Monday, September 13, 2010

September 2010

Looking to earn realistic risk-adjusted returns? Hold your equity fund for the long term and stick to a solid portfolio with the GEMs in the diversified equity category as the core. That seems to be the lesson from the 10-year performance of open-end equity funds that have a long track record. 58 of the 360 plus equity funds in India have been in existence for ten years or more. These funds averaged a return of nearly 13% (compounded annually) over the ten-year period, beating the Sensex and Nifty (11%) and easily outpacing the broader BSE 100 (9%).

The five GEMs of September 2009 have held on to their elevated position by virtue of their continued winning streak in September 2010 also.

HDFC Equity Fund Gem
Star studded

One of the mutual fund industry’s sturdiest shops, HDFC Mutual Fund, has historically been a consistent outperformer. Thanks to its focus on value, it has consistently been beating the category average at various time periods. HDFC Equity Fund focuses on investing in quality companies that are reasonably valued and have a growth bias. On a monthly rolling returns basis over the last five years, it has surpassed its benchmark six out of ten times. In 2009, the return of 106% put it way ahead of the category average of multi-cap funds and its benchmark (S&P CNX 500) by 23% and 17%, respectively. The focus on value and not on the direction of price movement resulted in the fund being fully invested in the down markets of 2008-'09. Being fully invested certainly helped when the market picked up in March 2009. The fund's strong point seems to be its ability to wade through periods of market volatility. It has unfailingly contained downsides better than its benchmark during most corrective periods in the recent past. With net assets of Rs 6525.77 crore, the one-year return of HDFC Equity has been 41.82% as against the category average of 27.97%. Finance, energy, and health care form the top three sectors accounting for nearly 50% of the net assets of the scheme. Nearly 60% of the portfolio comprises of large caps with the remaining in mid and small cap stocks. The large corpus has led to it being more diversified. With less than 20 stocks in the portfolio till 2003, the fund manager has increased it to around 60 stocks at present. The top 10 holdings have averaged at around 40% over the past one year.

Magnum Contra Gem
Back on track

What you will find in Magnum Contra is a diversified, multi-cap portfolio with a cautious view on contra bets. Magnum Contra sports net assets of Rs 3679.37 crores. In the past three months, the fund has generated about 25% returns against the Sensex’s 28% and Nifty’s 27%. The one-year return of the fund is 23.81% as against the category average of 29.82%. But its three-year and five-year returns are 10.5% and 22.47% as against the category average of 8.44% and 18.12% respectively. Moreover, the fund’s massive diversification dilutes risk to an extent. It has a portfolio of over 80 stocks and has limited the exposure to a single stock to about 5%. That one-half of the stocks in the portfolio account for less than 1% each of the assets explains the extent of the fund's diversification. The fund’s large-cap bias is also evident, with nearly 63% of its equity holdings comprising large-cap stocks. Close to 50% of the assets are invested in sectors such as energy, financial services and capital goods. The top ten stocks in the portfolio account for 38% of the assets. Given its past performance, the fund is expected to be back on track with the market showing signs of improvement.

ICICI Prudential Dynamic Gem
Defensive Play

ICICI Prudential Dynamic Fund invests across sectors, market capitalisation and in value and growth stocks. The fund's investment strategy of taking higher exposures to equity when the valuations are low or when the stocks are not favoured by the market may reap rich benefits albeit after a lag. However, the fund also picks growth stocks to catch market rallies to ensure returns that are in line with its benchmark during the short-term. The fund has a defensive nature - underweight on domestic consumption, interest rate cyclicals, etc. The fund, over three and five year periods, comfortably outpaced its benchmark S&P CNX Nifty by 5% and 7% respectively. The fund's five year performance places it in the top quartile of the performance chart of diversified funds. When the markets are falling, ICICI Prudential Dynamic is the fund to go with. The fund stood out in 2008 by limiting its fall to just 45% (category average: -54%). Over a one year period ICICI Prudential Dynamic generated an absolute return of 63% and bettered its benchmark by 22%. The fund's portfolio is represented by 37 stocks and 18 sectors. The top ten stocks accounted for close to 55% of the assets invested in equity. The top three preferred sectors were banking, pharma, and software. The fund often prunes its holding in individual stocks when its objects are met. This is evident in its portfolio turnover. Over a five-year period, this conservative fund has a better potential for outperformance than other funds.

DSP BlackRock Equity Fund Gem
Disciplined display

DSP BlackRock Equity Fund, a diversified equity fund with assets under management of Rs 2021.49 crore, is among the few consistent performers on the CRISIL~Composite Performance Ranking (CPR) with CRISIL~CPR 1 rank in 11 out of the last 12 quarters. CPR is a relative performance ranking of mutual fund schemes within a peer group. The fact that DSPBR Equity has ranked consistently in the top 10 of its peer category indicates that the fund has combined superior performance with disciplined portfolio management. The fund has beaten its benchmark, the Nifty, consistently over one-, three- and five- year periods. Over a five-year period, the fund has delivered a compounded annual return of nearly 21% that places it among the top few funds in the diversified category. The advantage of DSPBR Equity is that the fund prefers to stay invested in equities irrespective of the market condition and despite the presence of the mid and small-cap stocks (this segment being more prone to volatility). This demonstrates the fund's conviction in its investment strategy. Even during 2008, with reasonable exposure to mid and small-cap stocks and lesser cash position it withstood the market correction and contained losses. Clearly, stock-picking strategy has held the key. Though the fund is benchmarked against Nifty, one-third of the assets are invested outside the Nifty basket. Its one-year return was 37.52% as against the category average of 29.5%. The top three sectors, finance, energy, and engineering, constituted 40% of the portfolio. Single stock allocation has never crossed 5% barring a few large-caps. Exposure to the top 10 stocks is currently at 26%. From over 80 stocks over a year ago, the number of stocks is 67 at present. The diversification in terms of sectors invested is quite high, with as many as 26 of them in the portfolio.

Birla Sunlife Frontline Equity Fund Gem
Steady frontrunner

A long-term track record of good performance, proven ability to ride out corrections better than most peer funds and benchmark each year in the last five years, and a focused exposure to blue-chip equities makes Birla Sun Life Frontline Equity Fund an apt investment option. The fund's consistent performance not only lends credence to its ability to spot investment themes on time, but also puts in better light its ability to address downside risks. Over a five-year period, the fund has delivered a compounded annual return of about 25%, which places it among the top few funds in the diversified category. Birla Sunlife Frontline Equity Fund has net assets of Rs 2447.06 cr. Its one-year return is 26.99% as against the category average of 28.95%. But its three-year and five-year returns of 13.81% and 24.35% surpass the category average of 8.86% and 18.12% respectively. More than three-fourth of its portfolio is invested in companies with market capitalisation of more than Rs 7,500 crore. The fund’s large-cap intensive portfolio could restrain its participation in secular rallies. The fund, therefore, is best suited for low-risk appetite investors looking for steady returns. While little under 10% is invested in cash and equivalents, the rest is spread out among select mid and small-cap stocks. The top three sectors of finance, energy, and technology constitute almost 50% of the portfolio. The fund diversified from 35 to 60 stocks in one year. Apart from Reliance Industries, Bharti Airtel and Infosys, no stock has accounted for more than 5% in the last two years. And, concentration of the top five stocks has been lowered to around 18%. High returns, low risk and a diversified portfolio make this a worthy fund.


Anonymous said...

Nice article with GEMS to take home.

Mutual Funds said...

Thank you. There are GEMs to take home every month. Watch out for GEMGAZE second Monday of every month.