GEMGAZE

September 2017

All the GEMs from the 2016 GEMGAZE but DSP Blackrock Equity Fund have performed reasonably well through thick and thin and figure prominently in the 2017 GEMGAZE too. DSP Blackrock Opportunities Fund has been accorded a red carpet welcome.

HDFC Equity Fund Gem

2016 and 2017 were testing years for investors in HDFC Equity Fund given its poor showing compared to other large cap Indian mutual funds. The fund has invested 97.89% in equities, 76.96% in large caps, 54.09% in the top 10 holdings and 57.29% in the top three sectors, finance, energy and construction. One-year return of the fund is 14.23% as against the category average of 15.92%.The expense ratio is 2.05% and the turnover ratio is 24%. The 19,832 crore HDFC Equity’s prospects are not blemished by its recent underperformance. An unwavering focus on the long-term and willingness to back conviction bets are integral to manager Prashant Jain’s investment approach. Hence he does not shy away from trading near-term pain for long-term gains. This approach was on display not so long ago (in 2015) when Jain held on to his investments in public-sector banks (particularly SBI) despite it running into rough weather, and the fund languishing in the bottom performance quartile. This was not surprising as the manager has long favoured public-sector banks in his portfolios as he believes that they will be major beneficiaries of India’s long-term structural growth. Notwithstanding short-term blips, Jain has demonstrated considerable skill in navigating the fund through varying market conditions over the years. Expectedly, he made a promising comeback this time around as well with his conviction in public-sector banks paying off well, helping it to record top-quartile performance. An exceptional manager backed by a strong team, a robust investment approach, and one of the best asset managers in the industry add up to a best-in-class offering. The fund is positioned in the top quartile of the large-cap fund category over one, three and five-year time frames. Research is central to the investment style, with Jain effortlessly combining top-down and bottom-up analysis (with more emphasis on the latter) to identify companies with robust business models, strong balance sheets, and competitive advantages. In a downturn, Jain’s policy of staying fully invested could lead to underperformance as compared to peers that get their cash calls right. Yet, the process will hold long-term investors in good stead.

Sundaram Select Midcap Fund Gem 

Sundaram Select Midcap Fund has an AUM of Rs. 5,573 crores and is being managed by the well-known fund manager, Mr. S. Krishna Kumar since 2012. Sundaram Select Midcap Fund is one of the consistently performing equity mutual funds in the mid cap category. The fund aims to achieve capital appreciation by investing in high growth mid-cap stocks. The fund defines 'midcap' as a stock whose market capitalization shall not exceed the market capitalization of the 50th stock (after sorting the securities in the descending order of market capitalization) listed with the NSE. As the risk and return grade of the fund is ‘Above Average’ it could be a good pick for those willing to take high risk in order to get higher return by investing in midcap stocks. 47.81% assets of Sundaram Select Midcap are currently invested in three sectors -finance, energy and services. The 3, 5, and 10 year annualised returns of the fund is quite impressive at 19.95%, 26.14%, and 16.87% respectively. The fund has beaten the Benchmark S&P BSE Mid Cap Index with very good margin. The one-year return of the fund is 17.76% as against the category average of 18.24%. The expense ratio of the fund is 2.24% and the portfolio turnover ratio is 45%. True to its nature, the fund can be very volatile in the short term, reflecting the market conditions. It is not for the faint hearted. Krishnakumar is valuation-conscious while investing in stocks, but is willing to stay invested in companies with higher valuations if longer-term growth prospects appear favourable. The investment style is essentially bottom-up with a buy-and-hold philosophy on high-conviction names. Krishnakumar’s in-depth understanding of companies and background in researching small- and mid-cap stocks is an advantage. He typically seeks to invest in quality companies with differentiated businesses. Although the fund’s allocations towards large caps have gone up slightly over the past year, it continues to remain true to its mandate and has a higher exposure to small- and mid-cap stocks than its category peers. The fund’s long-term orientation could lead to a divergent performance profile compared with the competition and index over shorter periods. However, the investment process should hold the fund in good stead over the long term.

