Monday, October 11, 2010

October 2010

I have embarked upon the task of picking out one GEM from each of the prominent sector from the October 2010 GEM GAZE. Earlier the GEMs came from any of the sectors with certain sectors left uncovered. This broad-based Sector Fund GEMGAZE is all-encompassing…

ICICI Prudential Infrastructure Fund Gem

The largest fund in the category, at Rs. 3680 crores, it dabbles in every sector barring FMCG, Media, Infotech, and Pharma. Being a multi-sector theme fund, the fund changes the sector composition in tune with market valuations. The top three sectors, energy, financials, and metals account for 55% of the portfolio. For a sectoral fund, the fund is pretty well-diversified with nearly 38 stocks and 75% of the portfolio is large-cap oriented. However, this diversification is highly skewed in favour of specific scrips. The top three holdings alone account for nearly 26% of the fund’s portfolio and Reliance Industries is the fund’s top holding with a weightage of 9.5%. The fund also has a good exposure in the derivatives market. Though currently the fund is invested in equities to the tune of about 93%, historically, the fund has had a decent percentage of cash, debt and money market instruments in its portfolio – balancing the fund’s risk taking ability. The cash levels had however surged drastically during the downturn. The fund manager's contrarian calls give ICICI Prudential Infrastructure an edge over its peers. It expense ratio is 1.83% and the turnover ratio is 123%. Launched in August 2005, the fund has given significant returns since then. It has given 26.88% annualized return since its inception. A relatively high beta fund, ICICI Prudential Infrastructure outperformed its benchmark index – Nifty, with good margins, over the five and three year periods. However, of late, the fund has underperformed diversified funds in one year with a return of 18.59%. Though the good monsoon has played truant acting against short-term earnings for the sector as reflected in the quarterly numbers, this does not in any way alter the outlook for the infrastructure sector.

Reliance Diversified Power Sector Fund Gem

Reliance Diversified Power Sector Fund has generated huge investor interest. This could probably be the reason why a sector fund is, surprisingly, the largest equity fund in India today with more than Rs 5,180 crore of assets under management. Active fund management and portfolio rebalancing is the key. The flexible mandate (power and allied sectors and cash exposure) has been instrumental in the successful management of such a huge corpus. Equity exposure averaged just 68% in 2008 and helped cushion the fall to 50.39%, lower than the relevant sectoral indices and even the Sensex. Though equity exposure dropped to 55% February 2009, the fund manager quickly changed that when the market began to rally in March 2009. In fact, the fund had its best month soon after with a return of 35% (May 11 - June 10, 2009). In 2010, the fund's exposure to stocks is about 97%, while 3% of the total net assets are kept in cash. A large cap-oriented fund with a large cap exposure of 58%, the top three sectors, energy, engineering, and metals constitute 68% of the portfolio. Overall, the portfolio is well-balanced and there is not any over exposure to any particular stock. The expense ratio is 1.81% and the portfolio turnover ratio is 34%. Reliance Diversified Power Sector’s ability to beat the market indices in the bull-run, as well as in the downturn has given this fund an edge over many others in the sectoral theme based funds. The one year return has been 18.52% as against the category average of 13.93%. Though a pessimistic view is prevalent in the power sector in the short term, the long term is promising.

Magnum FMCG Fund Gem

In the past one year, the Rs 30 crore Magnum FMCG Fund has returned 61.77% as against the category average return of 49.85%. 86% of the fund’s investment is in the FMCG sector with the rest in the chemicals sector. There are 15 stocks in the portfolio and 35% of the assets are in large caps. The expense ratio is 2.47% and the portfolio turnover ratio is 45%. Given their ‘defensive' tag, stocks in the FMCG universe usually do not keep up in rising markets, but the past year has been an exception. The BSE FMCG Index, with a return of 26% for one year, has easily beaten the returns of BSE Sensex of about 17%. The reasons for FMCG stocks good performance were two-fold. One, FMCG companies managed the downturn of 2008-09 very well, delivering strong profit as well as sales growth, aided by the rural demand juggernaut. That and their strong cash positions endeared the sector to investors in the aftermath of the economic crisis. Two, home-grown FMCG players have managed to improve on profit growth in 2009-10 helped by acquisitions and expanding overseas operations. However, with the BSE FMCG index seeing its price-earnings multiple climb from its low of 20 to over 28 now, sustaining this kind of financial as well as stock price performance is going to present a challenge. With food inflation rearing up, players are already witnessing pricing pressures and slower growth in segments like soaps and detergents. Rising competition, which is driving up ad spend, too could play spoilsport. But given the mild diversification of this decade old fund, launched in July 1999, an encore could be possible.

