GEM GAZE

September 2012

The market volatility, notwithstanding, the five GEMs of September 2011 have retained their esteemed status by virtue of their consistent performance and they continue to occupy the coveted  position  in the September 2012 GEMGAZE.

HDFC Equity Fund Gem

Consistent in the constellation

With net assets of Rs 9719 crore, the one-year return of HDFC Equity has been –0.39% as against the category average of 2.37%. It has fared marginally worse (by 2 percentage points) than the category average and has under performed 68% of its large cap category peers. The relative underperformance can be attributed to two key factors. First, despite the downturn in equities, manager Prashant Jain has chosen not to take cash calls in line with his long-held investment philosophy. The fund’s average allocation to cash/current assets (roughly 3%) is lower than the category norm of 8%. Second, the fund’s top holding, State Bank of India, has had a terrible year. The public sector bank’s poor results for the March 2011 quarter hurt the stock price, as did subsequent news on rising non-performing assets. Finance, energy, and technology form the top three sectors accounting for nearly 45% of the net assets of the fund. Nearly 70% of the portfolio comprises of large caps with the remaining in mid and small cap stocks. With less than 20 stocks in the portfolio till 2003, the fund manager increased it to around 60 stocks in 2010. At present, there are only 32 stocks in the portfolio. The top 10 holdings have averaged at around 47% over the past one year. The large corpus has led to it being more diversified. The expense ratio of the fund is 1.78% and the portfolio turnover ratio is 31.26%.

HDFC Equity definitely boasts a long experience having faced both the bullish and the bearish phases in its 16-year-long journey. It is predominantly a large-cap oriented, actively managed, diversified equity fund. The fund has a clear bias towards growth investing given the good economic growth that India is experiencing. However while investing in growth, the fund does not want to overpay the growth and seeks to move out of growing companies when they become very expensive. Over three and five-year periods, the fund delivered 13% and 9%, respectively, and bettered its benchmark CNX 500 by nine and six percentage points. In the past five years the fund unfailingly contained downsides better than its benchmark during most market falls. On a monthly rolling return basis over the last five years, it has surpassed its benchmark seven out of ten times. The fund has not only successfully beaten its benchmark indices and cushioned its fall during the dot com bubble of year 2000-01, but also made a steadfast recovery in the immediately following years of 2002-03, when Prashant Jain started managing the fund. Jain’s enduring association with this fund has ensured stability and consistency in investment style and performance.

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Sundaram Midcap Fund Gem

Quality with Integrity under question?

Sundaram Midcap Fund sports net assets of Rs 1977 crores. The one-year return of the fund is 2.51% as against the category average of 2.56%. Its three-year and five-year returns are 9.71% and 8.29% as against the category average of 8.56% and 4.31% respectively. The fund has recorded a compounded annual return of 30.87% since launch in July 2002. Sundaram Select Mid Cap is a dedicated mid-cap fund. This style integrity, which has been maintained since launch, and the track record, places the fund as an appropriate vehicle for defined asset allocation decision by investors. 39% of the assets are invested in sectors such as finance, engineering, and healthcare. The top ten stocks in the portfolio account for 38% of the assets. The fund’s massive diversification with 61 stocks dilutes risk to an extent. The expense ratio of the fund is 1.89% and the portfolio turnover ratio is 48%.

The fund delivered 9.5% and 6.9%, respectively, over a three- and five-year period, outpacing its benchmark by over five percentage points. While this performance is better than broad market returns, over a three-year period, more than half a dozen funds delivered twice the returns of Sundaram Midcap. Over a three-year period, although stock markets remained highly volatile, the category average return of mid-cap funds was eight percentage points higher than the CNX Nifty, demonstrating the ability of mid-cap funds to outperform by a good margin even during volatility. Sundaram Midcap's performance in any ensuing market rally will prove whether it manages to catch up and outperform peers.

ICICI Prudential Dynamic Fund Gem

Deft defence

With net assets of Rs 3,999 crore, the one-year return of ICICI Prudential Dynamic Fund is 8.55% as against the category average of 4.09%. The fund's portfolio is well diversified and is represented by 69 stocks. The top ten stocks accounted for close to 49% of the assets invested in equity. The top three preferred sectors were technology, energy, and finance. The fund often prunes its holding in individual stocks when its objects are met. This is evident from its high portfolio turnover of 138%. The expense ratio is 1.82%.

The fund has a reasonable track record, outperforming its benchmark, the Nifty, over three- and five-year time frames. The fund has delivered returns of about 4%, 12%, and 8% over one-, three- and five-year periods. In each case, ICICI Dynamic’s returns surpassed the category average returns. While the returns have bettered the Nifty over three- and five-year timeframes, they have just matched the benchmark in the past year. One reason could be that the fund was not fully invested in the market, considering the volatility. During the last year, cash holdings have ranged from 7-24%. Besides, the fund’s sector choices could have hurt performance. For example, many funds benefited by increasing exposure to the defensive FMCG sector in the last one year. ICICI Dynamic’s FMCG exposure remained less than 1% throughout this period. Its year-to-date return of about 18% beats the Nifty returns of 15.5% for the same period as increasing equity holdings helped regain returns.

DSP BlackRock Equity Fund Gem

Temporary lull?

DSP Black Rock Equity Fund is a diversified equity fund with assets under management of Rs 2,531 crore. Its one-year return was –0.07% as against the category average of 2.37%. The top three sectors, finance, energy, and technology, constituted 45% of the portfolio. Exposure to the top 10 stocks is currently at 38%. The number of stocks is 73 at present. The expense ratio of the fund is 1.75% and the portfolio turnover ratio is very high at 208%.

DSP Black Rock Equity had a great run for years, but has under performed recently. The numbers are pretty middle-of-the-road when compared with the category average but it has beaten the benchmark, S&P CNX 500. It handled the downturn of 2008 very well and despite the change in market direction catching the fund manager on the wrong foot in 2009, he managed to steady himself and reposition the portfolio to a growth orientation. By upping the equity exposure and reducing allocation to defensives like FMCG and Healthcare, he impressed that year too. In the past two years, the fund’s performance has been more or less average. Over the 5- and 10-year periods, this fund features amongst the top five performers. In its existence of 14 years, it has outperformed its benchmark in 11. In fact, its strong showing through good and bad times makes it a choice as one of the core holdings of the portfolio for an investor.

Birla Sunlife Frontline Equity Fund Gem

Remarkable record

Birla Sunlife Frontline Equity Fund has net assets of Rs 2772 crore. Its one-year return is 6.25% as against the category average of 4.09%. But its three-year and five-year returns of 6.98% and 7.24% surpass the category average of 5.38% and 3.93% respectively. Nearly three-fourth of its portfolio is invested in large cap stocks. The top three sectors of finance, energy, and technology constitute 50% of the portfolio. The fund has 65 stocks in the portfolio. High returns, low risk, and a diversified portfolio are the hallmarks of the fund. The expense ratio of the fund is 1.86% and the portfolio turnover ratio is 94%.

Last year’s performance was not spectacular and this year it finds itself in a very average spot. But, when compared with the benchmark, it had just one annual underperformance (2003) in eight years. The fund surpassed the returns of its benchmark, the BSE 200 Index, over one, three- and five-year timeframes. Its 7.8% return in the last five years places it in the top quartile of large-cap oriented funds, categorised by returns. On a rolling return basis, the fund’s annual return has outperformed its benchmark 94% of the time in the last five years. Hence, this fund best suits investors with a limited appetite for risk and with moderate return expectations. Over one-, three- and five-year time frames, BSL Frontline made returns of 7.3, 6.9, and 7.8%, respectively.