Monday, October 12, 2009


Sector Funds

All the four sectoral GEMs of 2008 have withstood the onslaught of the crisis and are sparkling in 2009, thanks to their ‘diversified’ mandate and refuge in derivatives and/or cash.

DSP BlackRock TIGER Fund Gem

Cautious comfort…

Comfortable in all situations – the bear tear and the bull pull. Notwithstanding the bear hug, the fund emerged unscathed during the turbulent times that lasted till March, 2009. In the first quarter of 2009, the fund managed to stay in the positive territory with a positive return of 0.49% as against the category average return of -5.32%. The fund’s returns have remained more or less in tune with the category average in the recent bull run. The charm lies in the fund’s ability to consistently deliver risk-adjusted performance, despite being a sectoral fund. Its 3-year annualised return of 14.74%, positions it ahead of the category average returns of 11.03%.

The fund seems to be all over the place…but the fund was designed to pick stocks that benefit from growth related to economic reforms and continuing liberalisation. While maintaining a large cap exposure and reducing equity exposure, it increased its allocation to derivatives from 1.76% in January, 2008 to 17.96% in November, 2008. From December, 2008 to March, 2009, it was heavy on Nifty Futures. It has been increasing its equity exposure since March, 2009, in the light of the market rally.

In line with its objective, it has the highest exposure to the power sector (13.32%), followed by banks (11.33%), petroleum products (10.46%), and capital goods (9.71%). It has been gradually increasing its exposure to banking and power sector. Its top holdings have remained more or less the same with a portfolio turnover ratio of 1.44 times. Its expense ratio stands at 1.85%.

The broad mandate, the diversified portfolio (60 to 70 stocks), and consistent returns clear the way for the cautious. The sheer size of Rs 3500 crores prompts the fund to lean towards large caps. The fund abstains from aggressively moving in and out of sectors and stocks. Those who seek safety, will feel at home owning this fund.

Reliance Diversified Power Sector Fund Gem

Power packed…

With an AUM of about Rs 5,800 crores, Reliance Diversified Power Sector Fund comes next only to Reliance Growth Fund in terms of size. But as far as the performance is concerned, it is way ahead of its peers as well as those from its own fund house. The fund has amassed awards and accolades, by virtue of its scintillating performance. Its power to tower over the market in good times as well as bad has given this fund an edge over the other sectoral funds. The high alpha of the fund indicates its ability to beat its benchmark index. In 2008, it clocked -50.4% as against the sensex return of -52%. Its returns in 2009 has been 81% as against 73% by the sensex and 65% by the BSE Power Index. This high beta fund has made the best use of the opportunities that have been thrown open by the market. Though naturally dominated by power sector stocks, it has good exposure to engineering, metals, financial services, construction, and communication. Its diversification is marked down by about 30 stocks. The fund is wont to sitting on huge piles of cash, above 20%, on an average. It rose to 40% when the crisis was at its peak. It is 17.7%, at present, the lowest since April, 2007.

The fund has been a star performer but its high beta and aggressiveness call for caution. Rewards marry risk and if you are willing to play the game of probabilities, Reliance Diversified Power is the right answer.

ICICI Prudential Infrastructure Fund Gem

Allocating with alacrity…

With over Rs 4300 crore in assets, it is a theme fund that invests across infrastructure and allied sectors, thereby, increasing the universe of investments and facilitating the construction of a better portfolio. It plays it safe by maintaining a highly diversified portfolio. The highest alpha generator in the category, its returns are impressive. In 2008, it made the right moves. Its exposure to large caps rose to 77%. Its heavy exposure to debt and derivatives enhanced its ability to contain the downside. In the first quarter of 2009, it delivered 1.27% as against the category average of -5.32%. But the fund missed out on the March 2009 rally when it underperformed the category average. It had a 43% exposure to cash in May 2009. It cut cash in June 2009 to participate in the rally.

The successful sector rotation strategies adopted by the fund stood it in good stead. The fund actively changes its portfolio complexion with no qualms about going against the herd. The fund increased its exposure to financial services between September 2008 (9.3%) and December 2008 (23.26%). The fund manager had written a Nifty put option in April, 2009 and it augured well for the scheme. Between April 2009 and September 2009, the allocation to financial services sector dropped from 17% to 14.86%. The allocation to energy during these two months was increased from 15% to 40.39%. The fund includes every sector barring FMCG, media, IT, and pharma. Though the portfolio looked a little bloated in 2008, it has an averageof around 40 stocks in 2009. The fund manager rarely bets more than 8% on a single stock barring a few large cap names. It has a fair number of frontline stocks that augur well for the fund. One of the least expensive funds, its expense ratio is 1.86 as against the average of its infrastructure peers – 2.24%. This low ratio can mainly be attributed to the increase in the fund’s assets.

This fund has turned other infrastructure funds green with envy. The fund has stood tall amongst other infrastructure funds and has proved its mettle in its relatively short history.

DSP BlackRockTechnology Fund Gem

Broad breed…

Sector funds can at best stack money in cash, in case of absence of any lucrative opportunity in the sector. However, there was a discernible move to allocating funds to alternate sectors like telecom and entertainment. DSP BlackRock Technology Fund was a trend setter in this respect. The fund management had enough foresight to include a broader segment in its investment objective. The only fund that refrained from doing so was Franklin Infotech Fund. UTI and Kotak discontinued their technology schemes and merged them with their diversified equity funds.

This Rs 95 cr fund has invested 88% in equity and 8% in derivatives. 69% is in the software sector, 7% in industrial capital goods, and 5% each in media and hardware. It has allocated 23% to Infosys and 9% each to TCS and HCL. The allocation to all other stocks is 5% or less. Its one-year return has been 50% as against the category average of 46%. It has the impeccable record of having beaten the category average for the past five years with 2008 being the sole exception.

Include sector funds sparingly to spice up portfolio returns but refrain from making it the core holding. A maximum allocation of 10% would ensure that you boost your overall returns when the sector does well and develop the ability to withstand the steep slide when the sector underperforms.

1 comment:

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