ICICI Prudential Dynamic Fund Gem

While it looks like market volatility will remain an issue for at least some more time, funds that contain downsides and handle it well are good bets. The 7,382 crore ICICI Prudential Dynamic Fund, an equity fund benchmarked against the Nifty index, fits the bill. By its mandate, the fund shuttles between asset classes based on market valuations. If valuations turn expensive, equity exposure, 76.03% (at present), is cut in favour of debt. Though the fund can invest across market capitalisations, it puts 70-75% (68.04% at present) of its portfolio into large-cap stocks. In its debt portfolio, the fund has usually invested in fixed deposits, other short-term debt instruments, or held cash. In rallying markets, while the fund does not put up chart-topping returns, it still does better than its benchmark and the category. The expense ratio of the fund is 2.25% and the portfolio turnover ratio is 239%. The one-year return of the fund is 14.03% as against the category average of 15.92%. This is manager Sankaran Naren’s second stint after running it from September 2006 to February 2011. He relinquished fund management duties for about a year and returned to the helm in February 2012. However, the investment strategy remained unchanged. The ability to think differently and pick stocks that have the potential to become a big thing tomorrow is critical in this strategy. When markets run up and valuations seem stretched, Naren reduces net equity exposure in the portfolio. He deploys a rules-based approach using the historical price/book value of the market to determine fair value and in turn tweak cash allocations. His philosophy is to ensure the fund performs better than peers when markets fall, even if the strategy hurts performance in rising markets, thereby ensuring robust performance over a market cycle. Naren is willing to back his conviction even if it means underperforming over shorter time frames. He takes sector bets and aggressively trades his large-cap picks, but such tactics are not without risk. The fund has been jointly managed by Ihab Dalwai since Jun 2017. The fund can hold investors in good stead over a market cycle.

DSP Blackrock Opportunities Fund Gem

DSP Blackrock Opportunities Fund is a 3,364 crore fund that invests 71.52% in large caps and 59.45% in the top three sectors, finance, construction and energy. The expense ratio is 2.52% and the portfolio turnover ratio is 107%. The one-year return of the fund is 16.71% as against the category average of 15.92%. Large and small/mid cap stocks are different beasts that can deliver widely divergent performances. Rohit Singhania, the fund manager since June 2015, joined the fund house’s PMS division as research analyst in 2005 and moved to the equity investment team in June 2009. While Singhania is a seasoned analyst, over the years he has matured as a portfolio manager as well. However, it should be noted that he has a track record in managing the DSP BlackRock TIGER fund, which has a thematic bent since June 2012. In fact, Singhania runs this fund in line with its investment mandate, which allows him to adopt a fluid investment approach without any bias or restrictions in terms of stocks or sectors. In the manager’s own words, this fund does not have a defined investment approach; this provides him the liberty to capitalise on any investment opportunity that he sees in the market, provided it makes a grade on his selection parameters. Consequently, the fund’s portfolio turnover tends to be on the higher side. While an unconstrained process can be very rewarding, it is fairly risky, too. A wrong bet can lead to significant underperformance. It must be noted that the success of the investment process largely depends on Singhania’s execution skills.

Aditya Birla Sunlife Frontline Equity Fund Gem

The 18,948 crore Aditya Birla Sun Life Frontline Equity Fund is a diversified fund with a bias for large cap stocks but it does take advantage of select mid cap opportunities from time to time.  The fund invests 82.64% in large caps and 53.77% in the top three sectors, finance, energy and automobile. The expense ratio is 2.14% and the portfolio turnover ratio is 77%. The one-year return of the fund is 17.16% as against the category average of 17.25%. A skilled manager and his well-executed investment approach make this fund a compelling choice for investors. Manager Mahesh Patil is evidently mindful of the benchmark index S&P BSE 200 while investing. For instance, he invests largely in stocks chosen from the index. Year-on-year, Patil has ensured that the fund has delivered consistent returns. Its success can be attributed in no small measure to Patil’s deftly implemented investment approach. The manager’s stock-picking has been impressive. Discipline, bottom-up stock picking, and profit booking at opportune moments have stood the fund in good stead. Numbers are in its favor, consistency is clearly visible, and one can comfortably invest in this fund.