Reliance Banking Fund Gem

The very first banking sector fund, Reliance Banking made its debut with a bang. Its return in 2004 put it way ahead of the BSE Bankex and CNX Bank Index. Its performance has been scintillating barring 2006 when certain wrong calls were taken. The fund stood vindicated when it raced ahead in 2007 and fell the least in 2008. The fund manager has a keen preference for public sector banks. The transformation in the space and valuations beckon. Like other sector funds in the Reliance Mutual Fund stable, this one too has the flexibility to go 100% into any of the three asset classes: equity, debt or cash. Despite a high cash allocation way back in July 2004 (64%), the fund manager does not use this leeway to a large extent and even during the credit crisis of 2008, he refused to run to cash for cover. Between September 2008 and February 2009, the cash allocation averaged at around 18.51%. The cash component is 6% at present. The fund manager dynamically manages the fund by oscillating between large and mid caps as well as between private and public sector banks. 55% of the portfolio consists of large caps. He also dabbles in derivatives. The fund strives to exhibit consistency in performance. There are 18 stocks in the portfolio. The current AUM of the fund is Rs 1466 crores and the one-year return is 58.11% as against the category average return of 48.04%. The expense ratio is 2.01% and the portfolio turnover ratio is 31%. The banking sector as a whole has potential but within it there are also a lot of alpha generation opportunities which the fund looks for. Reliance Banking is a compelling choice if investors stay in for the long haul.

Franklin Pharma Fund Gem
This pocket-sized 286-crore pharma category was launched just nine years back. The category till date has five funds making it up. Over the years, it lingered at the bottom of the table but has now emerged out of the pocket. Despite having a miniscule portion of the pie, pharma funds are topping the charts with their recent enticing performance. Franklin Pharma Fund, a very stable decade year old fund, launched in March 1999, at times gets aggressive in its portfolio. This Rs 126.81 crore fund typically has a portfolio of 28 stocks and often takes concentrated bets. Like other pharma funds, this fund also took off as a large-cap, but gradually shifted towards mid-cap stocks. Its interest in small-cap stocks has also increased over time. At present 25% is in large caps. 9% of the portfolio is in cash. The fund has given the maximum returns, since launch, of 29%. Its one year return is an impressive 54.72% as against the category average of 47.42%. The expense ratio is 2.11% and the portfolio turnover ratio is 10.16%. The strong outlook of the pharma sector, besides being a defensive play, will hold the fund in good stead in the years to come.

ICICI Prudential Technology Fund Gem

One of the oldest funds in this category, this fund has been a top quartile performer continuing its winning spree in the past couple of years with a return of 51.17% in the past one year as against the category average return of 37.16%. Currently around 77% of the Rs 108 crore corpus is invested in the technology sector. The only other sector it has diversified into is services. Within the technology space, the fund is inclined towards software with Infosys alone accounting for 51% of the portfolio. The fund has made a fortune with the Infosys stock bought at the time of meltdown. The portfolio is highly concentrated with just 12 stocks. But 66% of the portfolio is large cap-oriented. The expense ratio is 2.49% and the portfolio turnover ratio is 17%.

The starting point in an investment journey should be through diversified equity funds. Thus, while diversified equity funds should constitute your core portfolio and form 90% of it, sector funds could be added to get an extra edge with an allocation of about 10%. Once you are comfortable with diversified equity funds, then you can look at sector funds for the added flavour or returns. Sectoral funds are riskier compared to well-diversified/plain vanilla equity funds. Such sectoral funds are suitable for sophisticated and nimble-footed investors with rich experience in the stock market. You should have a time horizon of three to five years while investing in such narrow-based funds.

1 comment:

Equity Mutual Funds said...

The returns offered by ICICI Prudential Infrastructure Fund Gem have been more-or-less in line with the category average. Occasionally it has outperformed the category, especially in a falling market when it has fallen less than the overall market.