even in the recent turmoil, in the first quarter of 2008, the fund gave negative returns of 24 per cent, four per cent less than the category’s fall of 28 per cent. And in the second quarter too the fund managed to restrict its fall to the average fall of the category. The fund has managed to stay afloat thanks to a large-cap tilt. In the latest portfolio, one-fourth of the assets have been invested in mid-cap stocks with market capitalisation of less than Rs 7,500 crore. The fund has a concentrated sector allocation while it has diversified it over a large number of stocks. Birla Sun Life Frontline Equity Fund has been among the handful of equity funds that delivered better returns than the BSE Sensex over the past one year, amidst rather challenging market conditions.

A common line that runs through all the funds discussed above – strong parentage, track record across market cycles, flexibility and diversification – have brought out the ‘GEM’ in them.

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